Also in the manufacturing industry, the prices of raw materials continue to rise – also in the Netherlands. The global pandemic, the ensuing lockdowns, limited stocks, the energy transition and (trade) conflicts are among the main causes of this. On 4 April 2022, Metaalunie reported that prices are being driven up also by the situation in Ukraine. Earlier, our contract attorney in the Netherlands had already discussed the acute shortages at chip manufacturers and their customers. This price increase of raw materials under Dutch law also continuing in the supply of, among others, gas, electricity, but also steel, paper and other raw materials. The price increase of raw materials and contracts in the Netherlands are increasingly at odds with each other. Previously made agreements suddenly seem unreasonable or even unfeasible in certain situations.
Price increase of raw materials and commercial contracts in the Netherlands
State of the art: price increases affect commercial contracts under Dutch law. Suppliers and manufacturers are raising their selling prices, which is causing the entire chain within the manufacturing industry to face economic (and legal) challenges. In essence, the main question then arises as to whether all players in the chain should share the pain for the price increases of raw materials in the market? This ‘share the pain‘ principle was already seen in the covid-19 related rental cases in the Netherlands, where landlords and tenant had to reach a reasonable price agreement again on the basis of ‘unforeseen circumstances’ or ‘force majeure’ in order to rebalance the disrupted rental contract (whether or not for a certain duration). It was concluded – in short and to the point – that making concessions from time to time is not unreasonable.
Our Dutch attorneys in contract law receive an increasing number of questions from the manufacturing industry about commercial contracts in relation to the (often unrealistic) price increases of raw materials. The increase of raw material prices is not something new. This subject has already come to the fore in previous crises. In this article we discuss in broad outline how to look at commodity prices in the light of a commercial contract. We will discuss 1) force majeure 2) unforeseen circumstances of Section 6:258 of the DCC 3) the reasonableness and fairness of Section 6:248 of the DCC and finally 4) contracting for work. We will first start with a short introduction to how Dutch contract law is structured in this respect.
ARE CONTRACTS governed by Dutch law LEGALLY ENFORCEABLE DESPITE RAW MATERIAL PRICE INCREASES?
It should be noted that, as a rule, the starting point ‘agreement = agreement’ applies. Certainly in the situation where two expert and professional parties do business with each other, it should be possible to fall back on the commercial contract, barring (high) exceptions. Whether it is a distribution agreement, a purchase agreement or any other form of cooperation, the agreement made is usually leading. This applies even if a mismatch arises when the market takes off in such a way that raw materials are extremely expensive in a relatively short period of time. This is the starting point.
An important follow-up question is of course what the underlying commercial contract contains? Have the parties considered possible price increases of raw materials and, if so, how have the parties structured the contractual agreement? It is not unusual for commercial agreements to contain a provision that includes a risk allocation in relation to price fluctuations in the market. As lawyers in contract law, we regularly advise our clients on this and we usually arrive at a percentage risk allocation. If there is such an agreement, it further colours the relationship between the parties. An arrangement has been made and the parties must comply with it. In short, in most cases contracts are legally enforceable in (international) trade in the way they have been agreed.
CAN AN INCREASE IN THE PRICE OF RAW MATERIALS FORCE THE CONTRACT TO BE ADJUSTED?
The starting point is therefore clear: agreement = agreement. However, is there still a life buoy that can be thrown to the disappointed purchaser within the chain? Dutch law offers a number of starting points to make it possible to pass on price increases, even when this is not provided for in the commercial contract, or when the contract contains a (percentage) regulation on how the price increase of raw materials should be calculated.
The construction sector in particular, but also the food and packaging industry, for example, currently faces challenges in this area. What about, for example, the contracting of work, and what about companies that are directly or indirectly dependent on Ukraine for their products, or are affected by shortages of other products (and therefore scarcity, and therefore price increases)? It is precisely for these market participants that this is currently going on and that there is a lack of clarity as to how to deal with it. There are a number of options to stand up against these price increases, even if this is contrary to the contract. Please note: these are exceptions to the rule. There must therefore be special circumstances that justify a deviation from a contractual agreement. In civil court proceedings, we have seen that appeals to change, dissolve, temporarily pause or terminate a contract under such circumstances are granted only with restraint. This is also in line with the purpose of these provisions, namely to let the word between two companies prevail. The same applies to declaring a contractual provision inapplicable on the grounds of (derogatory effect of) reasonableness and fairness. We will deal with the following topics below:
- Force majeure
- Unforeseen circumstances
- (The derogatory effect of) reasonableness and fairness
- Contracting of work
DO RAW MATERIAL PRICE INCREASES QUALIFY AS FORCE MAJEURE?
When we speak of force majeure, a contracting party cannot avoid failing to meet his obligation at all. In short, it is not his fault and he cannot be ‘blamed’. Fulfilment of the agreement can then, in all reasonableness, no longer be required. Think, for example, of a natural disaster, but also of a ban by the government (for example, to keep a catering establishment closed in times of covid-19). International supply bans may also arise, as a result of which performance simply cannot be maintained. In the manufacturing industry, this discussion will be more explicit when a supplier states that he cannot deliver. In other words, it is impossible to fulfil the contractual performance. The question that must always be asked is: is delivery actually impossible, or does the supplier simply not want to deliver because the margins are no longer good, or even loss-making? Conversely: can a customer within the chain not buy, or does the customer not want to because raw material prices are skyrocketing? In the latter case, we do not speak of force majeure in a legal sense. There are also a significant number of judgements in this area, where an appeal to force majeure under the above circumstances, i.e. the unwillingness to perform, fails.
IS THE INCREASE IN THE PRICE OF RAW MATERIALS AN UNFORESEEN CIRCUMSTANCE WITHIN THE MEANING OF THE LAW?
Many manufacturing companies and other buyers will answer this question in the affirmative. A certain market fluctuation is inherent in the normal business risk and must be accepted, there is usually no misunderstanding about that. However, when prices rise by 300-400%, or even more (!), the question arises whether parties could have foreseen this.
Section 6:258 of the Dutch Civil Code is the article of choice when it comes to the question of whether or not there is an ‘unforeseen circumstance’ in a legal sense.
This article stipulates the following:
- At the request of one of the parties, the court may change the consequences of an agreement or dissolve it entirely or partly on the basis of unforeseen circumstances of such a nature that the other party cannot expect the unaltered maintenance of the agreement according to standards of reasonableness and fairness. The amendment or dissolution may be given retroactive effect.
- An amendment or dissolution shall not be pronounced insofar as the circumstances are for the account of the person invoking it pursuant to the nature of the contract or generally accepted practice.
- For the purposes of this Article, the person to whom a right or obligation has been transferred under a contract is considered to be a party to that contract.
It is good to realize that this article is not easily met. There are more judgements in case law where an appeal to this article has failed, than procedures where it has been successfully invoked. Nevertheless, appeals are sometimes granted and it should be noted that no judgments are available yet about the extreme price increases of raw materials in recent months. A successful appeal to unforeseen circumstances occurred in a case where the prices of magnets rose by 400-600% after China restricted their export.
PRICE CHANGE CLAUSE IN A CONTRACT AND UNFORESEEN CIRCUMSTANCES
A successful appeal on unforeseen circumstances when parties contracted under a price adjustment clause seems less likely to succeed. Precisely in that situation, the parties have thought about the price increases and deliberately divided the risks involved.
Even if a customer (or manufacturer) is in dire straits due to raw material price increases, in our view this will not justify a change in the contractual term. A similar discussion has been held with energy suppliers who went bankrupt due to huge fluctuations. There, too, the court did not grant them a lifeline on the basis of unforeseen circumstances.
In essence, in our view, it comes down to whether the situation can be classed as business risk, however unpleasant the outcome, or if the cause lies outside the market, as is the case with a pandemic, for example.
REASONABLENESS AND FAIRNESS IN THE CASE OF PRICE INCREASES OF RAW MATERIALS
Dutch law has the figure of reasonableness and fairness. If a provision in an agreement is unreasonable, it can be set aside. This may therefore also apply to a price increase clause. Under the specific circumstances of a case, it may be that an unchanged continuation of such a provision may not be required of the contracting parties. Whereas invoking unforeseen circumstances involves amending and/or dissolving the commercial contract, a specific clause is not applicable here. Here too it is good to realize that a successful reliance on the reasonableness and fairness of Section 6:248 of the DCC is granted with restraint.
PRICE INCREASES IN CONSTRUCTION AND CONTRACTING under Dutch law
Price increases in raw materials and commercial contracts under Dutch law are more topical than ever in the construction industry. When it comes to price increases in construction and contracting, the law has a special provision, namely Section 7:753 of the DCC. An essential difference with the more generic Section 6:258 of the DCC is that this provision is of regulatory law and can therefore be excluded. Agreeing on a fixed price clause does not automatically exclude this Article. The article does give a little more room to discuss this price increase than Section 6:258 of the DCC. For instance, the article does not have the criterion as the article on unforeseen circumstances that ‘according to standards of reasonableness and fairness, the other party may no longer expect an undesired continuation of the agreement.
LAWYER SPECIALIZING IN Dutch construction law
The article regulates the situation when a fixed contract price has been agreed upon and after the conclusion of the contract cost-increasing circumstances arise in the relationship between the principal and the contractor. At a detailed level, there are a number of differences with the article on reasonableness and fairness and on unforeseen circumstances, but as far as we are concerned, the results will not differ substantially – also with regard to case law – in the sense that a price adjustment can be implemented more quickly in a contract that does not provide any room for this on paper. Article 7:753 of the Dutch Civil Code provides the following:
- If, after the conclusion of the contract, cost-increasing circumstances arise or come to light without this being attributable to the contractor, the court may, at the contractor’s request, adjust the agreed price in whole or in part to the cost increase, provided that the contractor did not have to take the possibility of such circumstances into account when determining the price.
- The contractor may adjust the price without the intervention of the court, if the cost increase is the result of incorrect information provided by the principal which is important for the determination of the price, unless the contractor should have discovered the incorrect information before determining the price.
- The provisions of paragraphs 1 and 2 shall apply only if the contractor has warned the principal as soon as possible of the need for a price increase, so that the principal can either make use of the right granted to him by Article 764 in good time, or make a proposal to limit or simplify the work.
A contractor will therefore have to state and prove (if necessary) why the circumstances are exceptional for abandoning a fixed price agreement. As with the other articles, a cautious application applies here. Our lawyers for contracts and contracting work receive continuous questions about this, certainly because the price increases are affecting the construction industry more and more.
Contracts can never cover every situation to 100%. Nevertheless, it is important to keep thinking about the risks that may arise, as this can prevent major financial suffering. Also in back-to-back contracts, for example with a subcontractor or reseller, it is extremely important for your own position that all risks of price increases are shifted within the chain. If you do not do so, the risk will often end up with you. As a rule, the sales conditions of a supplier or manufacturer will include a price adjustment clause – you should then agree on this with your (sub)buyer as well.
CONTACTING A LAWYER SPECIALIZED IN PRICE INCREASES OF RAW MATERIALS
Are you looking for an experienced contract lawyer? A lawyer who is at home in your sector? A lawyer who specializes in the increase of price increase of raw materials under Dutch law?
Our Dutch law firm in Amsterdam is a specialist firm for the manufacturing industry. We advise manufacturing companies on the price of raw materials and commercial contracts on a daily basis. Remko Roosjen is an experienced attorney in the Netherlands for contract law with expertise in national and international contracts and litigation. Please feel free to contact us for all your questions in the field of commercial contracting.