War in Ukraine and its impact on construction: tips for client and contractor

A war is raging in Europe right now. Russia has invaded Ukraine. Every day we get to see images of this. There is a humanitarian crisis. The EU and NATO countries are making efforts, mainly through economic sanctions, to get Russia to stop the war. These economic sanctions also have a direct impact on our daily lives. There was already a high price level of materials (see our earlier blogs on price increases) and ever-increasing inflation. That inflation was mainly driven by the ever-increasing price of energy. The war and sanctions amplify this to an extreme degree.

The effect, for example, is that the 2021 asphalt production offers are already loss-making (source: Bouwend Nederland). Steel prices are under such pressure that a major producer like ArcelorMittal has immediately canceled all offers (source: Bouwend Nederland). Because economy and law are closely intertwined, we immediately receive many questions about this new crisis. Therefore in this blog some practical tips, for both client and contractor, on how to deal with this.

Toward the client

Existing contracting agreement

The basic principle is that the agreements in the contract remain in place. But the law and the UAV (a widely used set of construction conditions) have options for passing on a price increase.

According to the law (Article 7:753 of the Civil Code), this must then include:

• cost-increasing circumstances not attributable to the contractor,
• which arise or come to light after the conclusion of the contract of engagement and
• which did not require the contractor to take those circumstances into account when determining the contract price.

However, the adjustment of the price must be ruled by a judge.

The UAV has a similar provision (para. 47 - the UAV applies only if the parties have agreed to it), but has an additional requirement of cost-increasing circumstances:

• which significantly increase the price of the entire work.

In both cases, entrepreneurial risk is taken into account. That in turn is completed by an analysis of price changes. Points of view do follow from the case law of the Council of Arbitration in Construction Disputes. If the price changes are normal then they must be taken into account. If they are unusual then a further increase must be taken into account. If the market is turbulent then further price fluctuations are not out of the question. A circumstance that rarely or never occurs does not normally have to be taken into account.

War is a circumstance that rarely, if ever, occurs in Europe. It also includes the resulting sanctions. But it will have to be determined for each type of material what caused the price increase, whether it can be linked to the war and the sanctions, and whether at the time the agreement was made, it was to be expected. After all, as we have explained in previous blogs, prices have been rising for quite some time.

Advice on an existing contracting agreement

It is very important to report the price increases to the client as soon as possible (in writing) and as specifically as possible (in time and money) and start the conversation. The client also has the option of simplifying or limiting the work in the event of a justified warning. Note: a price-fixing clause does not prevent a claim for cost-increasing circumstances. In short, food for thought!

Negotiating a new contracting agreement

In negotiations, it is important to in advance discuss the consequences of a possible price increase and make specific agreements about it. For example: for which building materials will a price increase be passed on, from what percentage (increase) and what allocation key will the parties use? Of course it is also possible to connect to an index/risk regulation.

Advice on a new contracting agreement

Bouwend Nederland has already drawn up a model provision that explicitly leaves open the possibility of price compensation in consultation during the execution of the work. More explicit is a provision whereby the quotation is based on the cost price level as it applies on the quotation date and that price increases (from a certain percentage) of cost-determining factors are passed on.

Tender

In order to avoid uncertainty about the right to additional payment/cost reimbursement, it may be opted to ask questions about this risk in the Invitation to Tender in an ongoing tender. In doing so, reference can be made to the proportionality principle. It follows from this that significant price increases after contracting cannot be passed on to the contractor.

Advice on procurement

Do pay close attention to whether a question during a tender on this topic is strategically convenient. Questions, of course, can also be answered disappointingly.

Note that for these new agreements, the circumstance of the war in Ukraine and boycotts from the West is no longer unforeseen. Thus, after the conclusion of this agreement, the consequences of the possible further out of control of the conflict are not without more reason to modify a contract.

Toward the subcontractor/supplier

Existing purchasing agreement

Again, the arrangements in the existing agreement continue to apply. For purchases, the law has no specific regulation on how to deal with unforeseen cost-increasing circumstances. Very often general terms and conditions do apply in this relationship. General conditions often contain rules about interim price increases of materials and raw materials. If the subcontractor/supplier is a member of the Metaalunie, it could be that the Metaalunie conditions apply to the contract. In these conditions there is a so-called 'pass-on clause' which means that it is then allowed to pass on price increases.

Other conditions commonly used in the industry also contain similar arrangements. For example, the HIBIN sales conditions (often used by construction suppliers) also have a pass-through clause, and the General Conditions for the Supply of Concrete Products have a less far-reaching variant. According to the latter variant, changes in raw material prices are settled only if the parties have agreed to this in advance.

Existing contracting agreement

General conditions also usually apply to contracts with subcontractors, but sometimes the law or the UAV. As explained above, the subcontractor will then have to be warned as soon as possible with a concrete estimate of the price increase. It will then be necessary to check whether there is a right to pass on that increase and what possibilities there are to limit it as much as possible.

Advice on an existing contracting agreement

Check current contracts. Again, after a notification from a subcontractor/supplier, it is good to start the conversation and check whether the notification is justified. Here, for a main contractor, it is important whether any price increase can be passed on to the client/principal. Note: it may happen that a price increase in a subcontract meets the threshold of significant (as referred to in par. 47 UAV), but not in the main contract. After all, if there is a small(er) part commissioned in subcontract, a specific price increase for this small(er) part is more likely to be 'significant' than in the main contract.

Negotiate a new building contract or purchase agreement:

First, whether there are framework or annual contracts that provide guidance for new agreements is relevant.

If so, those principles apply (with the addition that even in the case of framework agreements that are building contracts, the law and/or the UAV may play a role as explained above).

If not, it is important to agree on as much hold as possible even in new contracts. If some large parties suspend bids because of the great uncertainty of price fluctuations, this immediately means that there is great uncertainty about the final price. A price-fixing clause will then be impossible to agree on.

Advice on a new contracting or purchase agreement

Discuss the possibility of pricing the materials at the time of actual call or delivery using a specific risk regulation or index. This provides guidance because it can be calculated and is usually less erratic than the daily price.