Contract documents

January 14, 2022

Perhaps the best word to describe the current construction environment is uncertain. While opportunities are high, several persistent and problematic conditions continue to pose significant threats to full recovery in 2022. Preparation will be critical to success.

Construction costs are expected to keep rising through 2022 mainly due to insufficient materials and labor availability that will constrain the recovery at least through the first half of 2022. As of November, the 12-month producer price index for steel mill products was up 141.6%, according to the U.S. Bureau of Labor Statistics. Steel pipe and tube, iron and steel scrap have also risen as have concrete products and diesel fuels.

The uncertainty of the supply chain and continued pandemic consequences places owners and construction professionals in precarious positions when it comes to contractual obligations and dispute resolution.

Force majeure clauses may not cover everything, particularly price increases, loss of profitability associated with these conditions, or performance related to the pandemic. This is a good time to refresh yourself on legal principles such as force majeure, impossibility, and frustration of purpose during contractual negotiations.

Here’s a quick summary of terms to refamiliarize yourself with –

·       Force majeure: Force majeure clauses absolve liability in the event of uncontrollable events (e.g., war, hurricanes, tornadoes) that are not the fault of any party, but make it difficult or impossible to fulfill the terms of a contract.

·       Impossibility or impracticability of purpose: A common law doctrine that “allows a party to suspend or avoid performance when a supervening event beyond its control makes performance of the contract no longer capable of being performed.” Note: state law varies in the application of the principles. Common events during the pandemic that might be considered as triggering events are prohibition or prevention by law and forced supply chain closures.

·       Frustration of purpose: A frustration defense excuses a party from breaching a contract when the contract has lost all value to one of the parties. If the contract has lost all value, then the purpose of the contract has been frustrated. The loss of value must be due to changes in circumstances outside the control of either party.

Case-in-point is the 2021 Southern District of New York court decision in the Cai Rail, Inc., v. Badger Mining Corporation, 2021 WL 705880. When energy prices dropped at the outset of the pandemic, CAI Rail used the frustration of purpose defense to cut leases because they weren’t financially feasible. According to the court decision, “it is . . . not enough that the transaction has become less profitable for the affected party or even that the affected party will sustain a loss.”

AIA contract forms address excusable delays. For instance, the AIA A201-2017 General Conditions, Section 8.3.1 includes broad terminology that provides several examples as the basis for time extensions for events outside the contractor’s control such as unusual delay in deliveries or other causes beyond a contractor’s control.

As stated above, this is a good time to refresh yourself on legal principles such as force majeure, impossibility and frustration of purpose during contractual negotiations and contract execution to make sure you and your business are covered.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.