The verdict is in! Case in Jiangsu: The contractor canceled the contract due to a sharp rise in raw material prices after the contract was signed!
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In construction contracts with a fixed-price arrangement (including fixed unit prices or a fixed total price), if material costs rise significantly, the contractor will face huge losses if it continues to carry out the work at the contract price. This is unfair to the contractor, and in the long run it affects the quality of the construction. Therefore, the \"Guiding Opinions on Strengthening the Control of Price Risks for Building Materials\" issued by the Jiangsu Provincial Department of Construction (Su Jian Jia 67) stipulates that the extent of price risk associated with building materials included in the contractor’s bid price should be limited (the general risk coverage should not exceed 10%) ； In the case of fixed-price contracts: should the prices of non-key construction materials rise or fall during the project construction period, the contractor shall bear the resulting differences or reap the corresponding benefits ； During the construction of the project, if the price of the second category of major building materials (those materials whose cost accounts for more than 10% of the total cost of the project) rises or falls by within 5%, the difference in price shall be borne by or benefit the contractor; for any increase or decrease exceeding 5%, it shall be borne by or benefit the employer. Therefore, in order to effectively address the risk of substantial losses resulting from sharp increases in material prices, and in line with the principles of good faith and mutual benefit, the contractor should strive to have a price adjustment mechanism stipulated in the contract – that is, the contract price should be increased by a certain percentage whenever materials rise by a specific amount. This approach ensures fairness for both parties throughout the execution of the contract. Otherwise, it would be unfair to let the contractor bear all the risks associated with rising material costs, and this is also detrimental to the employer in the long run.
In this case, Chenyu Company sent a letter requesting an adjustment to the contract price on the grounds of a sharp rise in steel prices, while Xinyuan Company refused to make such an adjustment on the basis of a fixed unit price. On March 21, 2017, Chenyu Company sent a letter to Xinyuan Company to terminate the contract; such action constituted a breach of contract, and it shall bear the corresponding liability for that breach. Chenyu Company has breached the contract and shall bear the corresponding liability for breach of contract. Xinyuan Company filed this lawsuit against Chenyu Company, seeking compensation for the difference in contract prices resulting from the two bidding processes, as well as other losses incurred. However, the difference between the contract price of the re-tendered contract by Xinyuan Company and the price specified in the original contract is due to abnormal risks resulting from sharp fluctuations in the prices of building materials; it is not a loss directly caused by Chenyu Company’s breach of contract, nor is it within Chenyu Company’s reasonable foreseeability at the time the contract was concluded. Therefore, this claim cannot be accepted. In accordance with the principles of fairness and good faith, and by taking into account the reasons for terminating the contract in this case, the specific breaches and faults of Xinyuan Company, the consequences of the losses, the provisions regarding performance bonds in the contract, as well as the statements made by both parties regarding the role of such bonds, it is appropriate to rule that Chenyu Company shall compensate Xinyuan Company with 142,000 yuan as damages.