According to the May 27, 2010, press release issued by NOAA, the National Oceanic and Atmospheric Administration, there is an 85% chance that the 2010 Atlantic hurricane season will be above normal. Specifically, NOAA states: "We estimate a 70% probability for each of the following ranges of activity this season: 14-23 Named Storms, 8-14 Hurricanes, and 3-7 Major Hurricanes."
Hurricane season began June 1, 2010, and we have already gone through "B" in the alphabet of hurricane names. Just this past week tropical storm Bonnie passed through the Gulf of Mexico with everyone holding their breaths that the already damaged coastal areas would be spared further destruction. Bonnie was a reminder that we all need to immediately prepare for the anticipated hurricanes, if not already prepared. Helpful checklists can easily be found on the internet for your preparations. However, one major item is often overlooked: contracts.
A recent decision by the Mississippi Supreme Court highlights the need to be "contract ready" for hurricane season. In the case of Hill Brothers Construction Co. v. Miss. Transportation Comm., Hill Brothers Construction ("Hill Brothers") was hired by the surety to complete a project on which the original contractor had defaulted. The construction contract included a provision that provided for monthly cost adjustments based upon a baseline price established at bidding for pay items such as diesel fuel and asphalt which are affected by oil prices. However, the contract also included a provision which stated: "After the expiration of contract time, including all extensions, adjustments will be computed using fuel and material prices that are in effect at the expiration of the contract time." When the contract time expired and the project was incomplete, the Miss. Transportation Commission ("Commission") applied this provision to change the "baseline price" for adjustment purposes to the price in effect on the date the contract should have been completed.
Thereafter, disaster struck. Hurricane Katrina hit the Mississippi Gulf Coast and the price of petroleum products skyrocketed. The adjustment of the baseline price to the price in effect on the date of the contract expiration resulted in about $500,000 of unreimbursed petroleum costs to Hill Brothers. The Commission refused to pay and Hill Brothers sued. When the trial court granted summary judgment in favor of the Commission, Hill Brothers appealed.
On appeal, the Mississippi Supreme Court agreed that the "Commission’s interpretation of the provision was correct." However, the Court also determined that the provision exceeded the authority granted by statute to the Commission and, therefore, had to be stricken from the contract. This case is but one reminder that the effects of a hurricane will still be sorted out years after the landfall.
Have you prepared for the active hurricane season we now face? Get prepared:
- Review your contracts, especially the contracts you are contemplating entering into now. Make certain you have provisions that will protect you in the event of a disaster. If you are unsure what a provision means, seek clarification before you sign and modify the language in the contract so it is clear what is meant!
- If you are a subcontractor, your subcontract often binds you to the terms of the prime contract. What does it say? Do you even have a copy of the prime contract? Get a copy and read every word of it.
- Consider entering into contracts in advance of disaster that will provide you the assistance and/or pricing you may need if disaster does strike.
- Review your insurance policies to determine whether your coverage is adequate for the types of losses you might incur, including any unusual contract provisions that might be applied.