The prices of various building materials such as copper, wood and steel have skyrocketed recently, due to the corona pandemic and trade conflicts, among other reasons (see for example Cobouw, 19 April 2021, Madness in Building Materials Market: ‘I have not seen such price increases in twenty years' time’). Such price increases may cause problems for building contractors who concluded an agreement before prices started rising. Who will have to bear these additional costs? We will answer this question on the basis of the law and the terms and conditions often used in the construction sector, UAV 2012 and UAV GC 2005.
The law: Sections 7:753 and 6:258 DCC
Dutch law has a fairly concise regime for the contracting of work, set out in fifteen sections in the general part (Title 7.12.1) of the Dutch Civil Code (“DCC”). The basic principle of the contracting of work is that the contract sum is fixed. The law does not offer any specific exceptions for price increases. However, pursuant to Section 7:753 DCC, a building contractor can claim that the court adjusts the contract price in the event of:
- cost-increasing circumstances; which
- arise or come to light only after the agreement is concluded; and which
- are not attributable to the contractor; and
- the contractor, in setting the price, ought not to have taken into account the likelihood of such circumstances occurring.
Can the current price increases be regarded as a ‘cost-increasing circumstance’? This might very well be the case. For example, there is case law in which the court held that the rocketing of the steel prices, just before the economic crisis in 2008, could be qualified as a cost-increasing circumstance, which justified an adjustment of the contract sum (RvA, 9 June 2015, no. 35.130).
It is important that Section 7:753 DCC mentions a ‘full or partial’ adjustment of the contract price. To what extent should price increases be passed on? In the ruling mentioned above, the arbitrators held that an increase of the steel price of 10% maximum was within the entrepreneurial risk, and they awarded compensation to the extent that the price increase was higher than 10% of the agreed price of reinforcing steel.
Occasionally, Section 7:753 DCC is excluded in agreements. In that case, the contractor still has the option of relying on Section 6:258 DCC, which makes it possible to adjust the agreement if ‘unforeseen circumstances’ occur. This section cannot be contractually excluded (Section 6:250 DCC). However, such a reliance is not very likely to be successful. Reliance on unforeseen circumstances is only admissible if the unforeseen circumstances are of such a nature that the opposite party of the contractor, who requests a review of the agreement, cannot expect according to the standards of reasonableness and fairness that the agreement remains in force unaltered. It follows from case law that price increases are in principle within the sphere of risk of the entrepreneur, so that they do not constitute an unforeseen circumstance as such (Supreme Court, 20 February 1998, ECLI:NL:HR:1998:ZC2587). However, as far as a price increase can be related directly to the corona pandemic, unforeseen circumstances can perhaps be relied on anyway, since the courts have recently ruled in several judgments that the corona pandemic may constitute an unforeseen circumstance (cf. Court of Appeal of Amsterdam, 14 September 2020, ECLI:NL:GHAMS:2020:2604).
§47 subparagraph 1 UAV 2012
The UAV 2012 stipulates that circumstances are only cost-increasing if they ‘considerably increase’ the costs of the work (§47 subparagraph 1 UAV). The question what a considerable increase is has often been the topic of litigation. When deciding on the amount that can be passed on to the client, not only the price increase of the building materials themselves is considered, but also the increase of the overall contract sum. In the same way as when Section 7:753 DCC is relied on, a consideration of equitable grounds is in order when assessing the entrepreneurial risk.
For example, case law of the arbitration board for the the building industry (Raad van Arbitrage in bouwgeschillen, “RvA”) shows that the first 20% of the price increase of building materials may fall within the entrepreneurial risk of the contractor, and that only if the overall contract sum is increased from 5% onwards, this is a ‘considerable cost increase’ (cf. RvA, 25 April 2016, no. 35.131). Therefore, the only amount that is eligible for compensation is the amount in excess of that 5%. In summary: if the price increase of building materials above the first 20% does not result in an increase of the overall contract sum of more than 5%, there is no question of a considerable cost increase, and the contractor will have to bear the full price increase alone after all.
Incidentally, it must be observed that unlike the RvA, the regular courts do not apply this lower limit of 5% as a hard standard, but as an open standard, which they interpret on the basis of all circumstances of the case (Court of Appeal of The Hague, 31 January 2012, ECLI:NL:GHSGR:2012:83).
§44 subparagraph 1 UAV-GC 2005
In the UAV-GC 2005, §44 subparagraph 1 contains an exhaustive list of situations in which the contractor is entitled to compensation of costs and/or an extension of the term. Cost-increasing circumstances are not mentioned here. However, it appears from this paragraph that the contractor is entitled to compensation of costs and/or extension of the term if “an unforeseen circumstance occurs of such a nature that the Client cannot expect of the Contractor, according to the standards of reasonableness and fairness, that the Agreement remains in force unaltered”. This is a stricter standard than the one that applies by law and under the UAV 2012; the reference point for it is the standard of Section 6:258 subsection 1 DCC, as discussed above.
Conclusion
The question as to who foots the bill for the sharply increased prices of building materials depends both on the situation and on the substance of the agreement. As far as we are concerned, the parties should make an effort, regardless of what they have agreed exactly, to arrive at a reasonable solution.
You are welcome to contact us if you are in need of advice on a concrete case.
