Price-fixing clause: still pass on a price increase?

Almost every contractor faces it today: an increase in procurement costs. In the first quarter of 2021, prices of raw materials and construction materials rose at a record pace. Demand for (construction) raw materials is unprecedented, while supply lags behind. This is due to trade conflicts, supply problems and (of course) the corona crisis. Can a contractor - who has agreed on a fixed price with his client - pass on these price increases?

What is a price-fixing clause?

A price-fixing clause is not a well-defined concept. However, some form of such a clause appears in most (construction) contracts. After all, clients often wish to agree on a 'fixed price'. However, the presence of a price-fixing clause does not mean that the price is fixed at all times. This is explained by means of a fictitious case.

Case study

Client Y and contractor X conclude a building contract on January 1, 2020, pursuant to which X constructs a business premises for Y. A contract price of €1,000,000 has been agreed upon. The UAV 2012 has been declared applicable to the building contract. The building contract includes the following phrase: "The price is fixed".

In the first quarter of 2021, X faces an explosive price increase in its purchases (building materials), which X did not (or could not) take into account when agreeing the price/contract price.

X charges the price increase of €70,000 to Y. Y refuses to pay the price increase with reference to the price-fixing clause.

Can a price increase be passed on?

Both the law and the UAV have options for passing on a price increase. The law (Article 7:753 BW) provides that a judge can adjust the price at the contractor's request, in case of:

• cost-increasing circumstances;
• 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.

The UAV 2012 has (in paragraph 47) a similar provision. The main difference is that the UAV adds a condition, namely that it must be:

• a significant price increase.

It must involve a substantial increase in the cost of the entire work. What constitutes "substantial" is judged differently; case law sometimes uses a standard of 5% (over the entire contract sum).

Back to the case: can X pass on the "explosive" price increase? It depends - as often in legal matters - on the specific circumstances of the case. It is quite possible that this 'explosive' price increase can (partly) be passed on to Y. After all, it concerns cost-increasing circumstances, which arose after the conclusion of the contract and which X did not have to take into account. One could also speak of a considerable price increase, since the entire work will become 7% more expensive. Note: there will (almost) never be a case of being able to pass on the entire price increase. A fair assessment will have to be made (case by case).

Does the presence of a price-fixing clause still throw a spanner in the works (of X)?

Price-fixing clause

Client Y will take the position that a "fixed price" was agreed upon and the price increase of construction materials will be borne by contractor X. Probably this flyer will not hold. This is because such a price-fixing clause is (as a rule) interpreted as a provision that excludes normal price increases from settlement/indexation.

More than once courts and arbitrators have considered that a similar "standard" price-fixing clause (as described in the case) does not exclude the effect of 7:753 BW and/or Section 47 UAV (see, for example, RvA 29 August 2006, nos. 70,981 and 70,990, BR 2006, p. 1105). This often requires a more explicit exclusion in which Section 7:753 and/or Section 47 UAV are rendered inoperative. Also, a "more than usual" price-fixing clause may have the effect of rendering Article 7:753 and/or Section 47 UAV inoperative (see: RvA dated February 8, 2017, no. 72,067).

In short: a price-fixing clause does not mean (without more) that price increases cannot be passed on to the client.

Conclusion and tips for practice

A 'regular' price-fixing clause does not detract from the effect of the provisions concerning cost-increasing circumstances (Article 7:753 BW and Section 47 UAV). This requires that a 'more than usual' price-fixing clause be agreed.

For clients

A client who wishes maximum certainty regarding the price of the work would do well to stipulate explicitly that Article 7:753 of the Dutch Civil Code and/or Section 47 of the UAV have no effect. For example: "the parties agree that the price is fixed for the duration of the work, that the risk of price increases lies entirely with the contractor and that, consequently, Section 7:753 of the BW and Section 47 of the UAV are excluded".

For contractors

A contractor obviously benefits from the opposite. If the client wants a price-fixing clause anyway, a contractor would do well to include (for security purposes) that this clause "does not affect the claims in accordance with the law and the UAV ."

For both parties

Both parties benefit from as much upfront clarity as possible. In this context, the parties would do well to discuss the risk of price increases before entering into an agreement. Then lay down:

(i) of which materials price increases will be passed on;
(ii) from what percentage of price increase the contractor may pass on; and
(iii) what allocation key the parties will then use.