The impact of rising costs on the remuneration of contractors under contracts for specific work and contracts for construction

The sharp rise in the prices of goods and services has been a hot topic recently. This problem, which was already apparent last year, has been compounded by the effects of the Russian aggression against Ukraine. Certain fluctuations, and even the decreases in the prices of some goods, seen in recent weeks certainly do not solve this problem. It is of particular importance in the case of contracts concluded for a long period of time or well in advance. This is because in these cases, the differences between the contractor’s initial calculations and the actual costs are the biggest. Below, we highlight some issues that parties to construction and specific work contracts should be aware of in this regard.

When is a contract a contract for specific work?

Although contracts for specific work are one of the most common types of contract under Polish law, this notion is rarely used in everyday language. Much more frequently, contracts of this type are defined by reference to the specific works to be performed, e.g. a contract for renovation or a contract for design works. In legal terms, such contracts most often constitute a single type of contract, in which the contractor is obliged to achieve a specific result, be it tangible or intangible, in return for payment of remuneration. The result must be sufficiently determined to make it possible to establish whether it has been achieved, and whether it has defects. In addition to the examples indicated above, the work that is the subject matter of a specific work contract may be the preparation of an expert opinion or tests, the installation or maintenance of equipment, etc.

A construction contract is a type of contract very similar to a contract for specific works, however with the essential difference that it concerns the construction or renovation of a building. That difference translates to slightly modified regulations.

There is no direct impact of a cost increase on remuneration

In the absence of separate contractual provisions, an increase in the cost of performing a contract does not translate into a change in the terms of the contract, in particular an increase in remuneration. This applies both to contracts in which remuneration is specified as a lump sum, and those in which the basis for the final determination of the remuneration is a cost estimate. A significant increase in costs often leads to a loss on a given contract.

In practice, specific work contracts and, especially, construction contracts often contain provisions providing for an adjustment of the contractor’s remuneration. The effect of such contractual provisions, however, will depend in practice on how precisely they define the basis for the adjustment, the relevant scope of time, the subject matter of the adjustment, the frequency of adjustments, and the degree of adjustment of remuneration. It should be borne in mind that provisions of this type will often make the valorization dependent on undertaking certain actions within specified time limits.

As regards construction contracts, the best known example of such a clause is sub-clause 13.8 of the FIDIC standard contract. Its effectiveness depends on the inclusion in the contract of a list of components, a price change of which may be the basis for a remuneration modification. The protection of the contractor’s interests will often depend on the right choice of components. Exercising the right granted by the above mentioned sub-clause will depend on submitting a claim by the contractual deadline and in a manner compliant with the contractual requirements.

Amending the contract

In the absence of an adjustment clause in a contract, the only way to increase the remuneration is to have the contract amended. This can always be achieved via a separate agreement between the parties. The key thing to remember is the importance of observing the proper form required under the original contract. The contract may be amended after given increased costs have been incurred, as well as before. When amending the contract, it should be borne in mind that the current increases may be temporary and that a subsequent decrease of prices cannot be completely excluded, at least in the short term.

It might appear that the ordering party would not be interested in increasing the remuneration. In practice, however, it is often in its interest to have the contract performed effectively, especially in the case of larger projects – the lack of an increase could lead to serious delays in completion of the ordered works. What is more, the ordering party must take into account the possibility of the contractors forcing the change upon them through court action. Such possible actions are discussed in the next section.

A request for a pay rise must be carefully prepared, documented, and well thought out, with the prospect of possible court action in mind. The same applies to the ordering party’s response.

In the case of public procurements, the rule is that a contract may be amended only in the cases indicated in the statutory regulations. The most important of such situations is when the possibility and grounds for change have already been specified in the original contract that is to be amended. Contractors should remember that most clauses currently in use make valorization dependent on the contractor’s initiative and submission of the appropriate documentation and calculations justifying the valorization.

The mechanisms currently applied by public ordering parties usually set an upper limit for valorization, which may be inadequate for the current cost increases. Therefore, another instance when an amendment is possible is gaining more attention. It regards the need for change resulting from extraordinary circumstances, impossible to foresee at the time at which the contract was concluded. It appears that the sudden price changes caused by the war in Ukraine constitute such an extraordinary circumstance.

Public contractors should also follow the ongoing legislative work on the bill currently being drafted to expand the possibilities for adjusting remuneration under public contracts.

Judicial modification of remuneration

If reaching an agreement with their employer proves impossible, contractors have another option. They may apply to a court for a judgment adjusting the remuneration. When doing this, they should always remember that the court is not bound by the exact demand. When deciding the case, the court may modify the contract in a different manner than that requested, or even dissolve the agreement. Even if the court goes in the direction of increasing the remuneration, there is no guarantee that this increase will be sufficient to avoid the loss on the contract, let alone to guarantee the expected profit.

In the case of a lump-sum remuneration, the condition for an increase by the court is that it is found that there has been a change of circumstances, in particular in the cost of performing the contract, which could not have been foreseen at the time at which the contract was concluded, and which threatens a glaring loss on the part of the contractor in the event of performing the contract (cf. Art. 632 § 2 of the Polish Civil Code). The change of circumstances must be of a permanent nature from the point of view of the obligation performed. In other words, an increase of prices, even sudden, in the course of performance of the contract will not constitute grounds for increasing the remuneration if in a relatively short period of time similar decreases in those prices are likely to occur. Not each and every loss constitutes a glaring one, the possibility of which is always a risk of business activity. Instead we must be dealing with a loss of such a size that a prudent entrepreneur could not have reasonably expected it to occur when concluding the contract. Sometimes, however, the courts interpret the concept more favorably for contractors, by relating it to the assumed profit under the contract.

Remuneration based on a cost estimate may be changed on similar grounds (cf. Article 3571 of the Polish Civil Code), however the relevant regulations additionally require that the change of circumstances must not only have been unforeseeable at the time when the contract was concluded, but also be of an extraordinary nature. It is debatable whether this additional condition actually leads to any significant differences in the scope of the application of the two recourses. It is possible, however, that for an increase in the cost-related remuneration, the courts will take a more stringent approach as to whether the recent price increase is of an extraordinary, unprecedented nature.

If a contractor decides to go to court, the case should be prepared very carefully. It will be important to document in detail the increase in the cost of performing the contract, as well as the circumstances that confirm that this increase could not have been expected at the time the contract was concluded. As court proceedings tend to be lengthy, it seems critical to try to obtain adequate security for the demand sought. In any case, the lawsuit should be filed before the contract has been fully performed.


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