CMS Expert Guide on rising raw material prices in Germany

The Federal Ministry of Building and Regional Planning enacted a special administrative regulation for future and current Federal works projects regarding the following product groups only: 

• steel and steel alloys;
• aluminum and copper;
• petroleum products;
• epoxy resins; 
• cement products; 
• wood and cast iron pipes. 

This regulation has not changed existing public procurement or contract law but provides for guidelines for Federal contracting authorities on how to apply statutory law and what contract provisions may be used to deal with the rise in costs of the raw materials listed. Through this regulation, the Ministry entitles and encourages contracting authorities to accept price escalation clauses for the above-mentioned product categories because their prices are unpredictable. 

The administrative regulation expires on 30 June 2022, but we expect its period of validity to be extended. Apart from this, as no statutory law is amended through this instrument; the principles laid down in this regulation may also be applied after its expiration or in similar situations caused by the Ukraine conflict.

As a general rule, existing contracts must be applied without amendments. But existing general clauses of public contracts (see 4. below) as well as statutory contract law may allow for adaption of the contract terms (see 3. below).

In addition, German budgetary law entitles the contracting authorities to agree to changes of contract provisions under certain conditions. According to Section 58 of the Federal Budget Act, the contracting authority may agree to a contract modification if such an amendment will not cause the Federal Republic of Germany any economic disadvantage or if the contractor would suffer unreasonable hardship. This has to be evaluated by the authority on a case-by-case basis. The above-mentioned regulation on Federal construction (see 1. above) provides for procedural rules on how the contractor can apply for such amendments and underlines that contracting authorities may take into account circumstances such as timely completion of the project, disputes on other issues, additional administrative efforts or consequential costs when assessing whether changes have negative effects or not. Under these rules, the contracting authority may enter into a subsequent agreement with price escalation clauses. When applying such an amendment of existing contracts, the public procurement law restrictions for modifications of contracts during their term must be observed (see 5. below).

In German civil law, one fundamental principle of contract law is that contracts are binding (pacta sunt servanda). During the contract negotiations, the parties agree on a contractual distribution of risks. If unforeseen events occur, the consequences are generally borne by the party in whose sphere of risk the event falls. However, German statutory law provides for a clausula rebus sic stantibus provision (Section 313 BGB – Wegfall / Anpassung der Geschäftsgrundlage) under which a contracting party may claim that a contract be adapted in exceptional cases. 

This provision applies if

1. circumstances that had been assumed to prevail when the contract had been entered into have changed,
2. parties would (hypothetically) not have concluded the contract as they did had they known about such a change in circumstances, 
3. this change of circumstances does not lie within the sphere of risk of only one of the contracting parties; and
4. the execution of the unchanged contract has become unacceptable for one party considered from an objective point of view.

In the above-mentioned administrative regulation (see 1. above), the Federal Ministry states that the contracting parties would not have concluded the contracts with the agreed content regarding the above-mentioned product categories if they could have foreseen the effects of the war in Ukraine. It further states that the consequences of the war in Ukraine are in principle sufficient to alter the basis of a contract. However, this has to be examined for each contract on a case-by-case basis.

However, the adaptation of a contract under this provision does not mean that the additional costs for the raw materials can be fully passed on to the contracting authority. The adjustment of the contract is always dependent on individual case. If the disturbance cannot be remedied by adapting the contract, the contractor might also be entitled to withdraw from the contract.

The burden of proof is with the party that requests to adapt the contract, most likely the contractor. In this regard, the above-mentioned administrative regulation states that the contractor must prove that the conditions of Section 313 BGB are met, e.g. by submitting its original calculation and by providing proof of the actual purchase costs and their fair market value.

In principle, under German civil law, delays in delivery can lead to disadvantageous legal consequences. First, there is the normal liability for default. In addition to this, contracts often provide for contractual penalties for the event of delay. But such penalties will not apply if the contractor can prove that he is not responsible for the delay. Furthermore, the general terms for public works contracts provide that the deadlines for completion may be extended in case of force majeure. The above-mentioned administrative regulation (see 1. above) provides that, if raw materials mentioned in this regulation cannot be acquired even at higher purchase prices, such situation should be assumed as a force majeure event.

The above-mentioned rules also relate to the execution of contracts entered into by contracting authorities, including how to deal with delays to the completion of works. They also provide guidelines for the modification of contracts. The above-mentioned administrative regulation (see 1. above) also provides for rules on how to prove that the conditions of the claims that can be made by contractors are met.

Furthermore, the regulation refers to the provision of public procurement law on modifications of contracts during their term (Section 132 GWB). This provision transposes article 72 of EU procurement law directive (2014/24/EU) and requires a tender procedure for contract modifications which shift the economic balance of the contract in favor of the contractor. The above-mentioned regulation (see 1. above) states that, under the current market situation, this rule should be interpreted to mean that the enormous increase to the contractor’s costs regarding the product categories mentioned in the regulation must be taken into account to the effect that the economic balance of the public contract is not shifted towards the contractor. 

Yes. Under German law, all contracts entered into by contracting authorities on works, supply and other services are governed by private law.