The risk follows the contract, not the index
The first question is not how much prices rose, but what price agreement the parties concluded. A price rise affects the client's (tellija's) final cost in entirely different ways depending on whether the contract has a fixed price, a binding estimate, a non-binding estimate or a price adjustment clause.
Here, the word estimate (eelarve) means, in the sense of § 639 of the Law of Obligations Act (võlaõigusseadus, VÕS), the estimated cost of the work agreed in the contract for work (töövõtuleping), which is binding or non-binding for the contractor. It is not the company's internal detailed budget.
| Price agreement | Who bears the risk of a price rise | Legal basis |
|---|---|---|
| Binding estimate (including by default) | the contractor; according to the Supreme Court case-law review, it cannot claim payment above the estimate | VÕS § 639(1); 2-15-15662/55, para 12 |
| Non-binding estimate | the contractor, if the overrun is not substantial or was foreseeable; the client, if the overrun is substantial, unforeseeable and the contractor gave notice without delay; without notice, only to the extent of unjust enrichment | VÕS § 639(2) |
| Price adjustment clause | shared in the way described in the contract | the contract |
| Any of these, if circumstances change exceptionally | reallocated between client and contractor, only when four conditions are met together | VÕS § 97 |
With a binding estimate, a price rise is in principle the contractor's risk. VÕS § 639(1) presumes a binding estimate unless the parties have agreed otherwise, and according to the Supreme Court (Riigikohus) case-law review "Töövõtuleping" ("Contract for work", 2022), where the estimate is binding the contractor cannot claim payment above it (Supreme Court judgment of 19.12.2017 no 2-15-15662/55, para 12). A client that has not reversed the presumption in the contract is therefore protected against price rises without any additional clause, leaving aside the exception in VÕS § 97.
With a non-binding estimate, a price rise is a question of exceeding the estimate. The contractor may claim payment above the estimate only if the overrun is substantial and could not have been foreseen, and it must notify the client without delay; without notice, it may claim the excess only to the extent that the client has been unjustly enriched (§ 639(2)). If the price rise had already begun and was public knowledge when the contract was concluded, the foreseeability question is a difficult one for the contractor. How to check these three conditions, and when the client may terminate the contract because the estimate has been exceeded, is covered in this branch's article on substantial overrun of the estimate.
VÕS § 97: a narrow exception
Section 97 of the Law of Obligations Act allows a party to request an amendment of the contract if circumstances change after the contract is concluded in such a way that the balance of the obligations changes substantially. It is the general statutory basis for reallocating price-related risk after the contract has been concluded without an agreement of the parties.
The conditions are cumulative: all four must be met. Under subsection 2, the disadvantaged party may request an amendment of the contract only if:
| Condition (§ 97(2)) | What it means for a price rise |
|---|---|
| 1) the change in circumstances could not reasonably have been foreseen when the contract was concluded | a price rise that had already begun or was forecastable when the contract was concluded does not meet the condition |
| 2) the party could not influence the change in circumstances | usually met for market prices |
| 3) the party did not bear the risk of the change in circumstances under the law or the contract | a binding estimate or a fixed price may mean that the contractor has taken on the risk |
| 4) the party would not have concluded the contract had it known of the changed circumstances, or would have concluded it on substantially different terms | the change must be so large that it goes to the basis of the contract |
The third condition matters most for the client. If the contractor has taken on the price risk in the contract, for example by giving a binding estimate without a price adjustment clause, the client can argue that the risk was the contractor's under the contract. That is why the wording of the contract on who bears what is also decisive when § 97 is applied.
Even when the conditions are met, the consequences of § 97 are limited. An amendment of the contract with retroactive effect can be requested only to a limited extent (subsection 4). If amending the contract is not possible or reasonable, the party may withdraw from the contract or, for a long-term contract, terminate it under § 196 (subsection 5). For the client, this means that a claim under § 97 is not an automatic claim for extra payment but the start of a negotiation, one possible outcome of which is the end of the contract.
When a claim under § 97 arrives, the client asks the contractor four things. Each answer should be obtained in writing, together with supporting documents:
- when the circumstances changed compared with the date the contract was concluded;
- why the contractor could not foresee the change when the contract was concluded;
- whether the contract shared the price risk, and if so, how;
- how large the change is relative to the total contract value, not relative to the price of a single material.
An indexation clause shifts the risk predictably
If the parties want to share the price risk, the clearest tool is a price adjustment clause agreed in the contract. It replaces a later dispute about foreseeability with a formula that both parties have accepted in advance. For a longer construction period, such a clause may also reduce the tender price, because the contractor does not have to price the whole risk in.
A good clause names at least three things: the index, the base period and the trigger threshold.
| Part of the clause | What to write | What happens if it is missing |
|---|---|---|
| Index | a named official index or sub-index that the contractor cannot influence | the parties argue over which index applies |
| Base period | the month whose index value is the starting point, for example the month the tender was submitted | the price rise is calculated from the wrong date |
| Trigger threshold | the change from which the price is adjusted | every small fluctuation generates settlements |
| Interval | how often the adjustment takes place | the timing of adjustments is left to the parties |
| Scope | which part of the price the clause applies to (for example, not to work already done or prepaid) | what already has a fixed price is adjusted as well |
| Cap | whether the adjustment is limited | the client's risk is unlimited |
| Symmetry | whether the price also falls when the index falls | the clause only works in the contractor's favour |
A fictitious example shows why the effect of the trigger threshold must also be written down. The following figures are invented and are not a recommendation. Under the contract, the price of work not yet done is adjusted if the named index has changed by more than 5 per cent compared with the base period. At the time of the adjustment, work worth 200,000 euros remains to be done and the index has risen by 8 per cent. If the clause adjusts only the part above the threshold, the extra payment is 3 per cent, or 6,000 euros. If the clause adjusts the whole change once the threshold is crossed, the extra payment is 8 per cent, or 16,000 euros. Both readings are possible if the clause does not specify, and the difference is 10,000 euros.
Work done during a period of delay needs separate rules. If the contractor is late, there is no reason why the client should bear the price rise for that period. The clause can provide that the price of work carried out during the delay is adjusted using the index value at the agreed deadline, not a later value.
This article does not cover how to read the index and use it in a budget. What the construction price index measures and how to read its values is explained in the article on the construction price index and how to read it, and how to use the index in a budget in the article on using the index in a budget.
Contract clauses to look for before signing
Price risk is often shifted to the client by a single sentence, not a separate chapter. Before signing, it is worth looking for the following wordings.
The first is a clause that makes the estimate non-binding, for example "the estimate is indicative" or "the price will be refined as the works proceed". It reverses the presumption in VÕS § 639(1) and turns a price rise into a question of exceeding the estimate.
The second is a clause allowing the contractor to adjust the price "if market prices change" without an index, base period or threshold. Such a clause shifts the risk to the client without giving it any way to check the amount.
The third is a clause under which the price of materials is valid only for a limited period after the tender is submitted. If the contract is concluded or the works start later, this may mean that the client bears price rises before the first working day.
The fourth is the opposite case: a contract that states expressly that the contractor bears all risks of price changes. Such a clause also protects the client through the third condition of § 97, but it may raise the tender price.
Materials supplied by the client
If the client supplies materials itself, it also bears the price rise for those materials. This follows from the logic of the contract, not from a separate statutory provision: the contractor's price does not include materials it does not buy. If the client's delivery is late, this may give the contractor a right under VÕS § 652 to claim compensation for the damage caused by the delay, and in this way the risk of a price rise indirectly becomes a risk of delay.
Specific features for a contracting authority
A contracting authority (hankija) cannot freely agree a price change during the contract. According to the Supreme Court case-law review, the price agreement in a public contract cannot be entirely non-binding (Supreme Court judgment of 12.11.2014 no 3-2-1-102-14, paras 13, 14 and 19). A price review clause must already be written into the procurement documents, and its requirements and its link with the limits on modifying a public contract are described in the article on price review and indexation in a public contract.
This article describes the state of the rules and published case law on the date of checking and is intended for professional orientation. It does not replace legal advice or a review of the specific case.