Price increases in commercial contracts in wartime and post COVID-19
10/05/2022

Supply-chain problems post COVID-19 and the war in Ukraine are key factors for price increases currently affecting most industries. Undertakings that supply products and services should check their commercial agreements to ascertain to what extent they can increase the price of their supplies and, likewise, undertakings that buy products and services should check whether they can prevent price increases. In this article, we examine the most important legal questions surrounding unexpected price increases, in both the private and public sectors.

1. First and foremost, the parties must check their commercial agreements. Unless specifically provided for in their agreements, Belgian undertakings are currently not able to request a price adjustment following unexpected circumstances. If the price in an agreement is set by the parties, the supply-chain problems post COVID-19 and the war in Ukraine are not sufficient grounds to amend the agreement in relation to the price.

2. This will change in 2023. The Belgian civil code is currently under revision and Parliament adopted the new contract law provisions on 21 April 2022. The new civil code will recognise the principle of “hardship” for all contracts concluded after the new provisions have entered into force (expected to be late 2022 or early 2023). Pursuant to the new provisions, the debtor will be entitled to request the creditor to renegotiate the terms of the contract or to terminate it in the event of a change of circumstances that (i) makes it excessively onerous to perform the contract such that its performance cannot be reasonably demanded, (ii) was unforeseeable when the contract was concluded and (iii) is not attributable to the debtor. In addition, the law provides that (a) the debtor must not have accepted the risk and (b) the contract or the law must not exclude the option to renegotiate or terminate the contract in such a case. During renegotiations, the performance of the contract must not be suspended. In the case of refusal or failure of the renegotiations within a reasonable time frame, the judge may, at the request of either party, (A) adapt the contract in order to align it with what the parties would have reasonably agreed at the time the contract was concluded, had they taken the changed circumstances into account, or (B) terminate the contract in whole or in part at a date no earlier than the change of circumstances and on such terms as the judge may determine.

3. Can unforeseeable circumstances be invoked to terminate the agreement? There is more room to terminate an agreement due to unforeseeable circumstances than there is to amend it and change the price.

Terminating the contract may be requested in the event of a force majeure event, i.e. an event which (i) could not reasonably have been foreseen, (ii) arises after the conclusion of the contract, (iii) is not attributable to negligence on the part of either party and (iv) makes performing the contract impossible. Circumstances such as very long delays in delivery due to COVID-19 or the war in Ukraine may in some cases make it impossible to perform the contract.

Price increases in raw materials, labour costs, computer chips, etc. do not, in principle, make it impossible to perform the contract; they just make it more onerous. However, some recent case law and legal doctrine consider that the impossibility of performing a contract must be assessed in a reasonable manner rather than in abstracto (i.e. in relation to any other debtor who may be placed in the same circumstances) and that there is force majeure where performance is still possible but where it would be unreasonable to demand it.

There is also the option to terminate the agreement according to the principle of abuse of right, which stems from the general obligation to execute contracts in good faith. There is an abuse of right if the right is exercised beyond the limits reasonably expected of a prudent and diligent person. This is the case when the damage caused to a party is disproportionate to the advantage sought or obtained by the right holder. The court may find that the party demanding performance of the contract on the basis of the prices or delivery times initially agreed, as if COVID-19 or the Ukraine war had not occurred, abuses its right. Pursuant to some case law, the refusal to adjust or renegotiate an agreement by the creditor while the debtor's performance of the contract has been made significantly more onerous by unforeseen circumstances would also constitute an abuse of right.

4. To allow for an increase in the costs to produce goods and services, the parties can use an indexation clause in their contracts.

Belgian law, however, imposes certain limitations on such price revision clauses. The indexation clause will apply to maximum 80% of the initial price. 20% of the initial price must remain the same for the entire duration of the contract. The increase in prices must be based on the actual costs incurred by (for instance) the supplier, and in proportion to their share in the overall price.

The parties will often include a specific formula to determine the new (increased) prices in line with these limitations, such as: New Price = Old Price x (0.2 + (Ln/Lo) x 0.4 + (Mn/Mo) x 0.4), where L new or old and M new or old stand for components of the price, for instance 40% raw material costs and 40% labour costs.

If these limitations are not respected, the price revision clause will be null and void. These limitations, however, do not apply to lease agreements, nor do they apply to international agreements.

5. In Belgium, loss sales are prohibited by law. The Code of Economic Law prohibits undertakings from selling goods at a price that is lower than the price paid when acquiring the goods. An undertaking faced with price increases imposed by its suppliers may use the statutory prohibition of loss sales to justify that it is not legal for it to sell goods at the old contractual price, if that price is now lower than the price the undertaking has to pay its suppliers.

For many parties, the prohibition of loss sales will not help them when facing price increases: it only applies to the resellers of goods, not to producers or the providers of services.

Moreover, while an undertaking cannot legally sell at a loss, it may be ordered to provide compensation for the damage caused by its refusal to sell.

6. In public procurement, the situation is different.

The increase in prices for raw (construction) materials and energy prices also impacts many public contracts. And although public contracts are in principle concluded on a fixed price basis, contractors and suppliers can request a revision of the contract in the event of “unforeseeable circumstances”.

Indeed, circumstances that the contractor could not have reasonably foreseen when submitting its tender or concluding the contract, which it could not avoid and the consequences of which it could not prevent, despite having taken all necessary steps, can entitle a contractor to request one of the following measures:

  • an extension of the terms of the contract;
  • the termination of the contract;
  • the revision of the contract (including a price adjustment).

The law aims to restore the economic equilibrium of the contract. A request to terminate the contract or impose a price increase is only possible when the contractor has suffered a very large loss. This loss is defined as follows:

Public works contract: 2.5% of the initial contract value OR

  • €175,000 if the initial contract value is > €7,500,000 and ≤ €15,000,000;
  • €225,000 if the initial contract value is > €15,000,000 and ≤ €30,000,000;
  • €300,000 if the initial contract value is > €30,000,000.

Public supplies and services contracts: 15% of the initial contract value.

IMPORTANT: The contractor should as soon as possible report the circumstances, in writing, to the contracting authority, briefly stating the effect(s) they are having or could have on the progress and cost of the public contract. This should be submitted within 30 days of their occurrence or the date on which the contractor would normally have become aware of them. If this notification is not provided in due time, the request of the contractor will be inadmissible.

Sometimes the specifications include a price revision clause, which may be enough to deal with the increase in prices. However, the price revision clause should reflect the real cost structure. If this is not the case, the price revision clause could be deemed null and void and only the unforeseeable circumstances provision can be used to revise the price

Tom Heremans - Partner, Brussels

Florence Van Damme - Senior Associate, Brussels

Tom Reingraber - Senior Associate, Antwerp

Youri Musschebroeck - Senior Associate, Brussels

Voir aussi : CMS Belgium

[+ http://www.cms-db.com]


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