Germany: Dealing with deficit public contracts - contract adaption due to incalculable increased costs?

Serious cost drivers are for example natural catastrophes, the COVID-19 pandemic, the war in Ukraine, a change in collective agreements or generally actions by third parties that cannot be influenced. These costs are often not foreseeable or difficult to foresee for the respective company and are usually difficult or impossible to calculate. Price escalator clauses are regularly used as a remedy, which are intended to secure the value of the remuneration over the entire term of the contract by agreeing on an indexation of costs for susceptible price items (e.g. personnel, energy, raw materials). In Germany, indexation is usually based on indices published by the German Federal Statistical Office. Recently, the indexation clauses included in public contracts often no longer adequately reflect the significant cost increases, so that the equivalence ratio of the contracts is damaged. The contracts run the risk of running into deficit, and in some cases, companies even have to file for insolvency because they can no longer compensate the serious cost increases. Occasionally, entire sectors are concerned. A current example from practice is the local rail passenger transport sector, where rail transport companies often suffer, for example, from serious increases in personnel costs, construction site costs or energy costs, which disrupt the equivalence ratio of the transport contracts. The necessary adaption of remuneration or in general the contract adaption is in conflict between contract law, public procurement law, budgetary law and state aid law.

Contract adaption

Any substantial adaption to the contract during the term of the contract may require a new procurement procedure; necessary adaptations to the contract due to increased costs are generally not exempt from this. Adaption to the contract without a new procurement procedure may be permissible if the overall character of the contract does not change and the value of the change does not exceed the respective thresholds under procurement law and does not exceed 10 per cent of the original contract value in the case of supply and service contracts and 15 per cent in the case of construction contracts. In the case of serious cost increases, however, these limits are often reached quickly. The exceptions under Section 132 (2) German Act against Restraints of Competition (GWB), under which a change without a new procurement procedure may be permissible, are restrictively interpreted in case law and often cannot be justified with legal certainty in cases of necessary contract adaptations due to increased costs, or the cost increases the amount to more than 50 per cent of the value of the original contract, so that this is also often ruled out.

Not only in view of public procurement law, but also in particular because of the restrictions of budgetary law and state aid law, it must be checked whether the contractor is entitled to a contract adaptation because of the increased costs. If these restrictions are exceeded, this can lead to the invalidity of the agreed contract adaptation or, under certain circumstances, even affect the validity of the overall contract. Under budgetary law, a public authority can generally only adjust the contract to its disadvantage in justified exceptional cases or agree on a settlement if this is reasonable and economical for the public authority. Incidentally, all public measures that reduce the burden on a company are relevant under state aid law, which generally also includes an increase in remuneration. In individual cases, exceptional circumstances under state aid law may also be considered, which should be taken into consideration in the overall assessment. To mitigate the risk, however, the contractor must have a justified contractual or legal claim to ensure that the adaptation of the contract is legally secure for all parties.

First, it must be checked whether a contract adaptation can already result from the contract in the case of current contracts. This is not uncommon, especially in long-term contracts. However, such clauses often only relate to changes in performance that the client has in mind in the sense of optional additional services and are therefore not directly applicable to cost increases due to external effects. Before agreeing on new contracts, public authorities should carefully check which situations are covered by their planned contractual adaptation clause to avoid disputes at a later stage. If it is important for the public authority to secure the delegated task (especially relevant for tasks of public interest), a well-designed, balanced price escalation or contract adaptation clause can also secure the implementation of the contract in the long term. This is because the claims otherwise relevant to contract adaptation have narrow prerequisites and are generally only applicable in exceptional cases.

In addition, a supplementary interpretation of the contract can often be a method to deal with unforeseen costs. Accordingly, a contract adaptation may be permissible if, for example, the contractually agreed indexation clause later turns out to be unsuitable due to serious cost increases that are not covered by the clause.

Finally, a claim for contract adaptation due to increased costs can often arise from the interference with the basis of the transaction pursuant to section 313 of the German Civil Code (BGB). This first requires a serious change in the basis of the contract. If the circumstances show that, for example, the raw material or resources required for the performance of the contract will be available in the future and will only be subject to the expected price fluctuations or that these will in any case be compensated by the agreed indices and adaptation clauses or agreed risk surcharges, serious cost increases due to external effects can justify a serious change in the basis of the transaction in individual cases. Furthermore, this must result in the fact that the parties would not have signed the contract or would only have signed it with different content if they had foreseen the change. Finally, an adaptation of the contract pursuant to section 313 of the German Civil Code (BGB) requires that the disadvantaged party to the contract cannot reasonably be expected to adhere to the unchanged contract, considering all circumstances of the individual case, in particular the contractual or legal risk distribution.

Conclusion

Dealing with deficit public contracts and the adaptation of remuneration is generally a complex matter. Bird & Bird LLP regularly advises on complex negotiations on adapting contracts and securing future cooperation between the contracting parties on both the public authority and the contractor side and is very familiar with the respective pitfalls. In the event of a (threatened) insolvency of the contractor due to the cost increases, this can further complicate the process – in this case, additional quick transitional solutions or, for example, continuation agreements may be necessary to ensure the economic continuity of the contractor in the short term. The parties to the contract are therefore well advised to consider the contractual, procurement, budgetary and state aid implications at an early stage and to have them comprehensively checked from a legal point of view to ensure that the contract adaptation as a whole is legally secure.