COMMERCIAL CONTRACTS
If your company is active on the business-to-business market, then you’re basically free to lay down in a contract the arrangements you’ve made with your clients and suppliers—always within the boundaries of the law, of course.
Here, we will focus on several contractual mechanisms that you can use as an entrepreneur when you are faced with changed market conditions. In addition, we will point out the limits of freedom of contract. The legislature has even recently curtailed the contractual freedom between businesses (B2B).
1. Price increases
Let’s say that you, as a company, are concluding a contract for the supply and installation of new IT infrastructure at an SME. You made an offer to supply 10 laptops, docking stations, and thin clients. You also foresaw the supply and placing of audio- and video equipment in the meeting room of the SME. The SME wants a headset and a tablet for every co-worker, and you offered that too. 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 risen significantly in a few months’ time. Plus, there’s major shortage of these items on the market. You might not be able to deliver to your client on time or even at all. Then 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 increased by a whopping 500% in a year’s time. Can you pass on this huge increase in transport cost to the other party to the contract?
There are several clauses that you can include in your contracts, from either the client or supplier’s side, to brace your company for these times of uncertainty.
I. Price adjustment clause
i. Points of attention
Price is an essential term in your contracts. 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 client or supplier about the price and all the other aspects of the cooperation. 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 formation of the contract are no longer valid or are a lot less valid. Could you adjust the price that was agreed upon?
A price review clause is a provision that you can include in a contract in which it describes a mechanism for adjusting the agreed price if certain conditions are met. And a price adjustment clause can do this perfectly. But you’ll have to consider several preconditions. In this way, 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 you have agreed upon without the need for you to seek the other party’s consent.
If the price is 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 not to have been written. In short: you will not be able to rely on it when you need to.
ii. 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 void. Furthermore, the law states 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.
iii. New B2B Act
The new B2B Act entered into force on 1 December 2020. Much has been written about the way in which the legislature has intervened in the commercial relationships between businesses. The law indeed restricts the freedom of contract in B2B relationships.
But having regard to price adjustments in contracts in particular, this law is very. 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, …
Regarding this, you, as a company, must also give it the necessary attention. The new B2B Act applies to all contracts that were concluded, extended, or amended after 1 December 2020. New business clients that receive your general conditions or contract, quotation, etc. for the first time after this date can therefore rely on this new law as well.
iv. Tips & Tricks
Can’t see the forest for the trees? Not to worry. Here are some guidelines that you can use when drafting the price adjustment clause:
- State clearly in the contract 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 manner 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 you, as entrepreneur, would be back to square one.
II. Force majeure?
If you did not provide for a price adjustment clause in your contract with your client or supplier, there are still other mechanisms that can offer relief.
Force majeure is a well-known concept. Based on prevailing case-law of the court of cassation, “force majeure” is an 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 for you 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 considered as no event of force majeure. You could certainly 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.
III. Hardship?
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 is thus 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 frustration in Belgian law is typically not accepted. But you can certainly contractually stipulate a clause that governs hardship as well as the effects of it.
What is accepted more and more in Belgian case-law is that when the contractual equilibrium 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 will hardly offer a solution and does not create any certainty. We therefore advise that you include this principle in your general conditions or contracts (if you are the seller).
As you can see, there are several ways to anticipate and respond properly and transparently to unforeseeable market conditions in a commercial, contractual relationship. Indeed, creating the contractual framework and applying it for your business is customized work. Standard clauses are often not catered to the needs of your company.
Monard Law and its team of specialists are standing by to answer your questions about general conditions and contracts. Feel free to contact us to gain some initial insight, with no obligation.
