Uncertainty of current times
If anything has become abundantly clear in the past years is that uncertainty is really one of the few existing certainties. At first, there was the corona crisis. Then came the initial energy price increases, the war in Ukraine, the subsequent additional energy price increases, the scarcity of all sorts of materials ranging from construction materials to important technology components. On top of that, there were the occasional unpredictable events that had an impact on the entire globalized world such as the blocking of the Suez channel.
These changed circumstances, and the ones yet to come, require a response from contract law, as regards all types of contracts and in particular long-term contracts. The changed circumstances have notably not always been accounted for at the contract conclusion. This contribution gives a brief overview of the mechanisms and caveats available under Belgian law to tackle such circumstances.
First response: force majeure
Until 1 January 2023, Belgian law, with the exception of the 1980 Vienna Convention on Contracts for the International Sales of Goods (“CISG”; see below), knew only one mechanism to address the changed circumstances after the conclusion of the contract: force majeure. Where, after the conclusion of the contract, circumstances occurred that render the performance of the contract impossible and for the occurrence of which a party is not responsible, that party could be temporarily exempted from performing its obligation and thus from liability for non-performance towards the other party. The crux was to show that the performance of the obligation was impossible. Traditionally, this impossibility was considered in absolute terms but recent case-law and authors have accepted reasonable impossibility as sufficient for the application of force majeure.
Second response: the omnipotent good faith
In addition, in order to attempt to modify the scope of their contractual rights and obligations faced with changed circumstances, parties could rely on corrective mechanisms known in Belgian law. These mechanisms include the obligation to perform contracts in good faith and the prohibition to abuse the parties’ rights. Based on these principles, some case-law accepted the parties’ obligations to renegotiate contracts in circumstances of hardship that occurred after the conclusion of the contract.
Third response: hardship (new civil code)
With the entry into force of the modifications to the Civil Code in Book 5 on 1 January 2023, Belgian law now explicitly addresses hardship (Article 5:74 of the New Civil Code). In circumstances of hardship, the contractual party may request the other party to renegotiate the contract in order to adapt it or to terminate it. If the negotiations fail within a reasonable period of time, the party may request the judge to adapt the contract or to put an end to it.
Differently from force majeure, hardship occurs not where the performance of an obligation has become impossible but where the economy of the contract becomes disturbed. This is where a change of circumstances renders the performance of the contract excessively onerous in the way difficult to expect it reasonably, where the change was unpredictable and not caused by the contractual party, and where the contractual party has not assumed the risk of the changed circumstances.
The performance of the contract will be excessively onerous considering all aspects of the case in a reasonable way. It is to be expected that the conditions of hardship will be applied restrictively. If inspiration is to be derived from case-law rendered based on the CISG and from some CISG commentators, then only very significant percentages of cost increase or devaluation of the value of the counterpart of the performance would be accepted as hardship: examples refer to 70%, 100% or even between 150% and 200%. This bar is very high compared to the standards under some parts of Belgian law, such as public procurement (2,5%) or rules on commercial and private lease (15-20%).
Hardship must be unpredictable at the time of the conclusion of the contract. Furthermore, hardship cannot be caused by the party invoking it. However, and contrary to some other legal systems, it is possible that the hardship is related to the entity/person invoking it, i.e. that it is not purely external to it. Importantly, hardship can be excluded or modified by contract.
Fourth response: hardship in international sales contracts (cisg)
Indeed, hardship was already part of the Belgian law through the CISG which forms part of the Belgian legal system. However, the application of the CISG is often explicitly excluded by parties to international sales contract. Under Article 79 of the CISG, as clarified also by Belgian case-law implementing it, a party could be temporarily exempt from performing its obligations, when a change of circumstances beyond the control of a party makes the performance excessively onerous and if that party could not reasonably be expected to have taken the change into account or to have avoided or overcome it or its consequences.
Differently from the New Belgian Civil Code, the circumstances of hardship under the CISG only exempt a party from performing its obligation as long as hardship exists, although some controversy about this exists in case-law and among authors. In the strict application of the CISG, the parties are therefore not obliged to renegotiate the contract and there is no possibility to adapt it, nor to put an end to it.
Similarly as under the New Civil Code, contractual parties can modify contractually the rule of Article 79 of the CISG.
Fifth response: unilateral price modification and price revision clauses
Apart from the above instruments allowing the parties to temporarily escape the performance of their obligations, Belgian law addresses specific aspects of changed circumstances over the course of the contractual relationship. This is particularly in respect of price modifications and indexation clauses.
Prices can be modified unilaterally over the course of the contractual relationship if such a possibility is foreseen in a contractual clause. Such contractual clauses must, however, comply with specific requirements. Essentially, the unilateral price modification clauses should refer to a valid reason for the modification as well as to an objective benchmark or parameters for the modification, as concretely and specifically as possible. Furthermore, the way the party exercises its rights to modify the prices unilaterally is subject to subsequent court review for compliance with the requirement to perform contracts in good faith and not to abuse one’s rights. Importantly, specific industry limitations, such as in the pharmaceutical industry, could also apply.
Another available instrument are contractual clauses including the automatic revision of prices. Such revision is subject to strict conditions of article 57 of the reparation law of 1976, which forms part of Belgian public policy. This law was adapted during the historic stagflation in Belgium following the oil crisis, as a means to fight inflation and to protect Belgian businesses against competition coming from the neighbouring countries. As such, the rationale of the law becomes particularly relevant in current times. The automatic price revision as per the law cannot be linked to any index, and the price increase may only pertain to a maximum of 80% of the final price and must be related to objective parameters and real cost increases. The consequence of the violation of the 1976 reparation law is the nullity of the relevant revision clause.
Given the limitations of the applicable legal system, it is often interesting to take control of the uncontrollable and to provide appropriate tailor-made contractual solutions for the events of changed circumstances in a contractual relationship, which correspond to the specific parties’ needs. Such contractual solutions could include, among others:
- appropriate tailored force majeure and hardship clauses, or the exclusion or limitation of the latter if desirable;
- the obligation to renegotiate the contract not only where the circumstances already change, but also where there is a significant risk that they will change;
- the elements of the renegotiation obligation, e.g. specific procedures and the criteria for the contract adaptation following the negotiations;
- consequences of the occurrence of hardship, e.g.: the possibility to suspend performance of obligations as long as hardship continues to occur and/or as long as the parties negotiate, termination of the contract or whether or not the contract should be adapted and if so, to the extent possible – how;
- consequences of the violations of the obligation to renegotiate such as damages which might include liquidated damages;
- in the event of the nullity of the clauses, e.g. following the application of the 1976 reparation law, the parties’ will to limit the consequences of the nullity by adaptation of the relevant clause, taking into account the case-law of the Court of Cassation of 2015.
The new year 2023, with the new laws and with the revival of old laws such as the reparation law of 1976, will certainly be a year full of challenges. With the appropriate solutions, these challenges could sometimes be turned into opportunities. Strelia wishes you a prosperous 2023, despite the challenges and thanks to the opportunities!