Crises and rising prices – what to do?

The COVID 19 pandemic along with the Ukraine war and its effects led to a shortage of various building materials. The reduced supply in turn caused material prices to rise, in some cases explosively. Whether a contractor has the possibility to assert claims against the buyer in existing contracts due to those material price increases depends on a number of preconditions.

In principle, the contractor calculates his prices, which regularly comprise the individual costs of partial performance, surcharges for construction site overheads, general business costs as well as risk and profit. Particularly, the so-called direct costs of the partial services include material and substance costs, which the contractor must include in his price in view of expected developments and changes. If price increases that have not been calculated for occur during the execution of construction work, the unit costs of the partial services may increase. In a worst-case scenario, the services can no longer be executed in a cost-covering manner. While salary increases are regularly still calculable, as long as they are within the usual tariff range, expenses for materials are subject to greater fluctuations. As a result, due to the contractor’s authority to calculate, case law generally assigns the risk of a “right or wrong” calculation to the contractor. The price offered on the basis of his calculation is a fixed price for the service, irrespective of the type of contractual arrangement as a lump sum or unit price. The price must therefore remain unchanged, so that price adjustments in the event of a general increase in “purchase prices” are excluded. An exception is, of course, the regulation of possible price adjustment clauses in the contractual arrangements. These clauses, however, are seldomly found.  

In the absence of such a contractual provision, section 313 of the German Civil Code (BGB) offers a solution. Here, the legislator provides a claim to adjust the contractual arrangement in the event of a significant disruption of the basis of the contract.

Under this provision, a claim for adjustment of the contract is granted if the circumstances that became the basis of the contract have changed substantially after the conclusion of the contract and the parties would not have concluded the contract or would have concluded it under different terms if they had foreseen this change.

Use of this provision is excluded, however, if circumstances arise which are categorically within the sphere of risk of one of the parties. This basically includes the calculation and procurement risk, which is assigned to the contractor.

That said, the contractor’s calculation is not deemed a basis of the contract. However, it is assumed that the parties’ common understanding that performance and consideration are equivalent is part of the basis of the contract (Federal Supreme Court (BGH), judg. of 06.04.1995, IX ZR 61/94). Thus, if the balance of performance and consideration is disturbed to such an extent that the limit of the assumed risk (the calculation risk) is exceeded, and the interest of the contracting party (the contractor) disadvantaged thereby ceases to be adequately considered, this disturbance of the equivalence ratio may warrant an adjustment of the contract according to section 313 BGB.

The impairment of the so-called “major basis of the contract” denotes the expectation of the contracting parties that the fundamental political and economic conditions will not change due to revolution, wars or natural disasters and that the social existence of one of the parties will not be destabilised (BGH, judg. of 12.01.2022, XII ZR 8/21). This statement is intended to cover both the occurrence of the events and the measures taken in connection with or to overcome the crisis. The events mentioned are externally caused and unforeseeable events and therefore cannot be prevented by the individual contracting party, which also constitutes a case of force majeure. The parties’ perception that there would only be normal and expected price increases and that the markets would continue to function was considerably disturbed both by the COVID 19 pandemic and by the Ukraine war and its effects on the procurement of materials.

In this case, that unforeseeably affected the contractor’s calculation basis. With this in mind, it is again of great importance at what point in time the respective contracts were concluded. If a contract was concluded after the COVID 19 pandemic became known, but before the start of the Ukraine war, only price increases resulting from the pandemic are at the contractor’s risk, but not price increases resulting from Russia’s invasion of Ukraine. This will make substantiation considerably more difficult. For this reason alone, it is exciting to see whether and to what extent case law will comment on a standard of delimitation. 

Having to assume a disturbance of the basis of the contract against this background, this does, however, not yet justify the contracts’ adjustment. Rather, it must be added that the affected contracting party proves, taking into account all circumstances of the individual case, that they cannot reasonably be expected to adhere to the unchanged contract. The result would have to be unbearable. An actual threat to the economic existence does not have to be present (BGH, judg. of 12.01.2022 XII ZR 8/21). Not merely a single partial performance from the concluded contract is to be assessed, but rather the entire agreed remuneration has to be considered. There is no rigid risk limit in the sense that it would be unreasonable to adhere to the contract if a certain percentage of the agreed remuneration is exceeded. It is in fact reasonable for the entrepreneur to accept losses. However, there are indications that if, in addition to the calculated profit, the calculated general business costs have also been absorbed, i.e. the total sum of the agreed remuneration leads to a larger loss, this point in time can serve as a rough indication of when an unreasonableness can be assumed.

Once these disclosures have been made, the contractor is entitled to adjust the contract. Nevertheless, the contractual distribution of risk should not be changed. The question is therefore what legal consequence the parties would have developed in good faith if they had considered existing changes. This in turn shows that a complete relief of the contractor cannot be the aim of the adjustment. Rather, the relevant point of reference for an adjustment of the contract is the actual additional expenditure and not the previously calculated prices.

The basis for the adjustment is therefore the difference between the formerly calculated purchase price and the amount of inflation due to the respective crisis. Since a complete relief of the contractor is out of the question, it is difficult to find a yardstick for the magnitude of the adjustment. A point of reference may be found in the decree “Supply bottlenecks and price increases of important building materials as a consequence of the Ukraine war” of the Federal Ministry of Housing and Urban Development of 25.03.2022. In that decree it is assumed with regard to public contract awards that an assumption by the purchaser of “more than half of the additional costs shall regularly be unreasonable”. Conversely, an assumption of risk of up to half of the additional costs is considered altogether possible.

Overall, one would recommend every contractor to explain in detail the circumstances that led to an increase in the material prices. In particular, contractors will have to face the question of whether it was reasonable and possible for them to have ordered materials at an earlier or later, in any case at a more favourable time. Given the many preconditions, however, it is clear that the hurdle for requesting a contract adjustment is high and that a multitude of statements are required.

Against this background, the recommendation can only be to develop contracts that allow a price adjustment that is tolerable for both sides.

  • Rainer Beckschewe

    • Lawyer
    • Construction law and architectural law
    • Family law
    • Mediator
    • Arbitrator in accordance with SO Bau