The remedies for unforeseen construction
or material price escalation contemplated by
escalator clauses in construction contracts can
vary based upon how the provision is drafted.
performance by plaintiff must be excused”); American Trading and
Production Corp. v. Shell International Marine, Ltd., 453 F.2d 939,
943 (2d Cir. 1972) (holding that an extra expense of 31.6% of the
contract price, incurred because of the closure of the Suez Canal,
did not excuse performance); see also Louisiana Power & Light Co.
v. Allegheny Ludlum Indus., Inc., 517 F. Supp. 1319, 1324 n.4 (E.D. La.
1981) (considering the party’s profitability in general as a factor in
deciding whether forcing the party to perform would have been
“especially severe and unreasonable”).
Thus, a contractor’s ability to have its performance excused will
depend on the facts of the case. What does the contract say? Was
the anticipated or actual barrier to performance contemplated
by the parties at time of contracting? How much has the cost of
the project increased? How profitable is the contractor’s business
more generally? Has the value of the project to the counterparty
increased? These questions, among others, are fact intensive determinations
that will influence whether pandemic-related price
increases can excuse performance.
Escalator clauses
An escalator clause, also known as an escalation clause, is a provision
allowing for an increase in the price of a contract upon the
occurrence of certain defined events. For example, an escalator
clause might shift the marginal cost of lumber to a counterparty if
lumber prices increase by more than 30%. Because the parties can
craft the escalator clause in advance, escalator clauses are a more
predictable way for contractors to protect themselves against price
risk than force majeure provisions.
However, beware of unintended consequences. If a contractor
includes an escalator clause in its contracts, it ought to draft the
clause carefully. Expressio unius est exclusio alterius (the inclusion
of one thing implies the exclusion of another) is a fundamental
rule of contract interpretation. Accordingly, if a contract includes
an escalator clause governing lumber, but not for steel, it may be
presumed that the parties intended that the contractor bear the
price risk for steel. Therefore, the inclusion of an escalator clause
in a construction contract may prevent the contractor from later
raising a defense based on a force majeure clause or impracticability.
See Louisiana Power & Light Co. v. Allegheny Ludlum Indus., Inc.,
517 F. Supp. 1319, 1328 (E.D. La. 1981). Care must be taken to draft
the escalator clause such that it encompasses most, if not all, of the
contractor’s price risk.
The remedies for unforeseen construction or material price
escalation contemplated by escalator clauses in construction
contracts can vary based upon how the provision is drafted. Some
contractors may prefer the right to cancel the contract if one of
the parties does not agree to the increase in price, and others
may require continued performance without room for the parties
CONSTRUCTION LAW
to consequentially disagree to the price increase or adjustment.
Effective business planning and proactive contractual negotiation
of the escalator clause before the contract is signed will help
address these risks and enumerate adequate remedies. It should
be noted that in construing enforceability of escalator clauses,
some courts have required the contractor to show that it took reasonable
steps to avoid incurring the increased material costs, and
that it did not cause the materials to increase in price. Addressing
these issues through representations and warranties in the contract
may be a way to circumvent second guessing by the courts
on these issues.
Contract clauses requiring counterparty to
provide materials
Another way that a contractor can protect itself going forward is to
include a provision in its contracts that requires the counterparty
to purchase or provide the materials. This option is the simplest for
the contractor, and it obviates the need for a contractor to provide
the funds for the materials up front.
For small construction projects, or projects involving unsophisticated
counterparties, this option may not be feasible. However,
the sophisticated counterparty often exercises some level of oversight
over the procurement of materials. For those borderline projects,
a push by the contractor may reduce its ultimate risk from
volatile materials prices.
Conclusion
Many fixed price construction contracts contain force majeure
provisions. Therefore, for those contractors currently looking for
relief from standard fixed price contracts, force majeure provisions
may be the best bet. For those contractors concerned about
the future and looking for contract drafting tips, consider adding
an escalator clause; a clause requiring the counterparty to provide
or purchase the materials; and as to force majeure clauses, consider
specifically defining the force majeure events and crafting
language making it clear what will happen at the end of the force
majeure event, i.e., whether the party can terminate or merely
delay performance. Of course, each project is different. Therefore,
careful drafting on the front end can save much time, effort and
expense on the back end. t
C. Ryan Maloney is a Florida trial and litigation lawyer and partner
at Jimerson Birr in Jacksonville, Fla. He practices in the areas of
construction law, business and contract disputes, government bid
protests, real estate disputes and creditors’ rights. Among other designations,
Maloney is board certified by the Florida Bar in Construction
Law. A PDCA member and longtime PileDriver magazine contributing
legal author, you can contact him at rmaloney@jimersonfirm.com.
www.piledrivers.org PILEDRIVER | 123
/www.piledrivers.org
link
