It is the order of the day: huge price increases in construction. The entire construction chain is faced with these price increases, and so are wholesalers of building materials. It is relevant for wholesalers to know whether they can stop manufacturers and suppliers from passing on price increases and, if they cannot, how they can then pass on the price increases to their own customers. The possibilities are elaborated below using a fictitious case study.
Case study
A manufacturer has been supplying metal stud walls to a wholesaler for years. The wholesaler in turn sells the walls to the contractor. In late 2020, the contractor asks the wholesaler to reserve a large number of walls in advance for a job in June 2021 and to quote for them.
The wholesaler contacts the manufacturer. The manufacturer then sends a quotation stating that the quotation is valid for 14 days. This is called a validity period. After receiving the manufacturer's quote, the wholesaler prepares its own quote that includes the price quoted by the manufacturer plus a markup and without a standstill period. The wholesaler sends the quotation to the contractor at the end of 2020 only to forget that a quotation has been issued.
In May 2021, the wholesaler receives notification from the contractor that the quotation is accepted and that the walls must be on site in June 2021. The wholesaler then contacts the manufacturer, who informs the manufacturer that the quotation's deadline has expired. The manufacturer is still willing to supply the metal stud walls, but at a much higher price because the prices for the metal required have skyrocketed in the meantime. What can the wholesaler do?
Is there already an agreement?
The wholesaler will first have to assess whether agreements have already been reached with the manufacturer and the contractor. For this, the text of both offers is important, and in addition, of course, agreements made in, for example, framework agreements or annual contracts may still apply. Agreements are established by offer and acceptance. An offer is an offer and if the offer is accepted then there is a contract. As long as the offer has not yet been accepted, the preparer of the offer can normally withdraw the offer and send a new offer with a higher price.
In the example, the wholesaler is bound by the offer in its relationship to the contractor. This is because the contractor accepted the quotation and the wholesaler did not withdraw the quotation. This does not apply in the relationship between the wholesaler and the manufacturer. This is because the manufacturer's quotation stated that the quotation was only valid for 14 days and the contractor did not accept the quotation within that period. Thus, no contract arose between the wholesaler and the manufacturer while a contract arose between the wholesaler and the contractor.
The outcome described above may be different if the wholesaler has also included in the quotation to the contractor that the quotation is without obligation or if it specifies a validity period that has expired. The latter means that the quotation states that the price is valid until a certain time, such as 14 days after shipment. In that case, the contractor has until 14 days after the quotation is sent to accept the quotation. During the validity period of 14 days, the wholesaler may not withdraw the quotation, by the way.
What does the agreement say?
If it should be established that the wholesaler has entered into an agreement with both the contractor and the manufacturer, we must assess whether the price increases may be passed on based on the agreements made therein. Particularly important here are the agreements that deal with the price of the metal stud walls ordered. Consider, for example, a price-fixing clause. Such a clause means that the purchase price may no longer be changed and the selling party may therefore not pass on any price increases. Because of price fluctuations in the current market, by the way, manufacturers no longer readily cooperate with a price-fixing clause, especially if the materials are to be delivered in the future. Incidentally, a price-fixing clause does not automatically mean that price increases cannot be passed on to the client. As a rule, a standard price-fixing clause is interpreted as a provision that only excludes normal price increases from settlement or indexation. Extreme price increases are not covered by a price-fixing clause.
It is also possible for the contract to state that the price of materials at the time of actual call or delivery will be calculated using a specifically named risk rule or index. By agreeing the price in this way, part of the price increase can be passed on. It is good to know that in practice risk regulations and indexes have a somewhat less erratic course and often rise less explosively than daily prices.
In practice, we also see that parties who work together more frequently make agreements on the sharing of risks if the prices of materials or raw materials rise. These agreements are then often made in framework and/or annual contracts. In that case, parties make agreements on the question of the percentage of price increases to be passed on and what the allocation key will be in that case.
What does the terms and conditions say?
For the answer to the question of whether the manufacturer may pass on the price increase of the walls to the wholesaler and the wholesaler may pass on the price increase to the contractor, it is also important whether general conditions have been agreed upon. This is because general conditions often contain rules about interim price increases of materials and raw materials. Suppliers often use the HIBIN terms and conditions of sale. These conditions contain a so-called "pass-through clause" which means that the selling party is allowed to pass on price increases to the buying party.
So in the example, it is important for the wholesaler to check whether general conditions apply in the relationship with the contractor and with the manufacturer and, if so, what they stipulate about passing on price increases.
What does the law say?
For purchase agreements, there is nothing in the law specifically about passing on price increases. However, the general regulation on unforeseen circumstances does apply. On this basis, the wholesaler can initiate proceedings against the contractor to enforce a higher price. In that case, however, the wholesaler must show that there are unforeseen circumstances that are not for its account and, moreover, that the contractor cannot reasonably expect the metal studs to be delivered for the agreed price. In practice, we see that reliance on this article in connection with price increases is rarely allowed, especially in commercial relationships.
Solution case
In the relationship with the contractor, the wholesaler will first have to assess whether he is already stuck with the price given in the quotation. If it appears that an agreement has been reached between the wholesaler and the contractor, it is worthwhile to subject both the text of this agreement and any applicable general conditions to closer inspection. In the relationship to the manufacturer, the mirror-image situation applies. The wholesaler will first have to assess whether he can hold the manufacturer to the price included in the quotation. Then he will have to find out what is stipulated in the contract or general conditions. If nothing is stipulated, the basic principle applies that the manufacturer may not pass on prices to the wholesaler and the wholesaler may not pass on prices to the contractor.
This article underlines once again that it is very important for building material wholesalers to contract carefully both towards customers and suppliers. Especially when it comes to building materials to be delivered in the future.
