During the Corona pandemic, inventories have been reduced, logistics processes have stagnated and the demand for specific building materials has changed due to developments such as working from home, for example. The demand for building materials and raw materials is rising, causing significant price increases from early 2021.
Previous articles have explained how clients and contractors can deal with this. Contractors, in turn, purchase materials from suppliers. Can suppliers always pass on price increases to contractors? How this works legally is elaborated in this article using a fictitious case.
Case study
Client Janssen asks Aannemingsbedrijf Pieters for a budget for the construction of a new home in November 2020. Pieters asks Metaalbedrijf Vissers for a quotation for the metal profiles needed for the house. Vissers then sends a quote for the amount of €30,000 on December 1, 2020. Pieters then hands Janssen a budget for the construction of the home. Part of the budget is the price issued by Vissers for the metal profiles.
In early 2021, Janssen commissions Pieters to build the home in accordance with the price issued in the budget. Contractor Pieters then confirms to Metaalbedrijf Vissers that he agrees with the quotation. However, Vissers no longer wants to supply the profiles for the price stated in the quotation because the prices for the metal needed have skyrocketed in the meantime. Can Vissers now simply pass this price increase on to Pieters?
Is there an agreement already in place?
The first question is whether Pieters and Vissers are already committed to the price mentioned in the quotation. For this, the text of the quotation is important and possibly also the agreements made in, for example, framework agreements or annual contracts.
Agreements are established by offer and acceptance. A quotation is an offer and if the quotation is accepted then there is a contract. As long as the offer has not been accepted, the supplier can normally withdraw its offer and send a new offer with a higher price. In the example, Vissers did not withdraw the quotation in time, making him bound by the price given.
This may be different if Vissers' quotation states that the quotation is without obligation or if it states a validity period that has expired. The latter means that Vissers' quotation states that the price is valid until a certain time. In that case, Pieters has until that time to accept the offer. During the standstill period, Vissers may not incidentally withdraw the quotation.
What does the agreement say?
If Pieters and Vissers have already entered into an agreement with each other, then we must assess whether Vissers may pass on the price increase of the metal to Pieters based on the agreements made therein. Of particular importance here are the agreements that deal with the price of the metal profiles ordered. Consider, for example, a price-fixing clause. Such a clause means that the purchase price may no longer be changed and thus Vissers may not pass on price increases. Because of the price fluctuations in the current market, suppliers do not easily cooperate with a price-fixing clause anymore, especially if the materials are to be delivered in the future.
It is also possible that the agreement between Pieters and Vissers states that the price of the materials at the time of actual call or delivery will be calculated according to a specifically named risk regulation or index. The prior agreement of such an arrangement does not prevent price increases from being passed on by Vissers. However, it does give Pieters some guidance because in practice the known risk regulations and indexes have a somewhat less erratic course and often rise less explosively than the 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 Vissers may pass on the price increase of the metal to Pieters, it is also important whether general conditions have been agreed upon. General conditions often contain rules about interim price increases of materials and raw materials. If Vissers is a member of the Metaalunie, it could be that the Metaalunie conditions apply to the contract. These conditions contain a so-called "pass-through clause" which means that Vissers is allowed to pass on price increases to Pieters.
Other conditions commonly used in the industry also contain similar arrangements. For example, the HIBIN conditions of sale (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 that variant, changes in raw material prices are settled only if the parties have agreed to this in advance.
So in the example, it is important for Pieters and Vissers to check whether general terms and conditions apply and, if so, what they stipulate about passing on price increases.
What does the law say?
In previous articles it has been explained that for building contracts the law has a regulation for passing on to the client any cost-increasing circumstances that arise after the conclusion of the contract. However, Pieters and Vissers entered into a purchase agreement with each other, for which the said regulation does not apply.
However, the general regulation on unforeseen circumstances also applies to purchase agreements. If the contract between Pieters and Vissers or the general terms and conditions agreed upon do not provide for price increases, Vissers can initiate proceedings in order to enforce the price increase or to dissolve the entire contract. In that case, however, Vissers must show that there are unforeseen circumstances that are not for his account and furthermore that Aannemingsbedrijf Pieters cannot reasonably expect Vissers to deliver the metal profiles 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.
In conclusion
It follows from this article that it is not obvious that Metaalbedrijf Vissers can simply pass on the price increase of the metal profiles to Aannemingsbedrijf Pieters. First of all, it is necessary to find out whether Vissers is already stuck with the price given in the quotation. If it appears that an agreement has been reached between Pieters and Vissers, it is worthwhile to subject both the text of this agreement and any applicable general conditions to closer inspection. After all, if nothing is stipulated then the basic principle is that the agreed price for the metal profiles will not be adjusted, even in the event of excessive price increases of the metal.
