Impact of book 5 of the civil code on m&a – Capita Selecta

On 1 January 2023, new Books 1 (“General Dispositions”) and 5 (“Obligations”) of the Belgian Civil Code (“BCC”) have entered into effect for contracts signed as from that date.

On 1 January 2023, new Books 1 (“General Dispositions”) and 5 (“Obligations”) of the Belgian Civil Code (“BCC”) have entered into effect for contracts signed as from that date. These Books, introduced by the law of 28 April 2022, aim to refresh the principles enshrined in the (old) Belgian Civil Code of 1804 (the “what”) by (i) modernising the legal concepts, (ii) structuring the overall framework and (iii) codifying established case law and doctrine (the “how”). Contracts (and obligations) being the foundation of any transaction, the provisions of new Book 5 do have a certain impact on transaction documents and can, if neglected, lead to unwanted and far-reaching consequences for all parties involved.

In this (and the next) blogpost, we provide you with an overview of the most important impact we have identified in our practice so far. In this Part 1: (i) newfound emphasis on the precontractual phase, (ii) useful set of definitions on and (iii) interpretation issues of the contract.

1. PRECONTRACTUAL PHASE

A first innovation of the BCC is the codification of and emphasis on the precontractual phase. As a general principle, article 5.16 BCC prescribes that the parties need to provide each other during the precontractual negotiations with such information that the law, the good faith and the customs require them to provide, considering the capacity of the parties, their reasonable expectations and the object of the contract. This key premise is nothing more than an embodiment of the good faith principle.

The bigger effect for the transactional practice lies in the sanctions related to breaches during the precontractual phase that are now enshrined in article 5.17 BCC:

  • Paragraph 1 confirms that parties can incur extracontractual liability toward each other during the precontractual negotiations;
  • Paragraph 2 governs the wrongful termination of the negotiations and states that the grieved party can in such case be put back in the situation he would have found himself in if no negotiations would have taken place. When a legitimate expectation has been created that the contract would be concluded without any doubt, the liability can even comprise the recovery of the loss of the expected net benefits of the non-concluded contract.
  • Finally, paragraph 3 confirms that a breach of the information obligation can lead to precontractual liability, but also to nullity of the contract in case of a decisive defect in consent.

The new articles in the BCC on the precontractual liability are welcome for sure but mostly redundant in a modern M&A environment, where both the seller and the purchaser are typically well advised, and where the transactional documentation as a rule already provides sufficient protection as regards the provision of information. It cannot come as a surprise then that since the 1st of January 2023, we see increasingly more (i) transaction documentation excluding the application of article 5.17 and (ii) caution during the precontractual phase, with parties and their advisors emphasizing the conditional nature of the negotiations and avoiding to create expectations surrounding the signature of final agreements.

2. DEFINITIONS

Books 1 and 5 introduce some new definitions that are used in most transaction documentation. Be mindful that these definitions are suppletive and can be excluded.

Business day
Article 1.7 BCC defines “business day” as any day that is not a legal holiday, a Saturday or a Sunday (§3), which is a pretty straightforward and market practice definition, it being understood that any delay of two or more days needs to include at least two business days (§5). Beware of the last clarification which, if not excluded, can extend certain deadlines in the transaction documentation (for instance, contestation of a price calculation, notification of breaches of contract…).

Knowledge
Another interesting definition relates to knowledge and bad faith. Article 1.9 BCC provides that good faith is presumed and that a person acts in bad faith, when he knew or, in the given circumstances, ought to have known, the facts or the actions relating to his good faith. Sellers (and their counsel) typically limit their knowledge to the actual knowledge (and actual knowledge of some key personnel) as they are wary of the risks associated to accepting deemed knowledge. The BCC now provides a new argument for Purchasers (and their counsel) to include deemed knowledge in definition of Sellers’ Knowledge as well. An attentive reader/seller, however, shall argue that the definition provided in the BCC is suppletive and can therefore be deviated from.

Force majeure
In the absence of a definition of force majeure under the (old) BCC, transactional documents often defined force majeure as a long, non-exhaustive, list of eventualities (including new ‘trends” such as terrorist attacks and pandemics) that result in the impossibility for the debtor to perform its obligations under a contract. In new article 5.226 BCC, force majeure is now defined as a case of non-attributable impossibility of the debtor to comply with its obligation, whereby the unforeseeable and inevitable character of the impediment is taken into account. We expect that the transactional practice will maintain the endless string of examples of force majeure, albeit with a disclaimer “or any other case of force majeure as referred to in article 5.226 BCC”.

Damage
A final definition worth mentioning relates to damage and the calculation of damage. The (old) Belgian Civil Code (“(old) BCC”) described damage as (i) any loss suffered (damnum emergens) and loss of profit (lucrum cessans), (ii) that was foreseen or foreseeable at the time of the signature of the contract, (iii) to the extent that such loss was the direct and immediate result of the breach causing the damage (articles 1149, 1150 and 1151 (old) BCC). Such definition was generally accepted as a fair and comprehensive definition, reason for which in old SPA’s parties generally accepted to define damages as any damage under the abovementioned clauses of the (old) BCC.

Book 5 BCC no longer refers to loss of profit and loss suffered, but instead refers to the right of a creditor to demand the integral recovery of its damages. Moreover, the third criterium (direct nature of the damages) has not been retained, as the legislator felt that this criterium did not really limit the quantum of the damage but was rather an externalisation of the causality principle.

Until any final case law on the new definition of damage, the scope of the integral damage recovery will remain uncertain and open for discussion. In our view, however, the new definition of damage is at least as creditor-friendly (if not more so) than the one under the (old) BCC.

3. INTERPRETATION

In case a clause can be interpretated in one of two ways, the premise under the (old) BCC was that the genuine will of the parties needed to be sought. This main principle has remained unchanged in Book 5. In case of persistent doubt, however, Book 5 provides more protection for the weaker contract party. Whereas the (old) BCC in this case provides that such clause needs to interpreted against the party that was responsible for drafting it, the BCC makes a subdivision:

  • accession agreements (agreements that cannot be negotiated by the weaker party, e.g. bad leaver clauses or non-competes for key management) are interpreted against the party that has drafted the agreement or clause;
  • exoneration clauses (e.g. limitation of liability clauses) are interpreted against the debtor of the obligation;
  • in all other cases, the clauses are interpreted against the beneficiary thereof.

Moreover, (old) article 1602 BCC, which foresees that each ambiguous clause is interpretated against the seller, has not yet been incorporated in the new BCC, as this article falls under the subtitle ‘Special agreements’, which will be governed by (yet to be adopted) Book 7 of the BCC.

In conclusion, prudent advisors should take into account the interpretation rules imposed by both the old and the new BCC. If it is the intention to exclude the application of such interpretation rules, do not forget to exclude (old) article 1602 BCC as well.

More Partner Blogs


26 May 2023

The Foreign Subsidies Regulation in public procurement – (not just) another tool in the toolbox

In a noble attempt to address distortions caused by foreign subsidies to the detriment of fair...

Read More ...

16 May 2023

EU: New EU agreement on the impact of cross-border telework on the applicable social security legislation

The applicable social security system is regulated by Regulation (EC) No. 883/2004. When COVID-19...

Read More ...

12 May 2023

Impact of book 5 of the civil code on m&a – Capita Selecta

On 1 January 2023, new Books 1 (“General Dispositions”) and 5 (“Obligations”) of the Belgian Civil Code...

Read More ...

10 May 2023

Interview met Alexander Snyers Feitelijk bestuur: een grondige analyse leidt tot een pleidooi voor wetgevend ingrijpen

Obtaining a permit in Flanders, especially for a major infrastructure project, often feels like a...

Read More ...

08 May 2023

Constitutional Court annuls Flemish duty to remain alert and relativity requirement in administrative procedural law

Obtaining a permit in Flanders, especially for a major infrastructure project, often feels like a...

Read More ...