Can fixed price contracts be renegotiated?

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Inflation in construction costs leads to two problems; commercial losses and costly delays. But how does this affect fixed price contracts and can terms be renegotiated if prices rise?

Construction cost inflation in 2021/2022 is unprecedented, after decades of price stability in the supply of materials, labor and facilities, construction costs have soared with shortages of all resources.

Construction cost increases and shortages pose two problems; first, commercial losses as contracts become undervalued, and second, costly construction delays. This inevitably leads to demands for more money, which could be ignored, and walkouts by contractors, which is a repudiatory breach of contract, and liability to crippling damages ensues.

Most construction contracts are fixed price contracts with no price increase clause, indeed the standard forms include optional clauses such as the JCT fluctuations clause which is an option only and rarely used.

How to claim in the face of strict fixed-price contracts that are no longer tenable in terms of price?

Each case will have different circumstances and merits, and an analysis of the case will hopefully reveal a strategy. This outcome could be a claim for losses and expenses if the payer is responsible for delays or there may be a possibility of recovering losses in the assessment of variations. There could also be a case for a price adjustment based on an argument of erroneous contractual intent. However, the simplest solution is to renegotiate contract prices and achieve an amicable outcome, but any financial pressure should not amount to economic hardship as this would nullify any price increase.

Renegotiation is unlikely to be straightforward if an alternative contractor can be found easily after a walkout/repudiation or refusal to continue. The beneficiary should also be wary of any “work over” clause, which is legal and likely to be fatal to any profit. If the works are specialist, where there is no choice but to continue with the contractor, this could amount to an economic constraint, which if maintained will mean that price increases will be unenforceable and that the agreement will be cancelled. Some normal materials may be in short supply with a long lead time, and the threat of a walkout and no hope of hiring others for months may leave the payer no choice but to accept the price increase. Again, this could be seen as an economic constraint.

So what is an economic constraint?

One of the most familiar situations is Carillion Construction Ltd v Felix (UK) Ltd (2000). Félix was a cladding sub-contractor engaged in the design, manufacture and supply of cladding for the office construction project. Disputes arose in the contract over the prices of the work and variations. Félix then refused to make any deliveries until an agreement was reached. Carillion worried about significant liability for damages that might result from the delay. Carillion valued the job at £2.75m, after Felix’s demands the parties agreed to £3.2m in full and final terms. In the end, Carillion reverted to their original numbers. Félix sued to enforce the settlement agreement and it was found to be unenforceable because the pressure exerted by Félix was illegitimate and without justification.

However, now consider the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd (1990), when a carpentry sub-contractor under-priced the work, halfway through the work the sub-contractor ran into financial difficulties and threatened to stop the work unless a price increase was agreed . The main contractor felt that hiring a replacement would cost significantly more, so it was agreed to pay the extra. The contractor then reneged on the agreement and legal action was taken, but this time the Court ruled that the agreement was enforceable because the contractor had benefited by avoiding paying more to complete the work. In this case, it is financial pressure but not economic constraint. The principle, in this case, is important when an alternative can be obtained that would cost more to complete.

Each case therefore depends on the facts and the merits at issue. In summary, the financial pressure leading to a negotiated price increase agreement must be illegitimate to be void, which means that the paying party has no choice or practical solution but to submit to the financial pressure.

What are your options if you are affected by construction cost inflation?

Faced with a seriously undervalued contract due to unprecedented construction cost inflation, the recipient should not walk away or put their business at risk without professional consultation. If the payer has not yet been approached, there is politics involved, or the payer has refused to negotiate, there will be a strategy. If the Beneficiary has not moved the work forward and has been threatened to hire others or if others have been hired, the Beneficiary should act quickly to check the options and see if there is a breach of repudiatory contract. Employing other people without a “work overtime” clause is normally a repudiation. In the event of repudiation of the principal, the beneficiary will be entitled to the sums due for all the work carried out until then, increased by all deductions and damages for losses and expenses incurred, including loss of profit.

Explore trading strategies and options with Arbicon who can then provide a solution, hopefully avoiding economic hardship! If you need advice, please use our Contact form or call our offices below:

01733 233737 Peterborough

0207 406 1494 London

0121 262 4086 birmingham

https://arbicon.co.uk/

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