Arbitration Board for the Building Industry: the war in Ukraine may justify an amendment of a construction agreement

A tribunal of the Arbitration Board for the Building Industry ruled in an arbitral award of 25 August 2022 (no. 37.382) that the war in Ukraine and its consequences have to be regarded as an external unforeseen circumstance within the meaning of article 6:258 of the Dutch Civil Code (‘DCC’) and sub-clause 15 of the construction agreement between the Employer and Contractor in the dispute.

This award meant that the Employer may not expect an unchanged continuation of the construction agreement and uphold the Contractor to it. Although this award is specific to the facts and circumstances of dispute submitted to the tribunal, some relevant lessons can be drawn from it.

The facts

On 28 October 2020, a construction agreement was concluded between the Employer and the Contractor. Sub-clause 15.2 of the agreement plays a prominent role in the dispute. It states:

‘’The parties agree that interim adjustment of the construction agreement shall be possible if the parties jointly decide to do so or in the event of one of the following cases, which any of the parties may invoke:

a. If an extreme unforeseen change of circumstances occurs which, by objective standards, makes further unchanged continuation of the construction agreement no longer reasonably justifiable for the parties or one of them.’’

Sub-clause 15.3 of the agreement reads:

‘’If (one of) the situations in the previous paragraph arises, the most diligent party shall notify the other party by registered letter and the parties shall attempt, for a period of two months, to reach an amicable agreement to adjust the construction agreement and/or (one of) the annexes, which period may be extended by mutual consent. If the parties cannot reach an amicable agreement to adjust the construction agreement, there shall be a dispute as referred to in sub-clause 17.’’

The Contractor believed that it had the right to invoke sub-clause 15.2 sub a of the construction agreement because of the ongoing war in Ukraine, and argued that this war forms an external unforeseen circumstance with serious, far-reaching consequences for the economic conditions in the Netherlands. The Contractor further argued during the arbitral proceedings that due to the above situation it can no longer reasonably be required to build and deliver the project at the original contract price as laid down in the agreement.

Following the consequences of the war in Ukraine, the Contractor presented a detailed estimate to the Employer. However, the Employer systematically rejected the Contractor’s reliance on sub-clause 15 of the construction agreement, as a result of which the parties failed to reach an amicable agreement to adjust the agreement in accordance with the provisions of sub-clause 15.3 of the agreement.

The Contractor requested the tribunal in the arbitral proceedings to determine that it validly and rightfully invoked the provisions of sub-clause 15.2 of the construction agreement and that interim adjustment of the agreement, including an adjustment to the contract price, was in fact justified given the circumstances that were presented.

The tribunal’s findings

The arbitrators granted the Contractor’s claim and ruled as followed. The most relevant considerations of the award:

‘’On 24 February 2022, Russia invaded Ukraine. Due to the ongoing war in Ukraine, the prices of many products are rising, some of them even (very) sharply, and not just gas, oil and petrol. The situation in the already overstrained construction market with rising construction costs and (impending) (staff)shortages has only become more pressing.’’

‘’The war in Ukraine and its consequences for construction (among others), are, in the opinion of the arbitrators, (at this point) to be regarded as an external unforeseen change of circumstances which, according to objective standards, makes further unchanged continuation of the construction agreement no longer reasonably justifiable for the Contractor.’’

‘’What the precise consequences are, can be left unanswered at this moment by the arbitrators and also whether other parts of sub-clause 15 of the construction agreement can still be invoked. In any event, the current situation means that the Contractor is (at this point) rightfully invoking sub-clause 15 paragraph 2 sub a.’’

‘’This sub-clause, in the arbitrators’ opinion, applies to the entire construction agreement and thus also to the price included therein. The fact that article 7:753 of the Dutch Civil Code and paragraph 47 UAV 2012 (both provisions relating to cost-increasing circumstances) were not declared applicable in the construction agreement, does not change this.’’

In view of the above, the tribunal also found that there is a situation as referred to in article 6:258 of the Dutch Civil Code, which is of compulsory law and stipulates (as far as relevant here) that a court may, at the request of one of the parties, alter the consequences of an agreement on the basis of unforeseen circumstances of such  nature that the other party cannot expect an unaltered continuation of the agreement according to standards of reasonableness and fairness.

The Contractor’s claim is granted and in such a way that the tribunal ruled that the Contractor is in its right to invoke sub-clause 15 paragraph 2 sub a of the construction agreement.

Conclusions

In short, the tribunal found that the ongoing war in Ukraine qualifies as an external unforeseen change of circumstances which may justify the amendment of the construction agreement in this dispute between the Employer and the Contractor. The tribunal also qualified the ongoing war and its consequences as an unforeseen circumstance that is of such nature that the other party, according to standards of reasonableness and fairness, may not expect an unaltered continuation of the agreement, within the meaning of article 6:258 of the Dutch Civil Code.

Parties faced with, for example, price increases as a result of the war in Ukraine, have a point of reference with this ruling to amend (or have amended) a construction agreement.

If you would like to know more about this particular case and the consequences of the ongoing war in Ukraine on construction agreements? Please get in touch with Jacob Henriquez, our Construction & Real Estate partner (j.henriquez@ploum.nl / +31 6 12 10 13 68).