Pandemic, energy crisis, shortage of raw materials: your costs are increasing – how can you pass them on in your ongoing private and public contracts?

Several recent crises have highlighted the tension between the rapid increase in costs borne by companies, and the assumed impossibility of passing on all or part of this increase to their co-contractors under public or private contracts concluded at fixed prices. This impossibility is only apparent, however, because private law, but especially public procurement law, may offer relief, if not downright solutions, to the supplier faced with such untenable situations.

Let’s discuss three instruments and how they may be used and adduced in public and private law alike.

Price revision clauses

Private contracts: price review clauses are subject to strict conditions

The Act of 30 March 1976 on economic recovery measures prohibits any form of indexation of industrial or commercial prices by reference to the consumer price index or any other index.

In addition, contracts may only contain price revision clauses under three conditions:

• they must be limited to 80% of the final price,
• they must be based on parameters representing real costs, and
• they must be tailored to the price components responding to said costs.

Furthermore, in private contracts, only price revision clauses which are sufficiently precise will be efficacious: a clause which indicates that prices may be revised without determining how this should occur, will lack sufficient precision and may be null and void.

Public contracts: price review clauses are rather common

The Act of 30 March 1976 does not apply to public procurement contracts. In public contracts (or in private (sub-)contracts concluded to help execute a public contract), price revision clauses are common and may indeed be obligatory in public works or construction-related contracts that are worth more than 120.000 euro or whose execution last over 120 working days.

The price revision clause must deploy objective and verifiable parameters and weighing coefficients in order to reflect to true cost price structure. A public authority can add a fixed component to the formula, and can even use an index for public contracts other than work or construction-related contracts, if there is no better way to have a formula reflect the costs.

Accordingly, public contracts have more flexibility with respect to price revision clauses: indexing in accordance with the consumer price index is possible as a last resort, and there is no limit of price revision to 80% of the price.

In work contracts, often reliance is had on the so-called public indices. The S-Index, pertaining to wages and social costs and the I-index comprising a basket of some 26 kinds of construction materials, are the most known indices. During the Covid crisis, the I-index came under criticism because it is based on a list of materials that is no longer in line with modern reality. Since 2021, a new I-index can be used by parties for their current or new contracts.

However, it is possible that a price revision mechanism is enshrined in your public contract that does not rely on these indices. In that respect, insofar as the application of the price revision mechanism does not offer you relief when faced with rising costs, it may be interesting to raise the issue of cost-reflectiveness. Raising that issue may require your public contract partner to adapt the price revision clause in order to make it more truly cost-reflective.

This is – as of yet – not a matter of settled law. There are some judges who – also in public contracts – find price revision clauses that do not meet the legal criteria null and void. This, however, should not make you refrain from raising the argument that the price revision clause in your contract is not cost-reflective… for even if a judge would deem the price revision clause to be null and void, in your public contract, you will (usually) still have a hardship clause to rely upon to offset unforeseen costs.

Force majeure and hardship

Private contracts: hardship cannot be invoked without a specific clause granting such a right

Hardship allows for a revision of the terms of a contract when a contractor is faced with unforeseen/unforeseeable circumstances that unavoidably make the performance of the contract (much) harder.

Under private contracts, traditionally, hardship has not been accepted as a matter of common law. This means that, unless your private contract stipulates otherwise, you cannot ask for a revision of the terms of the contract when faced with circumstances that make it much harder for you to executive your obligations. Only if performing your obligations has become downright impossible, you will be exonerated from having to fulfil them, but in that case, force majeure, rather than hardship, is at hand. Unless you have made a different contractual arrangement, force majeure is governed by some – sometimes disadvantageous – rules and principles, the most known of which is probably that you cannot claim that it is impossible to pay up a price under a private contract (basically because ‘money’ is not perishable).

However, the distinction between hardship (not accepted) and force majeure (accepted) has come under pressure. Already before the pandemic struck, authors have concluded that the distinction is collapsing, because judges do not interpret the “impossibility” required for force majeure to obtain in an absolute way. It is not hard to fathom that there is a very thin line between being confronted with circumstances that make it reasonably impossible (force majeure) and much more difficult (hardship) to fulfil your obligations under a contract. However, what is presently still unclear, is what the consequences would be when a private contractor is faced with such circumstances: under the force majeure doctrine, anyone facing such consequences is in principle exonerated from having to perform under the contract; the hardship doctrine, on the other hand, is often associated with a duty to renegotiate in good faith.

The matter has not yet been entirely settled, but important to note is that even under private contracts, you may want to try to invoke force majeure / hardship, in order to address an unforeseen situation which reasonably requires an adaptation of the terms of the contract. Though this does not grant you a hard right to a revision (which is present in a public contract), as a matter of law, it no longer seems correct to say that hardship can never apply between private parties.

Public contracts: a legal right to revise the contract in case of unforeseeable circumstances

When you conclude a contract with a public authority against a fixed price, but when you encounter unforeseeable difficulties, you may be entitled to a revision of terms under the Royal Decree of 14 January 2013 on the general rules for the performance of public contracts.

In general, such revision is limited to a prolongation of the delay for performance, but when a very important disadvantage is proven, you may be entitled to break the contract or ask to offset additional costs that you incur. Unless your public contract stipulates otherwise, the law itself determines what counts as a very important disadvantage in financial terms, depending on the kind of contract involved. For instance, for supply or most services contracts, your loss should amount to 15% of the contract value. Once the legal criteria are fulfilled, the public authority must accept a revision of the contract, at least if you have notified the public authority in due time. The latter is crucial under public contracts, since the delays for doing so are rather short (30 days) and the notification is subject to formalities (you must notify even if the public authority is aware of the difficulties, and such notification must be in writing).

Succinctly resuming: you have the right under a public contract, when faced with unforeseen circumstances (eg a pandemic) or even with unforeseen rises of costs that are not covered by a price revision clause (eg the energy prices), to demand a revision of the terms of the contract, but it is crucial that you ask for such a revision in due time.

B2B-legislation

Finally, we want to draw your attention to some new legislation that you probably have heard about, i.e. the B2B-law which applies since December 2020 to business-to-business relations (though not to public contracts). This law may – as a last resort – give you some leeway in trying to adapt a contract that is imbalanced.

Under the B2B-legislation – which is inspired by consumer protection legislation – a number of clauses cannot be inserted into private contracts. Aside from a general prohibition on clauses that create a manifest disequilibrium, a number of contractual mechanisms is expressly excluded from the private contracts. Clauses reserving the right to unilaterally adapt the terms of the contracts or imposing unreasonable damages, are henceforth presumed to be null and void.

If you are bound by a contract, the terms of which are (very) strict (and bordering on the unreasonable) and a change of circumstances occurs that make the clauses utterly unreasonable, you may try to rely on the B2B-legislation in order to bring your contract partners to reason. Some caveats, however, apply: the legislator has expressly confirmed that a simple disconnect between the price and, for instance, the products to be supplied, cannot justify the claim that a manifest lack of contractual equilibrium is present, especially when terms are drafted clearly. Second, the B2B-legislation is rather new, and the precise way it must be applied, is still a matter of (ongoing) debate, which makes it harder to rely on the law with legitimate expectations. Third, and importantly, the B2B-legislation has not been designed to address unforeseen circumstances, but rather contract clauses that are deemed ‘abusive’ from the outset.

Although a B2B-legislation argument may be proffered when the contract was initially already questionable, the legislation offers little or no protection when you are faced with dire hardship under a well-balanced contract. 

Conclusion

In this blog, we have outlined three mechanisms that you may use when you are faced with circumstances beyond your anticipation or plainly with circumstances that threaten to make your contract loss-making.

If you have contracted with a government or another public entity, oftentimes you will be able to rely on a price revision clause. If this clause does not reflect your costs at all, you may even challenge the clause, have it rewritten, or rely upon the hardship clauses that are common in public contracts. Do not wait until it is too late to invoke them: such hardship clauses offer you protection, but only if you invoke them in due time.

In private contracts, price revision mechanisms are less common and subject to a number of stricter rules. Moreover, traditionally speaking, only force majeure qualifies as a valid reason not to perform your duties under a contract. Nowadays, however, it is becoming more acceptable to invoke hardship in a private contract: though the case law on this issue has not been settled yet, the fact that you are not in a situation of absolute impossibility to perform should not dissuade you from requesting an adaptation of the contract terms when you are faced with dire circumstances, unless you have made specific contractual arrangements that are binding in this respect.

But even when faced with (binding) contractual clauses in a private contract, you should verify whether the clauses (and the contractual arrangement as a whole) is not patently out of balance. If it is, the new B2B-legislation may bring you relief nonetheless.

Be that as it may, we hope to have made clear that in contracts concluded at a fixed price – both public and private alike – the fixed nature of the price is rather relative. There are legal mechanisms that you may use in order to pass on (some of) your costs or to obtain relief.