Over the past two years, due to the health crisis, supply problems and international conflicts, we have seen an exponential increase in the price of construction materials, rising by 11.5% in 2021.
The cost of materials continues to rise and in this situation construction companies are suffering losses due to the projects they are executing and in which their profit margins are decreasing and even non-existent.
In addition to this situation we find ourselves with a delay in the execution deadline due to the worldwide delay in the supply of materials.
Faced with this situation, we are faced with the dilemma of clarifying who has to assume these costs from a legal point of view and the possible solutions to it.
1st What is determined by the construction contract
The first thing to take into account is what the parties have established (the will of the parties) in the construction contract that they have signed between them.
In the works contract, a variation of the conditions of the contract can be established if the materials undergo a variation of a certain amount, for example, 10%. These clauses would make the contract more flexible and adaptable to the variations that arise in the process.
2nd The provisions of the supplementary regulations.
In addition to what has been agreed by the parties, the provisions of the Law, specifically the Civil Code, shall apply in all matters not regulated by the parties.
Article 1593 of the Civil Code states:
“The architect or contractor who is in charge of the construction of a building or other work in view of a plan agreed with the owner of the land, cannot ask for an increase in the price even if the price of labour or materials has been increased; but he may do so when a change has been made in the plan that produces an increase in the work, provided that the owner has given his authorisation”.
Focusing on civil law and not on public works contracts (administrative law), we find the following:
Lump sum construction contracts
A lump sum or fixed price works contract is one in which the price is fixed in advance, and cannot be varied even if there are increases or decreases in labour or materials.
Where the provisions of article 1503 of the Civil Code that we have just seen would be applicable.
Work contract by unit of measurement
On the other hand, in the case of contracts for work by unit of measurement, as established in article 1592 of the Civil Code:
“He who undertakes to do a work by parts or by measure, may require the owner to receive it in parts and to pay for it in proportion. It is presumed that the satisfied part has been approved and received”.
3rd Rebus sic stantibus
But what happens if neither in the construction contract nor in the supplementary regulations is a disproportionate increase in the price of the materials used in the construction work included?
If the increase in the price of materials leads to an imbalance in the conditions of each of the parties to the contract, it will be necessary to check whether the so-called “Rebus sic Stantibus” can be applied.
This legal principle, not expressly regulated in any regulation but applied by the Spanish courts, establishes what is considered to be a situation of force majeure:
“Apart from the cases expressly mentioned in the law, and those in which the obligation so declares, no one shall be liable for those events which could not have been foreseen, or which, foreseen, were unavoidable.” (article 1105 of the Civil Code).
This principle has been widely used by the Courts to restore the reciprocity of contracts affected by the state of alarm during the health crisis.
Specifically, our Supreme Court established it in SSTS 15 October 2014, SSTS 30 June 2014, 24 February and 30 April 2015 and 18 July 2019.
This principle requires a readjustment of the obligations and rights of each of the parties to the contract, distributing the damage between both parties.
The purpose of this legal doctrine is not to put an end to the contractual relationship between the parties, but to adapt the contract to the new situation.
However, in order for Rebus sic stantibus to apply, a series of requirements must be met, since the general principle in law is that what is established in the contract is fixed and cannot be altered except by agreement between the parties (otherwise, there would be great legal uncertainty).
4th Conditions for readjustment of the works contract
The conditions for readjusting these works contracts are as follows:
- The contract does not stipulate that the risk in the event of force majeure is to be borne by one of the parties.
- The impossibility of fulfilling the obligation (failure to meet deadlines, inability to assume the cost of materials, etc.) is due to a totally unforeseeable event (international situation) at the time the contract was concluded.
- There has been contractual good faith (none of the parties has the intention to evade the obligations of the contract).
- There must be a direct causality between the situation of force majeure and the non-performance (link between the increase in the price of materials and the delay in the distribution of materials, with the impossibility of meeting deadlines and the increase in the costs of the work).
- The effects of this exemption from liability must be proportionate to the situation (the conditions of each of the parties must be readjusted to the actual context of the contract).
If you need a review of a construction contract and to see the possibilities in the current situation, please contact us.