One federal government agency has instructed its contracting officers to deny contractor claims for additional compensation due to inflation-related material price escalations. The only exception to that instruction is where the contract contains an economic price adjustment clause. But does a contractor have any other avenues for relief where the contract does not have an EPA clause?
One potential option for contractors may be through common law economic excuse doctrines. For example, under the doctrine of commercial impracticability, a contractor could argue that its performance should be excused because the construction material cost increases were not foreseeable by either the owner or the contractor.
One treatise describes the doctrine of commercial impracticability as follows:
“Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”
Florida courts have concluded that the key issue when considering an impracticability defense is “whether an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract.”
In other words, a court’s analysis of a contractor’s commercial impracticability defense will likely turn on whether the contractor should have foreseen the increase in construction costs. While I have not yet seen a court that has addressed this issue in the context of recent inflation-related cost increases, courts addressing commercial impracticability in the past have made it clear that it is difficult to establish the defense.
For example, when a party attempted to get out of a contract because energy costs had sky rocketed during the 1973 energy crisis due to an oil embargo, the court rejected the commercial impracticability defense because “the events associated with the so-called energy crises were reasonably foreseeable at the time the contract was executed.”
Similarly, another court rejected a party’s commercial impracticability defense based on the 2007-2009 Great Recession. In that regard, the court found that:
“an economic downturn, even one as drastic and severe as the recent recession, is not the type of unanticipated circumstance that would relieve sophisticated business entities from their contractual obligations. While the parties may not have thought a recession likely at the time they signed the agreements, the possibility of economic downturn should have reasonably been within their contemplation.”
Thus, the court held that the commercial impracticability defense did not apply to the undisputed facts of the case.
How would a court resolve a contractor’s commercial impracticability defense based on the increase of construction material costs? It would likely depend on whether the court found that the increase of construction costs (e.g., 24.1% increase of the producer price index from June 2020 to June 2021) was an unanticipated circumstance that excuses the contractor’s performance.
I have yet to see a court that has addressed the above issue, but based on past court decisions addressing commercial impracticability due to unusual economic circumstances, successfully asserting a commercial impracticability defense may be an uphill battle. Regardless, it is an issue worth considering as contractors attempt to mitigate increased construction costs.