Simply passing on price increases for raw materials to a customer, is that permitted?
It has escaped nobody’s attention: the prices of various raw materials and products have increased enormously in the past few months. Businesses are frantically searching for ways to absorb these price increases, for example by passing them on to the customer. Recently, the first (to the best of our knowledge) preliminary relief proceedings were conducted about the question of whether an entrepreneur is permitted to unilaterally implement a price increase in these days. Contract-law lawyer Rosa Ruimschotel discusses the decision.
In this case, a supplier of concrete mortar had concluded a supplier agreement with a customer, customer X. At a given moment, the supplier was faced with an increase in the prices of the raw materials for concrete mortar of no less than 20%. The supplier then sent a letter to all its customers in which it stated that this price increase would be passed on.
Claim in preliminary relief proceedings: continued delivery of concrete mortar
Customer X did not agree with this and refused to pay the price increase. The supplier then threatened to suspend the deliveries, which would have disastrous consequences for the business operations of customer X. In preliminary relief proceedings he claimed that judgment be given that the supplier would be obliged to continue the delivery of concrete mortar. In this case, the customer was found for because a fixed price had specifically been agreed in the contract. The supplier therefore had to continue delivery at the same price.
Invasion by Russia an unforeseen circumstance?
The supplier’s reliance on unforeseen circumstances (Book 6, article 256 of the Dutch Civil Code) was not dealt with in this case, but the court hinted that this could have led to a different outcome. The question is whether agreements which were concluded before Russia’s invasion of Ukraine and in which fixed prices have been set out can be maintained unaltered in view of the current extreme price increases. Sometimes, the contract or the applicable conditions provide for this eventuality themselves by including a provision based on which the price may be changed. If this is not the case, a contracting party is in principle prohibited from changing the price.
Amendment to the agreement
Because unaltered maintenance of a contract may have disproportionately negative consequences for some parties, the law offers help. At the request of a contracting party, a court may amend the agreement based on unforeseen circumstances. The price, for example, may then be adjusted. The circumstances have to be such, though, that according to standards of reasonableness and fairness the other party cannot expect unaltered maintenance of the agreement.
Another statutory provision that may play a part in contracts that are directly or indirectly affected by Russia’s invasion is the provision regarding force majeure. If a contracting party is temporarily or permanently unable to perform due to a force majeure situation, this party will not owe any compensation. According to the law, this applies if a shortcoming is not the debtor’s fault or the debtor is not accountable for it by law, agreement or according to generally accepted standards. It should be noted that reliance on force majeure (e.g. in the case of war) has been excluded or limited in many contracts. This is why it is wise to take a good look at the ‘small print’ first.
Case law from the corona crisis applicable?
The question is whether the war in Ukraine is unforeseen to such extent that contracting parties did not have to take this into account when concluding the agreement. As far as I am aware, this question has not yet been answered by the court, but probably will be before long. The same trend was seen during the corona crisis when the consequences, in particular of the lockdowns, were divided among the contracting parties. Possibly, use can be made from this case law. We will keep you informed!