Price increases, (how) do I pass them on?

In early 2020, construction materials prices were expected to stabilize (or even decline) due to the Corona pandemic. Nothing turned out to be less true. In fact, this quarter (Q1 2021) speaks of "madness" in the building materials market. Steel prices are at historic highs and lumber prices have skyrocketed. A contractor who took on a job last year may be in trouble as a result. This contribution outlines the (im)possibilities for a contractor to pass on price increases.

Introduction

Prevention is better than cure. Similarly with price increases: it pays to discuss and agree on (the risk of) possible price increases in advance. Both upstream (contractor-client relationship) and downstream (contractor-supplier relationship). However, this contribution is not about prevention, but about cure. The do's and don'ts for new contracts are matter for another contribution.

This contribution deals with the situation where the parties (client and contractor) have already entered into a contract and price increases occur afterwards. In that case, can (excessive) price increases be passed on? The answer to this question must first be found in the specific contracting agreement between contractor and principal.

Since it is not possible to address "specific contracting agreements" in this article, the most common inputs (to pass on a price increase) are addressed below.

Risk regulation

A risk arrangement is an arrangement that parties can agree upon. The purpose of such an arrangement is to compensate or factor into the price strong price fluctuations of materials (but also, for example: wages and utility costs).

As the previous paragraph shows, the parties can agree on a risk arrangement. If a risk arrangement has not been agreed, the contractor can (obviously) not invoke it either.
There are various (types of) risk arrangements; a further consideration of these goes beyond the scope of this article. In any case, the parties would do well to be aware of the presence of such arrangements.

Article 7:753 BW (cost-increasing circumstances).

The law, specifically article 7:753 BW, provides (also) for a possibility to pass on price increases. Pursuant to this article, a court may adjust the price at the contractor's request in case of:

• cost-increasing circumstances not attributable to the contractor;
• that arise (or come to light) after the conclusion of the (contracting) agreement; and
• which the contractor did not have to take into account when determining the price/contract price.

Note that the legal text states that the court " may adjust the agreed price in whole or in part to the cost increase , " but in practice it is more likely to discount the price increase in part. The court will take into account the circumstances of the case and the contractor's entrepreneurial risk.

In principle, this article of law applies to every contract of contracting. However, it is regulatory law; that means the parties can agree otherwise.

Section 47 UAV 2012

The UAV (like the law) has a possibility for a contractor to pass on price increases. In order to invoke this, it is of course necessary that the UAV have been declared applicable to the contracting agreement. The requirements for invoking Section 47 UAV show great similarity to those in the law (Article 7:753 of the Civil Code). According to 47-2 UAV 2012, a contractor is entitled to additional payment if:

• cost-increasing circumstances not attributable to the contractor;
• which the contractor was not required to consider in determining the price/contract price; and
• which significantly increase the price of the work.

Different from the statutory provision is: i) the absence of necessary judicial intervention AND ii) the presence of the requirement of a substantial increase in the cost of the entire work. What is significant? Case law occasionally uses a threshold of 5% (of the entire contract sum). However, this is not a fixed figure.

Do cost-increasing circumstances arise? Then the contractor is obliged to inform his principal (in writing) as soon as possible.

A successful invocation of this section will generally result in partial compensation for the price increase, taking into account the contractor's entrepreneurial risk.

Section 44 UAV-GC 2005

The UAV-GC 2005 are (compared to the UAV 2012) more 'economical' in terms of awarding a cost reimbursement/additional payment to the contractor. The provision in the UAV-GC 2005 (section 44(1)(c) amounts de facto to an appeal to the statutory provision regarding 'unforeseen circumstances', consequently here a reference to the requirements as described below will suffice.

Article 6:258 BW (unforeseen circumstances).

The legal provision regarding unforeseen circumstances gives the court the possibility to modify or dissolve a (contracting) agreement. Therefore, this article also gives the court the freedom to modify the contract price (c.q. grant additional payment to the contractor). For a successful reliance on this statutory provision, it should be:

• contingencies;
• which are not for the account of the party invoking them, and;
• as a result of which the other party "should not, by the standards of reasonableness and fairness, expect unchanged maintenance of the agreement."

It should be noted that the requirement that there be "unforeseen circumstances" should be interpreted to mean a circumstance that was not factored into the contract. Therefore, the issue is not whether the parties could have (reasonably) foreseen the circumstance - but whether they contractually provided for it.

This statutory provision is mandatory law. Therefore, the parties cannot contractually exclude this article. Of course, parties can limit the scope of this article, by including in the contract provisions for certain circumstances (which would make that circumstance no longer unforeseen ). Whatever the case may be, an invocation of unforeseen circumstances by commercial parties rarely succeeds. Judges rarely honor an invocation of this article of law.

In conclusion

As this contribution shows: there are several roads that lead to Rome. Moreover, one does not (always) exclude the other. Thus, a request for additional payment can be founded on (for example) both the law, and the UAV 2012.

A road may sometimes also be contractually concluded. For example, a price-fixing clause may exclude reliance on Section 47 UAV and/or Section 7:753 of the Civil Code. However, the mere presence of a price-fixing clause is insufficient for that. It depends on the wording of the specific price-fixing clause. It goes beyond the scope of this article to go into this in more detail.

In case of price increases: it always pays to inform the client as soon as possible (in writing) and to start the discussion. However, the price increase is then already a fait accompli; it is better to discuss the consequences of a price increase in advance 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 distribution key will the parties use? Of course it is also possible to connect to an index/risk regulation.

In order to ensure that the "circle is complete": do not forget the relationship between the contractor and supplier. Ideally, the agreements between client and contractor should match this. Unfortunately, that is - especially in these times - easier said than done.