Decree of the Federal Ministry of Housing, Urban Development and Construction of 25 March 2022

As a result of the Ukraine conflict, supply chains are being significantly affected beyond the COVID-19 pandemic. This is currently leading to severe supply shortages and price increases of important construction materials. Especially construction steel, pig iron, bitumen, petroleum products, epoxy resin and cement products are affected. By decree of 25 March 2022 (Decree), the Federal Ministry of Housing, Urban Development and Construction (Federal Ministry) ordered that, with immediate effect, material price escalation clauses must be agreed for sensitive construction materials when awarding construction contracts for the Federal Government in order to make award procedures competitive again. Due to the rapid and strongly varying price increases, binding calculations for contractors are scarcely possible at present. In addition, the decree contains explanations on how to deal with existing contracts due to the supply shortages and price increases. Although the decree is only binding for federal construction sites, it will also have an impact on the entire construction industry and shows possible solutions on how clients and contractors can deal with the difficult situation:

Delivery shortages due to the Ukraine conflict as a case of force majeure or other circumstances beyond control of the contractor within the meaning of Section 6 of Construction Tendering and Contract Regulations (VOB/B).

Contracts with binding standard prices or a lump-sum fixed payment are generally binding and must be executed by the contractors as commissioned. Depending on the form of the contract, however, the supply shortages and price increases triggered by the Ukraine conflict may also have an impact on contracts already signed: According to the decree, supply shortages due to the Ukraine conflict are likely to be classified as a case of force majeure or another unavoidable event within the meaning of Section 6 (2) no. 1 (c) VOB/B. If the preconditions are met, the Contractor may extend the fulfilment deadlines by the duration of the non-deliverability of the respective materials plus a reasonable resumption period, Section 6 (4) VOB/B. In this case, the client is not entitled to any claims for damages or compensation. In its consistent case law, the Federal Court of Justice (“BGH”) defines the term force majeure as an "external event caused by elementary forces of nature or by the actions of third parties, which is unforeseeable according to human insight and experience, which cannot be prevented or averted by economically justifiable means, even by the highest degree of care reasonably to be expected in the circumstances, and which is also not to be accepted by the operating contractor because of its frequency" (BGH, judgement of 23.10.1952, III ZR 364/51). However, a Federal Court of Justice decision that the supply shortages due to the Ukraine conflict meet these strict requirements remains to be made. Yet decisions have to be made on a case-by-case basis, because the slightest fault of the principal excludes force majeure (cf. Leinemann, VOB/B Kommentar, 7th ed. 2019, § 6 marginal no. 47).

Price increases due to the Ukraine conflict as a case of disruption of the basis of the contract pursuant to Section 313 of the German Civil Code (BGB).

The decree also considers the events of the Ukraine conflict and the resulting price increases to be suitable in individual cases to justify the preconditions for a price amendment or, in particularly serious cases, the termination of the contract by the contractor due to disturbance of the basis of the contract pursuant to Section 313 of the German Civil Code (BGB). In construction contracts, however, the contractor generally bears the risk of material procurement and price increases. This principle is broken in exceptional cases by Section 313 BGB: If circumstances that have become the basis of the contract have changed seriously after the conclusion of the contract and if the parties would not have concluded the contract or would have entered into it with different content if they had foreseen this change, adjustment of the contract may be demanded to the extent that one party cannot reasonably be expected to abide by the unchanged contract, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk. The requirements for a price amendment under Section 313 of the German Civil Code are very high. In previous case law, the Federal Court of Justice (BGH) denied that the contractor's calculation, even if it was disclosed to the client before the conclusion of the contract, could become the basis of the contract. The principal would have no reason to include the contractor's calculation basis in its business intent with regard to increases in the cost of materials, the Federal Court of Justice has therefore rejected the application of Section 313 BGB until now (cf. judgement of 08.02.1978, VIII ZR 221/76 and BGH, decision of 23.11.2006 VII ZR 55/06). In fact, there must be "special circumstances which justify the assumption that the principal has included the calculation in his business intent, irrespective of the fact that it is basically the contractor's concern and risk how he calculates" (cf. BGH, NJW-RR 1986, 569). Whether the price increases due to the Ukraine conflict fulfil these special circumstances remains to be seen.

Adjustment of contractual practice in contracts to be concluded in the future by agreeing on material price escalation clauses

The decree provides for the agreement of material price escalation clauses for the award of construction services at federal construction sites. This is to be seen as a reaction to the fact that contractors do not see themselves in a position to make binding offers for a longer period of time due to the current price increases for relevant products. In contractual business between private contracting parties, the current situation also makes it difficult to agree on prices. In order to distribute the risk of price increases between both contracting parties in a way that is in line with their interests and based on an objective benchmark, the agreement of material price escalation clauses is a useful option. The material price escalation clauses are based on the producer price of industrial products of the Federal Statistical Office and grant the contractor compensation for the price increases for the relevant building materials for the price increases determined on the basis of the producer price between the time of the placing of the offer and the delivery or the installation of the respective building material. In this respect, the material price escalation clause is not only a unidirectional mechanism for price increases. The parties can also agree on the application of the clause for price reductions. In addition, de minimis limits and the participation of the contractor or client in price increases or price reductions can be agreed individually. Due to the currently unstable calculation situation, it can be assumed that material price escalation clauses will increasingly be agreed in construction contracts. When using such clauses, however, it must be ensured that they comply with the requirements of the Price Clause Act. Furthermore, it must be noted that the respective clause must withstand a review of the general terms and conditions or must be negotiated individually (cf. BGH, judgement of 1.10.2014 - VII ZR 344/13).