Construction is an essential business under Minnesota’s Stay at Home order. The order itself, has not shuttered construction projects—yet–but there are many other potential impacts of the current COVID-19 crisis on those projects including disruption of supply chains.
Most prime contracts and many subcontracts include force majeure clauses to address the impacts of unforeseen events. The purpose of a force majeure clause is to identify some types of unexpected contract risks that entitle a party to performance relief. The occurrence of COVID-19 alone may not be assurance of relief, so the wording of the clause is critical. Since the arrival of COVID-19, lawyers have been blogging about how those clauses may (or may not) apply to contractors.
Many material supply contracts, however, do not have explicit force majeure clauses, yet suppliers find themselves caught in the middle. They can see COVID-19 related impacts from both customers above and their own supply chains below. Those impacts can be costly or even devastating. Suppliers need to act now to prepare and respond.
First, it is important to acknowledge that there is no magic answer all for supplier contracts. Suppliers provide all the bricks, lumber, wire and equipment for construction. Things that are moveable when they are sold are “goods” governed generally by the rules of the Uniform Commercial Code (UCC), but in reality, contract terms and fact circumstances will be so varied that the best advice is to start “looking for trouble” early and consult your advisers.
Where do you look for trouble? Begin by assessing the business relationships both above and below that have the greatest potential impact on operations. What are the real contract terms in effect? Those may not be the standard terms and conditions of sale posted on your website. In any given case, a supplier may have by-passed those terms by signing a contractor’s material supply subcontract form. It is also possible that the supplier may have simply failed to effectively incorporate these standard terms into the deal. The UCC “knock out” rule may be in operation. There is likely still an enforceable contract, but a supplier may have to look to the gap filler terms of the UCC to find answers—or at least pathways to answers. More on all of this to follow.
The contracting rules for the sale of goods under the UCC are intentionally less formal than those which apply to construction contracts. As a result, a formal signed contract form for materials is the exception rather than the rule. A result of that is the potential for a kind of “gap” in contract terms between what a contractor may be bound to do and what it can require of a material supplier unless the supplier had made itself subject to those more formal and probably more stringent contract terms. This can happen by the supplier signing the contractor’s material supply subcontract form or by the supplier incorporating the terms of the upper-tier contracts into a purchase order wholesale. Common phrases that may signal this result for a supplier are “Contract Documents” and “per plans and specifications.” This may result in pulling a force majeure clause into a purchase contract, but it can also be a major source of the performance risks that the current crisis may trigger. Those risks may include product specifications and delivery schedules that can no longer be met, and the corresponding risk of significant breach of contract and damage claims.
Where the supplier finds that it has bound itself to the terms of the general contract, that supplier needs to immediately access those terms and specifications to discover what the contract says and what notice may be required to activate any relief the contract’s force majeure clause may provide. There may also be claims or change request procedures to follow. The opportunities and pitfalls will be similar for suppliers and contractors under the terms of a particular clause.
Note: This is the first in a series of three posts to address this issue. Should your situation require immediate attention, please feel free to contact me.