April 1, 2011

Addressing risk: Fuel prices and material availability


Recent events in relation to fuel prices and materials availability lead us to once again revisit ways in which contractors and subcontractors can better manage the risk associated with these concerns.

As a starting point, it is important to understand that, unless the contract documents expressly provide otherwise and absent severe and unanticipated circumstances generally attributable to an 'act of God,' the contractor will assume the risk of materials availability or price changes in his contract. This is because a contractor is expected to satisfy himself in providing a price to perform his scope of work. In this regard, the contractor is required to anticipate, and include for, all of his costs of performing the work he prices.

Contractors can, of course, anticipate that gas prices may change. Accordingly, the contractor bears the risk of these changes, unless the contract expressly provides otherwise. If prices escalate, the contractor may not request increased compensation unless his contract expressly allows for such additional payments.

The assessment of risk under a contract is the same with respect to materials availability. Examples of recent shortages include steel for construction and salt for use by winter maintenance contractors. Generally, contractors who agree to provide a certain scope of work must perform that work, and they assume the risk if, for whatever reason, they cannot do so. In this regard, contractors can anticipate that materials shortages could affect their ability to perform.

Exceptional circumstances
An exception to this general rule can include circumstances where the price increases or materials shortages are due to what might be described as a 'force majure.' Force majure includes acts of God and any other significant event that was clearly outside the realm of what either side would have anticipated. They might include hurricanes and tornadoes, as well as civil insurrection or revolution, for example. Absent such unusual circumstances, however, force majure will not arise and the contractor will not be relieved of his obligation to perform due to materials shortages or price increases unless his contract has placed some, or all, of this risk on the other party.

Another exception would be 'frustration,' where it can be argued that the contract cannot be performed and is therefore 'frustrated.' The problem with such an argument is that if the 'frustration' can be anticipated, the contractor will generally be held to assume the risk of the shortage occurring. In such a case, the client will often be entitled to damages.

Anticipate changes in contract
In the end, the best way to address the issue is to deal with it in the contract. With respect to fuel cost escalation, contractors can include clauses which provide that their contract price will change in certain circumstances. If the contractor is being paid monthly by way of a unit price, for example, the contract might provide that the unit price will increase by a certain amount or percentage during any month in which the gas price in the vicinity of the place of work exceeds a certain threshold per-litre cost. The contract might also provide that the contractor must provide evidence that fuel was purchased at the increased cost in the vicinity of the place of work before he is entitled to the extra payment. Even if the contract did not provide for this requirement, of course, the contractor should, nonetheless, retain this type of documentation to protect himself in the event of a dispute. A similar clause would provide that the contract price be renegotiated in the event that gas prices hit so-much-per-litre in a certain area.

Where contracts have already been signed without such a clause, the contractor will not generally be entitled to additional compensation due to increased fuel costs unless force majure or frustration can be established, or the client agrees to a change. While clients will not generally welcome such a change, they might consider it if they know the alternative is the contractor's inability to continue to perform the work. This is something to consider in negotiating such changes.

With respect to materials shortages, contractors are generally well advised to include in their contracts a clause which will relieve them of responsibility where the material in question is not available. These clauses should relieve the contractor of responsibility where the material is not commercially available at commercially reasonable prices. (This addresses, for example, the circumstance where salt is unavailable in bulk, but is available in small bags at the local store.) In addition, contracts can also provide that alternative materials may be used where the specified materials are not. The alternatives may be specified, at agreed upon prices, or the contract may simply provide that, in cases of shortages, alternatives will be negotiated.
Robert Kennaley of McLaughlin & Associates practices construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law and contract issues and can be reached for comment at 416-368-2555, 519-426-3777 or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.