Prices for raw materials and commodities have skyrocketed in recent months. The extreme price increases are due in part to the war in Ukraine. With price increases, many contractors are asking whether the agreed contract price can be changed. Recently, the Council of Arbitration in Construction Disputes ruled that the client could not hold the contractor to the contract for construction without question because the war in Ukraine had resulted in an extreme unforeseen change in circumstances.
What was going on?
The parties entered into a contracting agreement in the fall of 2020 for the construction of single-family homes and apartments. The contracting agreement states that the contract price is price fixed through 2021, and thereafter will be indexed based on the BDB index. The building contract states that the usual provisions on cost-increasing circumstances (Section 47 UAV 2012 and Article 7:753 Civil Code) do not apply.
In addition, the parties have agreed that the contracting agreement can be amended on an interim basis if there is an extreme unforeseen change in circumstances that makes it objectively no longer justifiable for a party to perform the contracting agreement. The parties have agreed that if this situation arises, they will try to modify the agreement by mutual agreement.
According to the contractor, the war in Ukraine is an extreme unforeseen change of circumstances. The contractor argues that the war has profound effects on the Dutch economy and that it cannot be expected to complete the project for the contract price originally agreed upon. However, the client is not willing to adjust the contract price.
The arbitrators’ decision
The arbitrators vindicated the contractor. They ruled that the war in Ukraine and its impact on construction could indeed be classified as an extreme unforeseen change in circumstances as envisaged in the agreement. As a result, it is no longer justifiable for the contractor to complete the project based on the agreements previously made. This means that the contractor is justified in claiming consultations to come to an adjustment of the agreement. Because extreme contingencies were involved, the client cannot successfully invoke the exclusion of the usual provisions on cost-increasing circumstances.
Moreover, although the contractor had not invoked it, the arbitrators ruled that there was an unforeseen circumstance within the meaning of Article 6:258 of the Civil Code. That article cannot be declared inapplicable in a contract and provides that if unforeseen circumstances arise, the court has the authority to modify the contract. The arbitrators did not address in the award how the modified agreement might look and to what extent the contingency risk should be shared between the two parties. However, the ruling does show that the parties must consider in their mutual consultation what is reasonable, and what circumstances are at the risk of the contractor and the client. According to the arbitrators, the parties should stay as close as possible to the original intent and scope of the contracting agreement.
Conclusion
This ruling is important because it shows that the war in Ukraine can be an unforeseen circumstance for contracting contracts, so that the contractor cannot be held to the contract price without question. Six months after the war in Ukraine began, this has now become clear for the first time.
This contribution was written by mr. Margot van Tol, affiliated with the Real Estate Practice Group.
