It is now “old news” that COVID-19 and the Ukrainian war have completely changed supply chains and prices of construction materials and energy. What is left to be solved (probably in most countries) is how the contractors will protect their rights and contain the price escalation within acceptable boundaries or through legal means where the contract was signed on a lump-sum basis and where any adjustment was excluded either by general or particular conditions (depending on the modelled contract).
In Serbia (Western Balkans) there were/are a great deal of discussions among the contractors, employers, consultants, and other practitioners, about price adjustment under the FIDIC Yellow Book contracts where the price was agreed as fixed. By “fixed” it is considered that the contract does not recognize adjustments due to changes in cost. The idea behind all discussions was the protection of the construction market and companies by introducing the price adjustment mechanism either by adopting an already defined FIDIC formula (Sub-Clause 13.8) or introducing a similar formula.
Based on official statistical data (published in February 2023) construction activity in IV Quarter 2022 was a 13.7% decrease in comparison to the same period in 2021 (for constant prices). The Monthly Statistical Bulletin 01/2023 issued by the Statistical Office of the Republic of Serbia states that “[i]n January 2023, producer prices of industrial products in domestic market were noted to rise when related to December 2022”.
Figure 1 – Data obtained from the Statistical Office of the Republic of Serbia
As observed, market disruptions and a substantial increase in the cost of steel, concrete, and other raw materials led to a decrease in construction activity and construction companies faced various difficulties in bringing the projects to an end without losing their profits or facing delay/liquidated damages and in worst case insolvency/bankruptcy. Therefore, something has/needs to be done.
“Where there’s a will, there’s a way.”
(George Herbert’s “Jacula Prudentusm”)
One of the solutions was provided by the deputy mayor of the capital City of Belgrade in May 2022, where the City of Belgrade issued a “Conclusion” where it is recommended that for both, the construction of infrastructure objects and the construction of buildings, a price adjustment formula was provided as a guide as how the price escalation shall be dealt with. The provided formula shall be used in conjunction with Article 637 of the Serbian Law on Contracts and Torts (“SLCT”). However, considering that the mentioned “Conclusion” is just a “recommendation.” There are no guarantees for the contractors that the same recommendation will be followed or that the parties will amend their contracts accordingly. Notwithstanding the actual (in) applicability of the proposed formulas (as they have been presented), the initiative should be welcomed.
Where the contract was concluded via public procurement processes, Article 158 of the Serbian Public Procurement Law may be seen as an umbrella for both parties to revise the contract if changes are required due to unanticipated events. However, the circumstances must satisfy the set conditions and amendments cannot change the nature of the contract and any “increase in the value of the contract cannot exceed 50% of the value of the original contract and cannot be aimed at avoiding the application of this law”.
In the described circumstances, one of the solutions for the Contractor would be to rely on the governing law. In the author’s view, the contractors can seek sanctuary under Article 637(1) of the SLCT, where:
“If it has been agreed that the price of the works will not change if after the conclusion of the contract the prices of the elements based on which it was a determined increase, the contractor may, despite this provision of the contract, demand a change in the price of the works if the prices of the elements have increased to such an extent that the price of the works should be higher by more than ten per cent.“ (Emphasis added)
(Article 639 of the SLCT operates in favour of the employer under similar principles)
Still, the contractor needs to complete the works within the time for completion to claim for price adjustment. Moreover, under Article 639 of the SLCT, it is envisaged that “[i]n case of delay by the contractor, the employer has the right to a proportional reduction in the price of the works for each reduction in the price of the elements on the basis of which the price of the works was determined”.
Naturally, the law envisages termination of the contract where “after the conclusion of the contract, circumstances occur that make it difficult for one party to fulfil its obligations, or if because of them the purpose of the contract cannot be realized” but “the party requesting the termination of the contract cannot refer to changed circumstances that occurred after the expiration of the deadline set for the fulfilment of its obligation” i.e., after the expiry of the time for completion (Article 133 of the SLCT).
In this regard, the ideal solution for the parties would be to agree on a method and/or process for dealing with cost fluctuations (Article 133(4) of the SLTC). This way, any price escalation problems may be avoided, and the project(s) can be finished to the satisfaction of both parties
Nota Bene: The content of this commentary is not legal advice and represents only the author’s view on the subject under certain circumstances. You should always consult a suitably qualified lawyer regarding a particular legal issue or problem that you might have.
Guest Article by Dusan Cvetkovic, CCM Solutions