Extraordinary times, require extraordinary measures. Many parties are facing high cost increases because of the war in Ukraine, as well as the corona pandemic. However, what if prices are contractually fixed? What if indexation does not provide sufficient coverage? On 16 December 2022, the North Holland court ordered that demonstrably excessive costs due to the war in Ukraine and the Covid pandemic must be shared 50/50 by the parties. This ruling is discussed in this post.
The ruling does not stand alone. The court again rules that it is reasonable for contracts to be adjusted because of the war in Ukraine and/or Covid-19. We already reported on 7 October 2022 that the war in Ukraine was an unforeseen circumstance according to the Arbitration Council for Construction Disputes. In addition, the same Haarlem court had already found Covid-19 to be an unforeseen circumstance in another procurement matter. The 16 December 2022 ruling highlights both crises.
The case study
What exactly was going on? The Purmerend municipality planned to build three hundred temporary housing units. To this end, it issued a European public tender. This stated, among other things, that a minimum of 100 temporary houses had to be built, with the possibility of more. The tender was therefore based on 300 dwellings. De Meeuw won the tender and a framework agreement was subsequently signed with De Meeuw. This agreement stipulated that the municipality would pay a (fixed) contract sum that would be indexed annually based on the CBS monthly construction cost index figure.
De Meeuw initially agreed to this, but later stated that the contract could no longer be executed, due to unforeseen circumstances. The war in Ukraine, the Covid pandemic, import duties and energy and transport costs have such an impact that it is not financially viable to execute the contract. De Meeuw therefore refuses to further execute the contract. De Meeuw also feels it did not have to take into account the construction of 300 homes. As consultation did not lead to a solution, the municipality claimed in summary proceedings (an urgent procedure) that De Meeuw was ordered to honour the agreement.
The court’s assessment
The judge in the summary proceedings (the interim relief judge) ruled that the circumstances mentioned by De Meeuw were unforeseen circumstances. It is therefore plausible that they lead to excessive cost increases. In that context, the municipality should not have the expectation that the framework agreement will be executed under the old conditions. The costs have risen too explosively for that. The fact that the contractor has not substantiated concretely what the war in Ukraine means for it does not alter this. According to the interim relief judge, undeniably unforeseen circumstances exist; making the consequences for the contractor concrete is therefore unnecessary.
Because the municipality of cooperation adopted a constructive attitude at the hearing to arrive at a division of the higher costs, the judge in preliminary relief proceedings sees no reason for a (partial) termination of the agreement. An amendment to the agreement offers a sufficient solution, according to the judge. This partly because De Meeuw did contractually undertake to realise the homes. The judge therefore amends the agreement. The interim relief judge determines a 50/50 split of the demonstrably excessive cost increases.
Demonstrably excessive cost increase
So when is there a demonstrably excessive cost increase? According to the interim relief judge, this is the case when the cost increase i) deemed to be the result of the Covid pandemic and the war in Ukraine and (ii) the cost increase is not already covered by the indexation from the framework agreement. This means that only the cost increases for energy and materials directly related to the realisation of the temporary housing should be shared 50/50. These are the costs to be incurred for energy and materials. The costs incurred by the contractor to free up additional production capacity to fulfil its obligations under the framework agreement do not fall under the demonstrable excessive cost increase. In fact, De Meeuw should have done this all along, if it had interpreted the tender correctly. Indeed, it already followed from there that up to a maximum of 300 homes were to be built.
There is a growing body of case-law classifying Covid-19 and the war in Ukraine as unforeseen circumstances. The higher costs as a result, need not simply be borne by one party. It does depend on all the circumstances of the specific case. So far, it is mainly about summary judgments. These are emergency provisions and not final assessments. It is likely, however, that courts on the merits will reach the same verdict.
In any event, it invites parties to enter into constructive discussions on the consequences of excessive cost increases. If you need advice on this, the specialists at Wille Donker lawyers are happy to be available.