Price increases: who pays for them?

For quite some time, we have been experiencing huge price increases in various industries. Consider the prices of fuel, electricity, gas and various raw materials. Prices were already rising as a result of the Corona pandemic, but the current situation in Ukraine is causing prices to rise even further. These price increases regularly lead to the question: can I pass on these price increases to my customers, or looked at from the other side: can my supplier just pass on price increases? Earlier we wrote specifically about price increases in Construction. But what about in the manufacturing industry, for example? 

Agreements in agreement or general terms and conditions

To answer the question of whether increased energy or raw material prices can be passed on, what the parties have agreed on is important first. For example, the parties may have agreed on fixed prices, which may not be changed during the term of the contract. It is also possible that the agreement or the general terms and conditions contain a provision stating that prices may be increased. For example, a certain index may have been adhered to, or it may have been agreed that prices may be increased in line with the increased cost price of the product. 

If nothing is regulated in the contract or general terms and conditions, prices cannot in principle be increased, because: a deal is a deal. Only in very exceptional circumstances can prices possibly still be increased by invoking the legal bases unforeseen circumstances (Article 6:258 BW) or reasonableness and fairness (6:248 BW).

Legal regulations

(i) Unforeseen circumstances

Article 6:258 BW offers the possibility to modify or dissolve a contract in whole or in part in case unforeseen circumstances arise, which result in unacceptable unchanged performance of the contract according to standards of reasonableness and fairness. These must be circumstances that were not foreseen in the contract. Whether or not the circumstances were foreseeable is irrelevant. The fact that prices may fluctuate is, in principle, a normal circumstance that parties must take into account. It may be different when it comes to extreme price increases.

But an appeal to unforeseen circumstances does not readily succeed. The basic principle remains: a deal is a deal and making deals always involves some degree of entrepreneurial risk. If a choice is made to agree on fixed prices, this can be advantageous or disadvantageous. Only if it is no longer possible to operate profitably at all or if the supplier could go bankrupt if delivery has to continue at the agreed prices could the contract possibly be amended or dissolved by invoking unforeseen circumstances.

(ii) Reasonableness and fairness

In addition to invoking unforeseen circumstances, it may be possible in certain situations to declare a certain contractual provision inapplicable by invoking the restrictive effect of reasonableness and fairness (6:248(2) BW). This may be the case if application of that provision is unacceptable according to the standards of reasonableness and fairness. Consider, for example, a provision that places the risk of price increases on one of the two parties.

An appeal to reasonableness and fairness will not easily succeed either. Only in very exceptional cases might it be the case that provisions by which fixed prices have been agreed or by which a price change is permitted lead to such unreasonable results that they should not be applied. It will soon be the case that price increases based on a price change clause can simply be passed on, especially if the price change is in proportion to the increase in market prices.

Tips for the supplier and buyer

Whether increases in, for example, raw material prices or energy costs can be passed on depends primarily on what the parties have agreed in the contract or general terms and conditions. If you are confronted with this, it is therefore advisable to first of all refer to the contract and any general terms and conditions. Do they not provide for the possibility to change prices? Then a price change can only be implemented in very extreme circumstances by invoking unforeseen circumstances or reasonableness and fairness. Also pay attention to possible delivery obligations. If there are none, a supplier may be able to stop deliveries if no agreement is reached on the price. Of course, it is always advisable to see if a solution can still be reached by mutual agreement. 

And for all future contracts?

Clearly define in an agreement or general terms and conditions whether prices may be increased and under what conditions. A buyer will preferably want to agree fixed prices, while a supplier will benefit from as much freedom to increase prices as possible. In order to limit this, it can be established which cost price increases may be passed on or it can be linked to a certain index. Of course, not all circumstances can be foreseen, but such provisions at least give parties some guidance.