The current steel shortage has prompted some owners to add a steel-price escalation clause in their new contracts. Bidders on new projects without price-escalation protection must decide how to cover the recognized risk associated with volatile pricing of steel products. In the meantime, how will the industry deal with price and delivery problems on existing contracts?

Suppliers unable to purchase material as planned will probably demand their performance be excused or compensation increased. A suitable force majeure clause in the material contract might end the discussion. But material purchase orders often used by contractors usually do not include language dealing with force majeure. Therefore, courts and arbitrators will likely be called upon to resolve such disputes. Resolution will require balancing a wish to grant relief to a contracting party with the need for commercial certainty in contracts.

A party seeking relief from a breach will likely claim the defense of impossibility or impracticability. True impossibility is rare. Commercial impracticability, however, involves performance that cannot be accomplished without excessive and unreasonable cost. Under Texas' Uniform Commercial Code, resulting unforeseen supervening circumstances not contemplated by the parties may excuse a supplier's performance. Suppliers should be award of questions that must be answered prior to being excused from a contract. For example: When the contract was made, could the parties have foreseen the occurrence and severity of the steel shortage? Did the supplier assume the risk of steel shortages either expressly or tacitly? Given the commercial circumstances surrounding the contract, could the parties have reasonably foreseen the eventual effect of the steel shortage?

The last major steel-industry crisis occurred in the 1970s. One Texas case that came about as a result of the shortage was in 1974, when J. D. Abrams Inc. encountered delivery problems with its steel supplier on a TxDOT bridge project. Despite the steel shortage, the El Paso Court of Appeals in Robberson Steel Inc. v. J.D. Abrams Inc. found that the supplier was responsible for Abrams' costs resulting from a six-month delay in delivering the steel. The Court affirmed the trial court's finding that delays in receiving steel from the mills was a contingency which the parties could reasonably have foreseen and one of the risks the parties tacitly assigned to the supplier. Robberson's bid included a disclaimer stating "delivery is subject to our ability to procure steel from our steel mill suppliers." But after checking with supply sources, Robberson chose not to incorporate the disclaimer into the purchase order. The evidence further showed that Robberson's purchasing manager confirmed availability with the mills before the state bid letting and again after he learned that Robberson was the successful bidder. The Court determined that Robberson was concerned with delivery before it entered into the contract with Abrams. According to the Court, the evidence showed that delivery from the mill was "very definitely a circumstance within the contemplation of the parties at the time the contract was made," and Robberson's delayed performance was not excused.

While courts cannot simply rewrite the parties' contract, performance can be excused in circumstances in which both parties held a basic (though unstated) assumption about the contract that proves untrue. Consider this example: A manufacturer has a contract to sell its product, but the factory that makes the product is destroyed. Under these facts, the manufacturer is still bound to the contract so long as the product is available elsewhere. But the manufacturer's performance might be excused if the parties understood that material from the destroyed factory must be used to fill the order. This provides an example of a basic assumption under the contract, shared by both, that cannot come true.

A party claiming commercial impracticability must also use reasonable efforts to overcome the obstacle to fulfill performance. In the previous example, the manufacturer must attempt to purchase replacement products to satisfy its contractual obligation. In searching for ways to overcome the obstacle, increased cost alone generally does not excuse performance. But a marked increase in cost resulting from a severe shortage of raw materials might. How great that increase must be is yet to be answered by the courts, and will depend on the circumstances surrounding the shortage and the individual facts of each dispute.

Parties involved in disputes regarding the steel shortage should exercise great care in their actions. A successful claim of commercial impracticability might excuse a contract breach, but is very difficult to evaluate in advance. Under the UCC, a party can breach it's a contract by taking action that reasonably indicates rejection of continuing obligations. Before taking any action that might be viewed as an anticipatory breach of your contract, be sure to consult your attorney.