Does a property development boom mean more litigation cases?
Property development projects are on the rise, accompanied by rising costs of building materials. Can contractors with old contracts which do not reflect inflation validly demand a higher fixed fee?
Following the 2016 downturn, 2017 and 2018 have seen rapid growth in property development projects. This is true of infrastructure projects as well, and has led to significant increases in prices of construction materials and construction services. Certain products such as wood increased in price by more than 30% year on year, and selected services are seeing similar increases in price. Doubtlessly, this is due to skilled workers leaving the profession at a time of a sudden rise in demand for bricklayer, plastering, and plumbing services.
The healthy condition of the market favours contractors, emboldened in dictating terms to customers. Many contracts signed in the past remain, however, and these are often in the public sector. These provide for a fixed price, with no contractual provision for adjustment of the price in line with inflation. Implementation of contracts over a number of years hurts contractors financially as the market climate changes.
Potential for increasing a fixed price
The situation was similar in 2005–2007 and 2010–2012, when the prices of some building materials increased by double digits above inflation. Some contractors decided to try to recoup the losses caused by sudden increases in price in court. The main arguments in rulings in cases of that type are significant as they affect the legal situation of contractors performing contracts in 2017–2018.
Not only a contractor producing a work, but also a contractor performing construction work, is entitled to demand a higher fixed fee under Art. 632(2) of the Polish Civil Code. A claim of this kind will be effective if the contractor proves that performing the work in new circumstances which could not have been predicted at the time the contract was signed puts the contractor at grave risk of losses. The Supreme Court of Poland ruled that an increase in a fixed fee can be demanded during or upon completion of a project, and this includes in public tenders. It also stated that a sudden increase in building materials prices can be grounds for adjusting a fixed fee, even when this option was excluded in the contract.
What needs to be proven
There are many pitfalls for contractors seeking a favourable ruling. Firstly, a contractor is required to prove that while exercising professional diligence it could not have predicted the rate of increase in prices and taken countermeasures, for example by entering into long-term contracts. Secondly, the burden of proof with respect to “severe loss” rests with the contractor. The loss must be suffered as a result of an unpredictable change in relations, in the context of a particular transaction. It cannot be associated with loss of profits or income. Overall, a comprehensive specialist opinion will have to be sought, irrefutably showing excess of the costs incurred by the contractor beyond the fee obtained. Only if a court finds that precisely determining the value of the demand is impossible or excessively difficult can it assess by itself the scale of the loss, after weighing all the facts in the case (Art. 322 of the Civil Procedure Code).
An increase in a fixed fee does not cover additional or substitute works the parties did not envisage when signing the contract, for which the contractor can seek payment on other legal grounds. Art. 632(2) of the Civil Code also does not apply when the contractor’s fee is an estimate or a combination of an estimate and fixed prices. In the latter case, Art. 357¹ of the Civil Code can be a point of reference. This is a more general norm and relates to an extraordinary change in relations in a contract of any kind. The impact of that change on the parties’ obligations has to be assessed taking into consideration their interests and the principles of community life.
It is difficult to tell whether investors and contractors drew any conclusions from past years and adapted contracts to account for market risks such as large fluctuations in prices. Perhaps the boom will affect courts hearing property development litigation cases as well.
Paweł Mazur, adwokat, Construction Disputes practice, Wardyński & Partners