Concrete & Steel injuridical perspective

Discussions about the risk of steel price increases and the extent of the increases are commonplace and therefore recur with some regularity in legal decisions. In this context, a recent Arbitration Council decision of September 6, 2024 (number 37,708) is very interesting. Not only because of the size of the work (662 million) and the size of the contractor consortium's claim (17 million), but especially because of the arbitrators' opinion on how to interpret the agreements made between the parties. For example, with respect to how to determine the amount for which the contractor combination buys off the risk of steel price increases.

When tendering for the work, the State wanted price certainty regarding the steel item in the project. Initially, the State asked the bidders to buy off this item, i.e. to tender a fixed price for the steel to be used. When the bidders indicated that they could not take this risk and asked for indexation of the steel item, the State decided to postpone the moment of surrender to a later moment, namely no later than 6 months after the date of final award. With regard to the 6-month period between the tender and the time of commutation, an annex stipulates that the CROW product groups 18 (reinforcing steel) and 19 (steel) will be settled. It has not been determined according to which index the settlement should take place.

The State argues that indexation must be done in accordance with the CROW indexes for product groups 18 and 19, because it is simply a matter of settlement of CROW product groups. In addition, with regard to other product groups it has been contractually determined that settlement must take place in accordance with the indexes belonging to those CROW product groups. The contractor combination's claim for reinforcing steel is based on indexation according to the Platts index and for steel according to the Grymafer index. The contractor combination argues that the mention of the CROW product groups in the specific annex does not automatically imply that the CROW indexes are then also applicable. 

The arbitrators follow the contractor's position. It is not clear from the text of the annex that the CROW indexes for product groups 18 and 19 are to be used. The mention of the CROW product groups 18 and 19 is to make it clear on which materials price changes may be set off, not to determine the manner in which those price changes are determined. Thus, on balance, it is not determined which indexing to use.

The arbitrators stated first of all that by including the specific provision for the indexation of steel, the State had shown that it wanted to make a regulation for steel that was different in character from the indexation regimes for the other product groups. And the surrender provision for steel does not refer to a CROW index to be used for the surrender, while for the other product groups there is an explicit reference to the CROW indexes. According to the arbitrators, the contracting consortium was also correct in pointing out that the Memorandum of Information stated that the purpose of the relevant provision in the annex was to make the risk of price increases for steel in the phase between the tender and the time of redemption manageable for the candidates. According to the contractor consortium, this risk becomes manageable if the final contractor has the freedom to price the risk of steel price increase in accordance with an index that allows it to effectively control the risk it faces for the entire project.

According to the arbitrators, the combination was therefore free, based on the annex, to use the Platts index and the Grymafer index. In accordance with those indices, the combination was willing to hedge the risk for the duration of the work. That is its risk and the method used does not appear incorrect to the arbitrators either. For example, the Platts index is eminently suitable because it includes an analysis of future expectations. The arbitrators therefore grant the contractor combination's full claim of 17 million euros. 

This ruling once again demonstrates the importance of clearly defining what agreements and indexes the parties want to agree on for indexing steel.