Ukraine War and Construction: Passing on War-related Price increases for Building Materials
- 14. March 2022
- Posted by: Ahlers & Vogel
- Category: Construction Law and Law for Architects
Although the current images and reports of the Russian Federation’s attack on Ukraine in violation of international law are hard to bear and very few professionals in the construction sector will think of their day-to-day business when they see these images, it is nevertheless the case that this war of aggression against Ukraine and the associated consequences will also have an impact on the construction sector in Germany.
These effects will be manifold and present the construction sector with a multitude of challenges. Among other things, it is to be expected that in future more and more Ukrainian construction companies which are used as subcontractors as well as Ukrainian personnel which is hired by German and other European construction companies will be absent from German building sites. This is probably also because it is to be feared that the armed conflicts will continue in the long term.
Another significant effect will be that the prices for building materials and raw materials will rise considerably. It is already becoming apparent that Ukraine, as a major exporter of raw materials, will not be able to maintain its current export volumes due to the current war-related conflicts and the consequences that are to be feared in the longer term. The consequence of this is, of course, that there is already a shortage of supply on the raw materials market and there will be even more in the future, which will inevitably lead to price increases, if only because of market economy principles. In addition, of course, the mutual sanctions imposed by the Russian Federation on the one hand and the member states of the European Union on the other will further reduce supply, as fewer and fewer Russian raw materials and building materials will reach the German and European markets.
Against this backdrop, the construction sector will once again be confronted with significant price increases, having already experienced considerable inflation in recent years due to the already strong inflationary trend and the ongoing Corona pandemic.
Not least against this background, construction companies that are already contractually bound will check whether they will be able to pass on these price increases to their respective clients. The clients, in turn, are faced with the question of whether they have to pay these price increases or whether they fall within the contractor’s sphere of risk.
Whether these price increases can be passed on and what principles and opportunities exist in this regard is the subject of this paper.
1. Contractual provisions
The starting point for answering such a question is – as always – the respective construction contract, so that it is always necessary to examine each individual case accordingly. In this context, however, it should be noted that only a few construction contracts still have corresponding provisions regarding increased prices, such as material price escalator clauses. It is therefore rather the rule that the majority of construction contracts do not have such provisions.
2. Regulations in the VOB/B and the BGB
Against this background, the question then arises whether a claim for price adjustment could possibly arise from the law or from the VOB/B, which from a legal dogmatic point of view are only general terms and conditions. First of all, it should be noted that both the German Civil Code (BGB) and the VOB/B are rather “inflexible” in this respect, as it is known that prices agreed between the parties remain binding (cf. section 2 I and II VOB/B).
It is therefore questionable whether there are exceptions to this principle. In the following consideration, a distinction is made between the situation where the originally contractually agreed scope of services remains unchanged irrespective of these price increases (a)) and the case where the price increases are possibly in connection with increases in quantity or supplements (b)).
a) Contractually agreed scope of services
aa) Basis of claim
If the contractor demands an adjustment of the contractually agreed unit prices due to increased material prices, such a demand can only be based on section 313 I BGB, i.e. the provisions on the disturbance of the basis of the contract, irrespective of whether a BGB construction contract or a VOB construction contract exists.
As far as it could be considered whether such a claim in the case of a VOB construction contract could also be based on section 2 V VOB/B or section 2 VI VOB/B, it has to be stated that these provisions are not appropriate in the present case, since in fact there is neither a post-contractual change of the performance target or any other order of the principal (section 2 V VOB/B) nor a performance not provided for in the contract within the meaning of section 2 VI VOB/B. Consequently, the Hamburg Higher Regional Court had already decided in its ruling of 28 December 2005 (Case No. 14 U 124/05) that these provisions cannot be considered as a basis for a claim.
Rather, the court took the view – and this is still the prevailing opinion today – that such a claim can only arise from section 313 I BGB.
bb) Prerequisites for a claim
According to the provision of section 313 I of the German Civil Code, an adjustment of the contract may be demanded if the circumstances that have become the basis of the contract have changed seriously after the conclusion of the contract and the parties would not have concluded the contract or would have concluded it with a different content if they had foreseen this change and if, taking into account all circumstances of the individual case, in particular the contractual and legal distribution of risks, one contracting party cannot reasonably be expected to adhere to the unchanged contract.
Even a first glance at this rather convoluted wording of the law reveals that the individual requirements are very general, cannot be clearly distinguished from each other, but rather overlap and, above all, offer ample room for interpretation. Such an interpretation can, of course, sometimes be more and sometimes less in the sense of the respective contractor. Accordingly, it will continue to be the case that each individual case must be considered separately and any courts to be called upon will interpret the requirements differently.
Against this background alone, it is therefore not possible to make a conclusive assessment at this point. Nevertheless, the following will illustrate which principles apply in this context and which argumentative possibilities and opportunities exist to enforce a claim for adjustment of the contract.
Following the prerequisites already described above, it would therefore have to be examined in a first step what the respective circumstances were that became the basis of the contract and in a second step whether these circumstances have changed seriously after the conclusion of the contract.
With regard to the term “basis of the contract”, it can be interpreted both subjectively and objectively. Essentially, this term is understood to mean the circumstances and general conduct whose existence or continuation is objectively necessary for the contract to still exist as a meaningful arrangement in the sense of the intentions of both contracting parties. In this context, the general economic conditions could certainly serve as an argumentative connecting factor. Ultimately, therefore, the economic situation as the parties had imagined it when concluding the contract. In this context, however, it must be taken into account that the economic risk that can be foreseen according to general experience, but also the economic risk that cannot be foreseen to a certain extent, is not covered by the basis of the contract. Accordingly, this is solely a risk of the respective contractual partner who is affected by negative changes. This can certainly be described as correct, since this is precisely the general risk of business life.
Consequently, price increases, for example for materials, are in principle also borne by the respective contractor. Therefore, as far as claims for adjustment of the contract, i.e. ultimately of the contractually agreed prices, were asserted in the past, these efforts were consequently only crowned with success in the rarest of cases. The senate of the Hamburg Higher Regional Court (OLG) also came to the conclusion in its above-mentioned ruling of 28 December 2005 that a claim for price adjustment under section 313 I of the German Civil Code (BGB) was not given. This decision was based on a case in which a contractor offered to provide steel construction services to a client in 2004 and there was a subsequent price explosion on the world market for steel. In this respect, there were price increases of up to 400% within a very short period of time. It is therefore the case that even at that time considerable price increases (alone) were not sufficient to successfully enforce a claim for price adjustment.
This case law on section 313 I BGB is also based on the previous case law of the Federal Supreme Court on the question of the extent to which the unit prices resulting from the calculation have become the basis of the business at all. This was denied by the BGH because, on the one hand, the contractor will not always disclose his calculation and, on the other hand, the client does not necessarily have to have acted at the time of the conclusion of the contract in the knowledge that the calculation basis would become the basis of the contract. Accordingly, special circumstances would have to be present (BGH, judgement of 10.09.2009 – VII ZR 82/08). It remains to be seen whether this argument, which will of course be put forward by clients, is actually the last word in wisdom. It is certain that in mutual contracts the basis of the business is governed by the idea that performance and consideration are of equal value.
Especially with regard to the latter consideration, it can be argued that if the changes in the basis of price determination are of such a magnitude that one has to speak of a drastic and thus fundamental change in the circumstances at the time of the conclusion of the contract, a disturbance of the basis of the contract exists.
With regard to the arguments that the contractors concerned could put forward in this context, a wide field is open to them.
A useful argumentative approach in this context would certainly be the argument that case law had often used to reject corresponding claims. Namely, the question of whether the inflation was foreseeable or not. In the past, claims were rejected not least because it was decided that it would have been possible for the contractors to recognize timely price increases if they had paid due attention to the market situation and that it would therefore have been reasonable for them to take appropriate precautions. Thus, it was precisely the contractors who were often reproached for not having stocked up on appropriate materials. With regard to the current situation, however, it is now the case that the massive price increases, which can be attributed to a large extent to the war and the associated sanctions, were not foreseeable for the construction industry and its suppliers. This is certainly all the more true when one considers that even for the federal government, which is known to be advised by its ministerial administration and external observers, this attack in violation of international law was not foreseeable. This is quite irrespective of the fact that the corresponding threat potential emanating from the Russian Federation has been known since the annexation of Crimea in 2014, which was in violation of international law. In any case, however, the construction industry cannot be blamed for the fact that the price increases were foreseeable and that it could or should have stocked up.
Another possible argumentative approach – especially vis-à-vis public contracting authorities – may be that the Federal Ministry of the Interior, for Building and the Home Affairs had issued a decree on 17 April 2020 which provides for the area of federal building construction that section 4 I No. 1 VOB/B is to be interpreted to the effect that corona-related additional costs for hygiene and health protection measures that are spatially related to the construction site are to be regarded as a measure within the meaning of section 4 I No. 1 VOB/B. This was intended to ensure that the public building owner, the federal government, would share in the additional costs caused by the pandemic. The reason given for this decree was that both the fight against the Corona virus and the continuation of the public construction measures as undisturbed as possible are in the interest of the federal government and the public good.
With regard to the price increases associated with the war in Ukraine, it could be argued that the shortage of materials, essentially caused by sanctions and counter-sanctions, is also in the federal interest, since this means that the Russian Federation can no longer find buyers for its goods, which significantly worsens the economic situation of the Russian Federation, which, as is known, should lead to an end to the war against Ukraine as quickly as possible. This is undoubtedly both a federal interest and a public interest. On the other hand, there is of course also an interest in ensuring that public construction measures in Germany continue as undisturbed as possible. Against this background, section 313 I BGB could possibly be interpreted to the effect that the (public) client also participates in these additional costs.
Finally, it will certainly be possible to put forward equity considerations with good arguments. These should then be along the lines that it is certainly absolutely correct if, under normal circumstances – and possibly beyond – price increases are an economic risk to be borne by the contractor and he therefore “sits on” these costs. Of course, this also applies against the background that the contractor regularly does not pass on any savings to the client if the prices for raw materials unexpectedly fall massively. On the other hand, with the price increases due to the war in Ukraine, a situation presents itself that is completely unexpected and entirely new. In the middle of Europe, another state invades a neighbour and uses very considerable military means. The result is damage and mutual sanctions the likes of which have probably not been seen in Europe since the Second World War. The question therefore arises that if such a situation is not to have an impact on the basis of business, then when does it?
With regard to the further prerequisites, here in particular that of the “serious change” in circumstances, much will depend on the respective price increases and quite specifically how high these were in detail. Slight increases – even if they are related to the Ukraine war – will certainly not be sufficient.
In view of the above considerations, it can be stated that there are certainly argumentative possibilities to pass on additional expenses incurred to the client and to assert them accordingly. Whether these claims can be enforced in court remains to be seen. As the article has shown, the courts have so far tended to be rather reluctant to adjust the contract pursuant to section 313 I BGB. However, with the current global political situation, there is a new state of affairs that could result in different decisions. Against this background, there are opportunities and risks at the same time for both contractor and client.
The respective contracting parties to a construction contract should therefore possibly consider whether it would not be worth trying to agree on a pro rata cost sharing by the client within the framework of an amicable solution. This would certainly not be unfair and could also be a quick and practicable solution at the same time.
b) Price Increases in the Context of Quantity Increases and Subsequent Orders
In view of the above considerations, the question then arises as to which special features apply if the price increases are possibly in connection with increases in quantity or demands for supplementary performance.
According to the provision of section 2 III No. 2 VOB/B, if the quantity originally agreed in a bill of quantities is exceeded by more than 10%, a new price must be agreed taking into account the additional and reduced costs. With regard to the amount of this new price, it has long been – and in some cases still is – customary to calculate it on the basis of an update of the original calculation. In this context, it should be noted that the Federal Supreme Court (BGH) had ruled in 2019 that with regard to additional quantities exceeding the 110% limit, a new price is to be formed taking into account the costs actually required plus reasonable surcharges for general business costs and risk and profit (BGH, ruling of 08.08.2019 – VII ZR 34/18).
This can therefore be very significant for price increases that have occurred in the meantime, as the actual costs are decisive at least for the additional quantities and thus corresponding price increases are also taken into account. In this respect, it will therefore be possible for contractors to pass on corresponding price increases.
Although these supreme court decisions have so far been issued on additional quantities and thus on section 2 III No. 2 VOB/B, there is much to suggest that such an argument can also be made if the client orders changes to the construction design or additional services. Corresponding decisions of the higher courts indicate this in any case. Thus, corresponding price increases could also be claimed in this case group, at least with regard to the specific change.
Not least against this background, contractors should therefore always particularly check whether invoicing of additional quantities and supplements should not be based on the actual costs.
Against this background, it can be stated that, especially in view of the current global political situation and the associated massive price increases for building materials and construction materials, there are certainly starting points for achieving such a claim by way of a claim for adjustment of the contract under section 313 I BGB. Although case law has been rather restrictive in this respect in the past, there is now a completely new situation which does not rule out the possibility that courts will deviate from their previously rather restrictive approach.
Not least for this reason, the respective contracting parties should consider whether they cannot reach an amicable and consensual solution that takes into account the fact that neither the client nor the contractor could have foreseen these price increases and that a unilateral allocation of this risk to one of the contracting parties is inequitable. How this solution can be designed in detail must then be considered in each individual case.
With regard to increases in quantity and claims for supplementary work, the situation from the contractor’s point of view looks much better, as price increases can usually be claimed via the actual costs.
If you have any further questions, our experts in Construction Law and Law for Architects will be happy to help you.