Ukraine: Supply Bottlenecks and Price Increases for Raw Materials – Contract Adjustment as an Exit

Events such as the Corona pandemic, the Ukraine war and the current energy crisis have clearly shown how susceptible international supply chains are to disruption. In recent years, repeated dramatic shutdowns and production losses have affected countless companies worldwide. The sometimes dramatic price increases for primary products and raw materials are affecting not only so-called global players but also companies in all sectors and sizes.

According to Hildegard Müller, President of the German Association of the Automotive Industry (VDA), the current situation in Ukraine is expected to have a sensitive impact on supply and logistics chains with repercussions for factories in Germany and Europe.

Experts estimate that about every seventh wiring harness installed in the EU comes from an Eastern European country. As a result, German car manufacturers are forced to make rapid changes and restructure their supply chains. On the one hand, they are currently trying to win suppliers from other countries. On the other hand, they are supporting the Ukrainian suppliers in finding new, safe locations for their production.

As is well known, not only the original equipment manufacturers and suppliers of the automotive industry are affected by the supply bottlenecks. Due to the price increases for raw materials such as steel, bitumen or aluminium, it is currently impossible to calculate offers seriously, according to Tim Oliver Müller, head of the Main Association of the German Construction Industry. Companies would also be left with additional costs for current contracts, as they cannot easily pass on the price increases to their contractual partners.

Longer waiting times for ordered raw materials and goods also leads to higher planning costs. It becomes particularly problematic when existing orders cannot be fulfilled according to the contract, and delivery bottlenecks lead to turnover losses.

To provide our clients with the necessary clarity regarding the legal options for action in such a situation, the German law firm Schlun & Elseven offers legal assistance that is both competent and committed. Our contract law practice group will examine how much you can invoke the force majeure clause agreed upon in your contract and what specific legal consequences you should expect here. Please get in touch with us today.

Invoking the Force Majeure Clause

Companies affected by the pandemic and currently by the Ukraine war should first check whether the contracts agreed with suppliers and other contractual partners contain so-called force majeure clauses and whether these apply.

The invocation of such a clause depends, among other things, on the company’s situation triggered by the military conflicts. Force majeure clauses are mainly used when there is an event that the company cannot avert. Such events refer to unforeseeable circumstances for the contracting parties over which they have no influence. These are events of force majeure such as pandemics, wars or natural disasters. In part, the events that lead to the applicability of the above-mentioned clause are listed in it.

Whether the force majeure clause applies must be examined in detail. The question is whether a case of force majeure exists and whether the company’s services can no longer be provided. Indicators for the examination are:

• Availability of company employees,
• possibility of using transport routes and means of transport,
• preservation of the production site – Is it still in a functional condition?

If the contracting party can invoke the clause, this usually leads to the temporary exemption of the latter from performance until the work required to fulfil the contractual obligations can be resumed. The affected company should then contact their contractual partners as soon as possible to avoid possible liability for damages.

Our contract law practice group will be happy to examine how you can invoke the force majeure clause agreed in your contract and what specific legal consequences you should expect here.

§ 313 BGB – Interference with the Basis of the Transaction

Suppose an agreement between the parties cannot be reached by peaceful means. In that case, the parties concerned are also free to oppose the fulfilment of the contract by raising the defence of disturbance of the basis of the contract under § 313 BGB. In the past, it was considered an absolute rarity that case law affirmed that the base of the transaction had ceased to exist. However, the unexpected economic consequences of the war in Ukraine (shortage of raw materials, the resulting price increase and the permanent disruption of supply chains) and advancing inflation are now likely to lead to an increased examination of the provision of § 313 BGB.

For a contract adjustment to be considered, there must be credible arguments. The business basis is mainly based on the value relationship (equivalence) between performance and consideration. Due to a substantial increase in the service price (e.g., a price increase of raw materials) or a considerable devaluation of the counter-performance (e.g., inflation), this relationship can become considerably unbalanced.

About the current situation in Ukraine, the disturbance of the basis of the contract is likely to be assumed in many cases already because the contracting parties may have mistakenly considered the following circumstances to be sure at the time of the conclusion of the contract:

• The unrestricted availability of the goods and labour required for the performance of the contract,
• the continuation of previously used transport routes and means of transport.

If both contracting parties were in error about the existing circumstances at the time of the conclusion of the contract (cf. § 313 (2) BGB) and that now – given the current supply bottlenecks caused by the war – one of the two contracting parties can no longer be expected to adhere to the contract, the basis of the contract is to be affirmed to have ceased to exist.

Amendment of the Contract using an Addendum

The following solutions can be considered within the framework of an amendment contract/addendum according to § 313 para. 1 BGB:

• Determination of a new delivery date,
• a downgrading of the quality of the goods,
• a reduction of the delivery quantity,
• deferral of all performance obligations (until deliverability can be guaranteed again).

Although such an addition modifies the contract’s content, the debts’ character does not change. The agreement continues as such, with the securities provided therein (surety, mortgage, etc.) retaining their validity.