If your company is active on the B2B market, in principle you are free to set terms and conditions with your clients and suppliers—always within the boundaries of the law, of course—and formalize such terms in a contract.
In the following sections, we will focus on several contractual mechanisms that you, as an entrepreneur, can use when you face changed market conditions. Moreover, we will also point out the statutory restrictions to the freedom of contract, following for example restrictions thereof by new B2B legislation.
1. Price increases
Imagine your company executes a a contract for the supply and installation of new IT infrastructure for an SME customer. You made an offer to supply 10 laptops, docking stations, and thin clients. You also offered the supply and installtaion of audio- and video equipment in the meeting room of the SME. The SME wants a headset and a tablet for every co-worker, which you offered as well. In addition, you sold several software licenses, and you will support the SME co-workers in migrating to the cloud.
Due to the huge demand for IT equipment, which has been boosted by a lot of remote-working during Covid, the prices for certain components increased tremendously. The price for not only CPUs but also SSDs and RAMs has also gone up significantly in a few months’ time. Plus, there are major shortages of these items on the market. You might not be able to deliver to your customer on time or even at all. Now what?
Or how about another scenario: your company is active in the international distribution of industrial products. The market is booming, but it gradually becomes nearly impossible to get a hold of shipping containers in order to organize the import and export of your products. Besides the major delays in the supply chain, the prices for the shipping containers go soaring. The price for ship transport jumped by a whopping 500% in a year’s time. Can you pass on this huge increase in transport cost to your contracting partner?
There are several clauses that you, being a client or a supplier, can include in your contracts to brace your company in these times of uncertainty.
I. Price adjustment clause
- Points of attention
Price is an essential element in any agreement. As a company, you set a price bearing in mind the cost structure, overhead, and margin. In your commercial relationships, price will often be the main focus in negotiations. Eventually, you reach an agreement with your customer or supplier about the price and all the other aspects of the cooperation. Following which a contract is formed based on the parties’ consensus.
But here’s the moment of truth: you’re faced with increasing prices so that the conditions that applied at the time of execution of the contract do no longer apply or are a lot less viable. Can you adjust the price that was agreed upon?
A price review clause is a provision that can be included in a contract, which describes a mechanism for adjusting the agreed price when certain conditions are met. By included such price adjustment clause, the new price can be determined based on the stipulated mechanism without the need for a new consensus between the contracting parties. In other words, the new price must be able to be determined based on the principles that have previously been agreed upon without the need for you to seek the other party’s consent.
If the price cannot be determined transparently based on the price adjustment clause, that can lead to the clause’s nullity. This means that the clause is considered void. In short: you will not be able to rely on it when you need to.
2. Recovery Act
Furthermore, you should also consider the Act of 30 March 1976 on economic recovery measures. Although it’s dated quite a while back, it’s still very topical. This law states that every price adjustment clause that is paired with the consumer price index or another index is automatically null and void. In addition, the law prescribes that the price adjustment clause may change the price only to a maximum sum of 80% of the final price, and—moreover—it must be paired with objective parameters that represent actual costs.
3. New B2B Act
The new B2B law entered into force on 1 December 2020. A lot has already been written about the way in which the legislature has intervened in commercial dealings between companies. The law indeed further restricts the freedom of contract in B2B relationships.
When it comes to price adjustments in contracts, this law is particularly relevant. Under this new B2B Act, it is forbidden to unilaterally change the price, characteristics, or the conditions of the contract without valid reason. The possibility to adjust prices must therefore be transparently paired with objective parameters: increase in prices of raw materials, increase in transport costs, …
Any company should keep this in mind when contracting. After all, the new B2B Act applies to all contracts that were concluded, extended, or amended after 1 December 2020. New B2B customers that received your general terms and conditions or contract, quotation, etc. for the first time after this date can therefore rely on this Act.
4. Tips & tricks
Can’t see the forest for the trees? Not to worry. Here are some guidelines you can use when drafting the price adjustment clause:
- Clearly mention in the agreement when the price is allowed to be adjusted (monthly, on the anniversary date of the contract, each time when a price increase occurs, …)
- Be transparent: use objective parameters that can affect the price and can thus trigger a price adjustment
- Indicate the way in which you will have to inform your contractual partner about your intention to adjust the prices (by registered letter, email, …)
- Mention the date when the changed price becomes effective
- Be clear: which orders will the new prices affect? Caution: confirmed orders form the basis of the contract, so you are not allowed to unilaterally change the prices that you have agreed on for those.
- Provide options: you can provide for the possibility of terminating the contract if there is no consensus on the new prices.
Drafting an appropriate price adjustment clause that considers all limitations under the law is customized work. Therefore, invest in making good arrangements. If the clause does not adhere to these principles, then there is a chance that the provision could be declared void and youwould be back to square one.
II. Force majeure?
If you did not provide for a price adjustment clause in your contract with your customer or supplier, there are still other mechanisms that can offer some form of relief.
Force majeure is a well-known concept. Based on prevailing case-law of the court of cassation, “force majeure” is an unforeseen and unavoidable event that creates an insurmountable hindrance to the fulfilment of an obligation and that is beyond the will of the party who invokes it.
For there to be force majeure, it must therefore be absolutely impossible to supply the products or services agreed upon.
If the prices are so high that it is not feasible for you as a company to still supply at the agreed prices, that is strictly not considered as an event of force majeure. You could supply the goods or services even if you don’t make any profit at all.
The inability to fulfill a payment obligation because of economic circumstances cannot be an event of force majeure either.
For force majeure to come into play, there must be an absolute impossibility for you to perform the contract (on time or at all), whereas we talk about “hardship” or frustration if it is not impossible—but only a lot more difficult—to fulfill the contractual arrangements.
For example, if the price of steel has increased by 70%, the steel supplier would not be unable to supply under a sales contract, but the fulfillment of the terms will certainly be more difficult and/or economically painful.
Hardship thus covers an unforeseeable situation that creates such a major imbalance between the contracting parties that the continued performance of the contract in unchanged circumstances is extraordinarily detrimental for one contracting party. An important remark about this is that the legal doctrine of hardship is typically not accepted under Belgian law is. But you are free to agree on a clause that governs hardship as well as the effects thereof.
What is increasingly accepted in Belgian case-law is that when the contractual balance between the parties is disrupted by external circumstances (e.g., drastic price increases, huge shortage), the obligation lies with the contracting parties to renegotiate the arrangements in good faith, taking into account the new reality. This obligation stems from the statutory obligation to perform a contract in good faith (Article 1134, third para. Belgian Civil Code). But in practice, this might not offer a solution and hence does not create any certainty. We therefore advise that you include an agreement on hardship in your general terms and conditions or contracts (if you are the seller).
If your company tenders a bid for a public contract (under public procurement), the contracting authority’s tender documents provide all governing principples. Your company undertakes to perform the contract for the public authority under the conditions that were offered in the bid. As soon as the your company is awarded the public contract based on your bid, the tender documents and your offer, combined with the public procurement legislation form the contractual framework of the cooperation.
Therefore, your own general terms and conditions will not apply to the performance of such a public contract.
The Royal Decree of 14 January 2013 on the general rules governing the performance of public contracts (Royal Decree) sets out the guidelines of cooperation between the contracting authority and the contractor. They leave very little or even hardly any leeway for negotiation.
If you are faced with major price increases during the performance of a public contract that make it nearly impossible for you to perform the public contract under the conditions you presented in your bid, what are your options?
In the following sections, we’ll focus on the options that the public procurement legislation provides, which enable you to confront the challenges in today’s market, in the performance of public contracts.
1. Price review
Public procurement legislation considers any price review to be a change to the contract. Moreover, price review is possible only if the tender documents (the specifications) explicitly provide for a price review clause.
Article 38/7 of the Royal Decree stipulates that for public contracts for works, the specifications must contain a price review clause, whereas for the supply of goods and services, the clause is optional. The parameters that must be used to determine the price when undergoing review are also embedded in the law: hourly wages of staff, social security costs, prices for materials, costs of raw materials, or currency exchange rates.
If a price review clause applies to an ongoing public contract, this applies in theory to the account receivables. Caution: the price review clause can also be detrimental to you. If the set parameters cause the price to drop, you as the contractor will also be bound by it.
2. Unforeseeable circumstances
What if you’re performing a public contract for the supply of goods or services and the specifications do not have a price review clause (which is optional after all)?
Well, the Royal Decree on Public Contract Performance provides for a possible solution: the rule on unforeseeable circumstances in Article 38/9. This rule is considered to be the codification of the abovementioned doctrine of hardship. But the outcome of the rule under the public procurement legislation is different: the purpose is to assure the continuity of the public service.
Even if the tender documents do not provide for a price review clause, the statutory rules under Article 38/9 of the Royal Decree will apply by law.
I. Conditions for application
In concrete terms, the rule on unforeseeable circumstances creates the possibility for the contractor to seek compensation if:
- he is faced with a circumstance that was not foreseeable at the time of the tender submission; and
- The circumstance invoked could not be avoided and the consequences of it could not be remedied even though the contractor had done everything necessary to that end.
The effect of invoking “unforeseeable consequences” successfully in the performance of a public contract would thus be the following:
- You, the contractor, will have the right to seek time extension for the performance of the contract;
- In addition, if you can demonstrate that you have suffered major adverse consequences, you can also seek another form of review of the public contract, such as the restoring of the contractual balance (and the ability to pass on (all or part of) the price increase), or even seek termination of the public contract.
The threshold for determining what is a “major adverse consequence” is also set out in the Royal Decree. The Roayl Decree moreover distinguishes between public contracts for works and those for the supply of goods and services. Specifically, you can assert that you suffered a major adverse consequence if:
- For public contracts for works: the value of the adverse consequence is at least 2.5% of the initial contract value or a lump-sum threshold if 50% of the contract was awarded at a set price (€175 000 for public contracts whose initial contract value is higher €7.5 million and lower or equal to €15 million; €225 000 for public contracts whose initial contract value is higher than €15 million and lower or equal to €30 million; €300 000 for public contracts whose initial contract value is higher than €30 million).
- For public contracts for the supply of goods and services: the value of the adverse consequence is at least 15% of the initial contract value.
If your company is active on the public procurement market, you probably know that the performance of a public contract entails some administration and formalities.
This is no different if the contractor invokes “unforeseeable circumstances. In such scenario, you, the contractor, have 30 days from the occurrence of the unforeseeable circumstance to notify the contracting authority by means of presenting an account of the facts. In the same letter to the contracting authority, you can also seek a review of the public contract.
As you can see, there are many ways to anticipate and respond properly and transparently to unforeseeable circumstances in a commercial, contractual relationship as well as in the framework of a public contract under a public procurement procedure.
Of course, properly setting out everything and applying them contractually for your business is customized work. Standard clauses are usually not adapted to the needs of your business. Moreover, we often see that agreements that were drafted in the post-Covid period should best be re-evaluated again.
Monard Law and its team of specialists are happy to answer all your questions about general terms and conditions, contracts, and public contracts. Reach out and gain some initial insights into these matters—without obligation.