Price increases are unavoidable in the economic market. Companies have to accommodate this trend, but are not always able to do so. With the following tools, supplier and customer agreements can be reviewed so that your company continues to perform profitably.
I. Legitimate price revision clause
A price revision clause is a contractual provision that contains a mechanism to adjust the price of the contracted goods or services based on objective parameters representing the real cost (e.g., wages, energy, construction materials, etc.), beyond the will of the contracting parties. In other words, it must be possible to revise the price without requiring a new agreement from (one of) the contracting parties.
Price revision clauses are allowed only to the extent that they are applicable up to a maximum of 80% of the final price, and only for the part of the price they represent.
A formula of automatic indexation of industrial and/or commercial prices as a function of the consumer price index or another index is not allowed in principle.
Price review clauses are contractually expressed by a formula incorporating price factors (e.g., labour cost, material cost) and their percentage share of the price.
If such a valid price revision clause is present in the contract, the price can be adjusted according to the applicable contractual modalities (e.g., with prior notice).
II. Good agreements make good friends
Make price increases negotiable in the contractual relationship. Try to (re)negotiate the conditions and prices of the agreement amicably according to, among other things, the economic, financial and social needs of your company, taking into account (the maintenance of) a sustainable commercial relationship. You can always change prices and conditions subject to mutual agreement, of course.
Some professional bodies have already made a general call in the light of the current economic perils to enter into dialogue with the contract parties so that the negative consequences (price increases, absence or delay of deliveries...) can be ironed out reasonably, with mutual understanding and flexibility.
But what if your contracting party is not amenable to reason?
III. Hardship clause vs. imprevision clause
If your contracting party is not reasonable, check whether there is a hardship clause in the contract. Under a hardship clause, parties have a renegotiation obligation if, as a result of an unforeseeable and unavoidable situation (e.g., a war), serious changed circumstances arise for one of the contracting parties, making it more difficult (not impossible) for the affected party to fulfil its contractual obligations.
Such a hardship clause is a contractual confirmation of the common law hardship doctrine, which has been legally enshrined in Book 5 of the new Civil Code since 1 January 2023. Specifically, if no hardship clause is present in the contract, then for (i) contracts concluded from 1 January 2023 or (ii) contracts concluded before 1 January 2023 to which the new provisions of Book 5 have been declared applicable, the parties may still have an obligation to (re)negotiate the contractual terms on the basis of the hardship doctrine.
If your contracting party then still refuses to (re)negotiate or the contracting parties do not reach an agreement on price fixing, the court in summary proceedings can modify the agreement according to that which the contracting parties would have reasonably agreed upon following the change of circumstances (see also our previous newsletter regarding the new contract law).
IV. Abuse of law
If your contracting party pushes it to the limit and insists on the punctual performance of the contract, you should consider whether that course of action is not an abuse of law.
A contracting party may commit an abuse of rights when it exercises a right in a manner that manifestly goes beyond the limits of how a normally prudent person would exercise it. This may be the case when a contracting party insists on strict performance of the contract at the initial price while prices have risen to so an extent that the company is making a loss as a result.
In this view, the contracting party can be induced to behave in good faith and accept a reasonable price change, at least negotiate about it, or terminate the contract amicably.
V. Force majeure?
Pursuant to the common civil law, force majeure exists when the performance of an obligation of a contracting party has become permanently or temporarily impossible due to an unforeseeable and unavoidable event beyond the control of the contracting parties. Temporary or definitive impossibility may lead to suspension or termination of the contract, respectively.
Force majeure offers little or no relief in the case of price increases because, strictly speaking, the company can still perform its commitments, albeit on less favourable financial terms.
Conclusion
With these tools, existing customer and supplier contracts can be reviewed in the light of price increases. BDO can assist you in analyzing the contracts, proposing and working out appropriate solutions. Do not hesitate to contact our legal experts.
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