The pain of price hikes caused by the war in Ukraine must be shared

On May 31, 2022, the trade associations in construction, project development, supply and advice have laid down in a letter of intent how the parties involved are expected to deal with each other in relation to the consequences of increases in construction costs due to the Ukraine conflict.

The underlying motive is that it is socially undesirable for construction projects to come to a standstill. From project to project, the parties involved are expected to make tailor-made agreements according to a number of guiding principles. These are named as follows in the letter of intent:
The starting points for this letter of intent are:

  • that financial risks are not unilaterally placed with one party in the chain; nor in its entirety to consumers, clients, contractors and/or taxpayers;
  • that principals and contractors, in mutual consultation – also towards subcontractors – will reach agreements, taking into account each other’s interests, on how to deal with the risks of price increases and supply problems in tenders and new contracts to be concluded;
  • that parties reach agreements in mutual consultation about how to act in the event that existing contractual agreements cannot be fulfilled (on time) due to the crisis;
  • that the parties will work together in mutual trust to keep the construction flows going as smoothly as possible.

The entire letter of intent can be found via this link:
22_315+statement of intent+Building+DEF.pdf

 What could this mean for new and existing contracts? A few (purely speculative) thoughts:

  • If a party is not affiliated with the aforementioned sector organizations (see the box in the letter of intent), that party is not bound by this intention. But it will certainly not be easy to steer a different course in negotiations.
  • The guidelines are formulated in such a general way that the concrete elaboration will give rise to discussion in countless areas, and by extension also legal discussions and/or proceedings.
  • We expect that judges will also apply these principles when applying legal concepts such as ‘unforeseen circumstances’, ‘cost-increasing circumstances’, ‘force majeure’, ‘reasonableness and fairness’ and so on. It will therefore be more difficult from now on to invoke indiscriminate contract agreements (regardless of how rightly or deliberately those agreements have ever been made).
  • Contracts that have already been ‘broken open’ or where the Ukraine consequences have already been taken into account in some other way will not be able to be renegotiated just like that. In recent months, practice has already tried to give substance to this in many ways. Further agreements that (unlike the guiding principles are intended) nevertheless place the pain entirely with one of the parties, could perhaps still be discussed.

Ronald Hogewind, 2 June 2022