Netherlands: Bidders bearing the burden of current supply chain problems for construction projects
The construction sector is dealing with rapidly increasing energy prices as well as existing difficulties in obtaining materials and supplies due to supply chain problems. The continuity of the construction sector is in turmoil and both procuring authorities and bidders are facing higher risks and uncertainties when putting out tenders, submitting offers and concluding contracts. This results in construction projects being postponed or delayed. This is undesirable given the objectives that the Dutch government is facing such as realising a more sustainable (and even circular) construction sector and solving the housing shortage.
Uncertainties and risks should usually be allocated in a proportional manner between employer and contractor. Recently, the Dutch court determined (to our knowledge for the first time) that supply chain issues, for example as a result of the war in the Ukraine, may not be laid entirely at the winning bidder’s feet.
Court case [1]
This case concerns a tender procedure for the construction of a research ship. One of the bidders argues that the contract provisions of the procuring authority are disproportionate. The relevant provisions include a stringent time for delivery and furthermore stipulate that every delay in the supply of materials can be considered as an attributable breach of contract.
The judge notes that procuring authorities have the freedom to determine the form and specifications of a tender. The limits of that freedom are determined by procurement law, such as the principle of proportionality. Rule 3.9A of the so-called Proportionality Guide[2] stipulates that a procuring authority allocates risk (to a certain extent) to the party that can best control or influence it.[3] Consideration is given in the ruling to the fact that suppliers can face difficulties due to the current market situation – which is impacted (still) by the COVID-19 pandemic, the shortage in raw materials and the war in Ukraine – and that bidders cannot prevent the delays that result from such difficulties. The court decides that allocating the risk of the current supply chain issues is in breach of the principle of proportionality and that a more balanced arrangement will have to be included in the contract.
Interestingly, the court places weight on the fact that the ship in question is still sailing (and that there is thus no need for the stringent risk allocation), as well as that the problems in delivery cannot be covered by insurance. This raises the question in which situations allocating the risk to the bidders may be proportional (and therefore acceptable). A question that cannot be answered with current case law. Only time will tell.
Response by the Dutch government
In the wake of the court case and the volatile market situation pointed out by it, the Dutch government (being one of the biggest employers for construction projects in the Netherlands) stressed the importance of the joint effort to keep construction projects going.[4] This requires a cooperative mindset from market parties, which could include the following guidelines.
- The financial risks of the current uncertainties will not be placed unreasonably and unfairly on just one of the parties involved.
- Parties will come to arrangements on possible price increases and supply chain problems during the tendering procedure or (if the contracts are already concluded) after such circumstances arise.
- If contractual agreements can no longer be met due to the crisis, parties will come up with a solution in mutual consultation.
Parties need to be aware of each other’s positions and interests, and act accordingly in reasonableness and fairness. Agreements need to meet the common interest to achieve workable solutions for all parties involved. Not only should the scheduling and realisation of a project be based on this principle, but also the tendering procedure.
Concluding
We see that the market is struggling with the uncertainties and issues that come with turmoil in the global economy. Not only is it advisable for the employer to consider if allocating all the risks with the contractor is to its advantage, but it is also essential to pay attention to a good relationship between the parties involved. We have found that good cooperation based on a fair and flexible contract meets the interests of the parties involved. Tendering procedures can run smoothly, even when world events seem to make this impossible.
Do you need assistance with your procurement or construction projects? Please contact Andrea Chao or Mariam Ali.
[1] https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBNHO:2022:3274&showbutton=true&keyword=%22aanbesteding%22&keyword=%22oorlog%22 (only available in Dutch).
[2] Bird & Bird participated in the 3rd revision of this guide. A translation in English of the Proportionality Guide is available at: https://www.pianoo.nl/en/legal-framework/proportionality-guide#:~:text=The%20new%20Proportionality%20Guide%20provides,with%20regard%20to%20legal%20processing.
[3] It should be noted that this guide is not binding from a legal perspective, but that its content is considered to be of importance (as the referenced court case also shows).
[4] See https://www.rijksoverheid.nl/actueel/nieuws/2022/05/31/intentieverklaring-samen-doorbouwen-in-onzekere-tijden-tegen-stijgende-bouwkosten (only available in Dutch).
