Zhongcheng Qingtai. Real estate perspective: the risk of rising material prices in construction projects.

Published:

2022-04-21

1. issues raised Affected by multiple factors such as rising raw material prices in the international market, domestic and foreign epidemics, and world energy shortages, the price of building materials has risen sharply, which has a significant impact on the performance of construction contracts? 2. relevant referee views (I) the contract stipulates that "market price fluctuations do not adjust the contract price", the contractor shall consider the market environment of construction materials and commercial risk factors such as price changes when bidding or signing a contract. If the price increase of materials does not exceed the peak market price, the principle of change of circumstances is not applicable, and the risk of material price increase shall be borne by the contractor. Case: Chongqing Construction Engineering Group Co., Ltd. and Chongqing Rongchang District Rongxin Environmental Protection Industry Development Co., Ltd. (Supreme People's Court [2019] Supreme Law Minshen No. 5829 Civil Ruling) The court held that the question of whether Article 11.1 of the Special Provisions of the Construction Contract for Construction Projects should be changed. Chongqing Construction Engineering Group believes that in this case, according to the principle of change of circumstances and the relevant provisions of the competent authorities, the part of the price increase of more than 5% should be adjusted to be borne by Rongxin Environmental Protection Company. In the opinion of the Court, Article 11.1 of the Special Terms of the Construction Contract for Construction Projects stipulates that market price fluctuations do not adjust the contract price, I .e. the risk of market price increases is borne by Chongqing Construction Engineering Group. After the contract was signed, the market price did rise due to changes in policy or market environment. However, as a professional and rational construction enterprise, Chongqing Construction Engineering Group submitted a bid to Rongxin Environmental Protection Company after carefully studying all the contents of the bidding documents and comprehensively considering the corresponding commercial risks and cost changes, under the premise of knowing that the project involved in the case is limited to 0.15 billion yuan, it should include the market environment and price changes of building materials as the commercial risk factors that should be considered in whether and how to bid. Article 26 of the (II) of Interpretation of the Supreme People's Court on the Application of Several Issues is a provision on the principle of change of circumstances in contract law. The objective situation emphasized in this article is that the parties cannot foresee at the time of conclusion of the contract and are not non-commercial risks caused by force majeure. Continued performance will be obviously unfair to one party or fail to realize the purpose of the contract, in this case, the increase in the price of construction materials should be a commercial risk that Chongqing Construction Engineering Group should reasonably foresee when bidding and signing the contract, and the increase did not exceed the peak market price, so the provisions of Article 26 of the (II) of Interpretation of the Supreme People's Court on the Application of Certain Issues shall not apply. (II) the contract stipulates that "the contract price will not be adjusted during the construction period", during the construction process, the price of materials will rise due to the adjustment of the national macro policy, and the relevant government departments notify the construction enterprise to make appropriate compensation with reference to the market price at the time of bidding and the price at the time of contract settlement. The notice is not mandatory and cannot be the basis for breaking through the contract. The risk of price increase shall be borne by the contractor. Case: China 13th Metallurgical Construction Co., Ltd. and Shaanxi Huangyan Expressway Co., Ltd. Construction Contract Dispute (Supreme People's Court [2018] Supreme Court Civil Judgment No. 380) The court held that whether the claim of 4154868 yuan for material and freight adjustment by XIII Metallurgical Company should be supported. As for the part of the appraisal opinion that the loss amount of material and freight adjustment is 4154868 yuan, the 13th Metallurgical Company claims that the price of material and freight will rise during the construction period, which belongs to the situation change stipulated by law and should be adjusted. In this case, relative to the total amount of project funds agreed by the parties in the contract, there is no sufficient evidence to prove that the range of changes in the freight prices of self-purchased steel, fuel and self-purchased materials during the construction period has reached a level that the parties could not foresee at the time of the conclusion of the contract, and does not constitute the Supreme People's Court on the application of<中华人民共和国合同法>Article 26 of the (II) for Interpretation of Certain Issues "After the establishment of the contract, the objective circumstances have undergone major changes that the parties could not foresee at the time of the conclusion of the contract and were not caused by force majeure and did not belong to commercial risks. If the parties request the people's court to modify or terminate the contract, the people's court shall, in accordance with the principle of fairness, and in the light of the actual situation of the case to determine whether to change or lift the circumstances of the change of circumstances. The general terms and conditions of the Contract Agreement signed between Huang Yan Company and Thirteen Metallurgical Company 70.1 stipulate that the fluctuation of labor, mechanical construction and material prices shall not be considered during the execution of the contract, I .e. the contract price shall not be adjusted during the construction period. During the construction of this project, due to the increase in steel prices caused by the adjustment of the national macro policy, the Shaanxi Provincial Department of Communications notified that for the construction in progress signed before the end of May 2003, the construction enterprise can be appropriately compensated according to the unit price of the contract and the actual implementation of the contract, referring to the market price at the time of bidding and the price at the time of contract settlement. On January 23, 2010, Huang Yan Company, in accordance with the notice spirit of Shaanxi Provincial Communications Department, decided at a special meeting of Huang Yan Company to compensate for the difference of 1415287.55 yuan in the price of self-purchased section steel in the HY-8 contract section. The first-instance judgment found that XIII Metallurgical Company could not use the notice as the basis to break through the contract and require Huang Yan Company to bear the loss of material price increases. Therefore, the appeal claimed by the 13th Metallurgical Company for Huang Yan Company to pay 4154868 yuan for materials and freight adjustment cannot be established, and the court will not support it. The agreement of the (III) construction contract on the risk of material price fluctuations during the normal construction period does not apply to the adjustment of material payments during the period of delay caused by the contractor, and the risk of material price increase during the period of delay caused by the contractor shall be borne by the contractor. Case: Erdos Municipal Transportation Bureau and Erdos along the Yellow River High-grade Highway Construction and Development Co., Ltd. (Supreme People's Court [2019] Supreme Law Minshen No. 5628 Civil Ruling) The court held that: whether there is a factual basis for the original court's determination that the Transportation Bureau and the company along the Yellow River are responsible for the increase in the price of construction materials and the increase in costs caused by the delay in the construction period. The original trial found that the construction period was delayed due to the transportation bureau and the company along the Yellow River, and the delay also brought about an increase in the cost of engineering materials of the top five companies. The original trial court found that the transportation bureau and the company along the Yellow River were responsible for the increase in the price and cost of construction materials caused by the delay in the construction period, which is based on facts. In addition, although the Bidding Document provides an agreement on the risk of material price fluctuation during the normal construction period, the agreement does not apply to the adjustment of material payment during the delay of the construction period caused by the Employer. It is obviously against fairness and logic to adjust the expansion of losses caused by unilateral breach of contract by the reasonable risk burden agreement that both parties can expect; the Transportation Bureau and Yanhuang Company have no evidence to prove that they have paid the materials in full to the actual constructor or contractor before the construction period is delayed due to their own reasons. The one-time full payment is not in line with the trading habits of the construction industry. The Transportation Bureau and Yanhuang Company claim that they should not bear the increased cost of materials caused by the delay in the construction period on the grounds that they have already paid the materials, which has no factual basis. (IV) the construction contract stipulates that the settlement shall be based on the facts, and if both the contractor and the contractor are at fault for the extension of the construction period, they shall each bear the fault liability in proportion to the loss of the material increase. Case: Jinan Changxing Construction Group Co., Ltd. and Zibo Yinuo Real Estate Development Co., Ltd. Dispute over Construction Contract (Shandong Higher People's Court [2020] Lu Min Zhong No. 2563 Civil Judgment) The court held that: on the issue of whether the first instance court's determination of the loss of material rise is correct. ...... During the construction of the project involved in the case, Yino Company had the problem of defaulting on the project payment, and Changxing Company also had the problem of insufficient construction personnel and mid-way exit. Both parties were at fault for the increase in materials caused by the delay of the project involved in the case, and the court of first instance found that both parties were each responsible for 50% of the loss of the increase in materials, which was in line with the actual project involved in the case. (V) the construction contract stipulates that the price of materials increases by a certain percentage and can be adjusted according to the facts, if the contractor can provide evidence, the contractor may request the contractor to bear the burden. Case: Dispute over Construction Contract between Shandong Liaojian Group Co., Ltd. and Shandong Liaocheng Zhongjusaida Real Estate Development Co., Ltd. (Shandong Higher People's Court [2014] Lu Min Yizong Zi No. 50 Civil Judgment) The court held that the settlement report submitted by Liaojian Group Company was in accordance with the contract. According to the provisions of Articles 23.2 and 23.3 of the special terms of the contract, the price of construction materials in the contract price involved can be adjusted according to the facts if the price increases by more than 5%. The policy adjustment documents and relevant regulations during the construction period can be applied. In the process of contract performance in 2010 and 2011, labor and material costs increased significantly, and the government made policy adjustments to labor costs. The adjustment of the actual labor and material costs in the settlement report of Liaojian Group Company has a contractual basis as well as a factual basis. Although the bidding documents stipulate that the construction measure fee will be covered in one lump sum and will not be adjusted during settlement, as the labor and material fees stipulated in the contract can be adjusted according to the facts, the increase in labor and material fees directly affects the measure fee. Under the condition that the labor and material fees can be adjusted according to the facts, the measure fee cannot be covered in one lump sum and should be adjusted accordingly during settlement. In the process of contract performance, Zhongju Saida Company subcontracted a large number of projects, the failure to pay the project progress payment in time leads to the extension of the construction period, increasing the measure cost and labor cost; in the case of fundamental changes in the construction market, only the actual adjustment can ensure that the measure fee is not lower than the cost, that is to say, the settlement report adjusts the measure fee, which has factual basis and contract basis. 3. Summary 1, material prices rise is the result of the law of the market, generally does not belong to the situation change. Article 533 of the Civil Code of the People's Republic of China stipulates that "after the establishment of the contract, the basic conditions of the contract have undergone major changes that the parties could not foresee at the time of the conclusion of the contract and do not belong to commercial risks. If the continued performance of the contract is obviously unfair to one of the parties, the adversely affected party may renegotiate with the other party. If the negotiation fails within a reasonable period of time, the parties may request the people's court or the arbitration institution to modify or terminate the contract. The people's court or arbitration institution shall, in the light of the actual circumstances of the case, modify or terminate the contract in accordance with the principle of fairness." The application of this article requires a strict distinction between changes in circumstances and commercial risks, which are inherent in the conduct of commercial activities, such as changes in supply and demand, price increases and decreases that have not yet reached an abnormal level of change, and risks inherent in non-market systems that the parties could not foresee at the time of contracting. The Notice of the Supreme People's Court on the Interpretation of Several Issues Concerning the Correct Application of the the People's Republic of China Contract Law (II) Serving the Overall Work of the Party and the State clearly stipulates that the court should correctly understand and carefully apply the change of situation. If it really needs to be applied in a case, it should be reviewed by the Higher People's Court and reported to the Supreme People's Court for review when necessary. 2. In the case of a commercial risk, the assumption of the risk depends on the agreement of the construction contract and the construction facts. If the price of materials fluctuates during the construction period in a fixed lump sum contract or the contract stipulates that the contract price is not adjusted, and there is no delay in the construction period due to the employer, the risk shall be borne by the contractor; if the construction period is delayed due to the employer and the price of materials rises during the construction period, the contractor shall provide evidence to prove that the risk of material price rising during the construction period delay shall be borne by the employer; if both the employer and the contractor are at fault for the contractor, the risk of material price increase during the delay of the construction period shall be borne by both parties in proportion to the degree of fault, and if the contract price can be adjusted according to the facts after the material price increases as stipulated in the construction contract, the contractor shall provide evidence to claim to the contractor. 4. Risk Alert Our lawyers believe that the construction period of the construction project is long and there are indeed many uncertain factors. Under the current situation that most of the construction contracts are fixed total price contracts or fixed comprehensive unit price contracts, the employer should carefully perform its contractual obligations to avoid the risk of unnecessary losses due to the delay of the construction period caused by its own actions. In the face of the payment of the project funds beyond the contract stipulated by the contractor due to the increase in material prices, it can have a benign communication with the contractor, the Contractor shall fully consider the possible risks in the contract performance during the bidding stage or contract signing stage, and reasonably determine the contract quotation to deal with the risks caused by the increase of material prices during the construction process, during the construction process, the contractor can strengthen the management of visa claims, and actively communicate with the contractor when the price of the main materials rises sharply, and strive to make a supplementary agreement on the sharing of the costs arising from the increase in the price of materials.</中华人民共和国合同法>

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