How to protect your business against rising prices in b2b contracts: just write a flexible price revision clause?

Strict validity requirements: Article 57 of the Restoration Act of 30 March 1976

Article 57 of the Economic Recovery Act of 30 March 1976 (hereinafter ‘the Recovery Act’), which was created to act as a brake on ‘super inflation’, imposes strict conditions on price adjustment clauses.

First, Article 57 § 1 prohibits the parties from automatically adjusting the price by a general index (e.g. the consumer price index) or other general parameters (e.g. ‘economic fluctuations’). This means that using a very specific verifiable index (such as for example the “Agoria index” on reference wage index, the “Mercuriale index” on prices of (construction) materials,...) would be acceptable, whereas an automatic (general) price indexation would result in the absolute nullity of the clause concerned. In order to safeguard the validity of the rest of the contract, it is important to include a boilerplate ‘survival’ clause in the contract. Second, Article 57 § 3 provides for exceptions to this prohibition (indexation of rents, salaries and wages, social security contributions,....).

Furthermore, Article 57 §2 imposes three strict conditions in order for the price revision clause in order to be valid:

1. the clause can only apply to 80% of the final price (in other words: 20% of the original price must remain unchanged; this rule may thus have a fundamental impact on the overall potential profit margins and is hence problematic)
2. the parameters used to adjust the price should always represent real costs (e.g. the cost of raw materials, salary costs, transport costs)
3. each parameter applies only to the part of the price to which it refers (only the part of the price affected by e.g. material costs may be adjusted according to this parameter).

The price review clause should therefore reflect the actual cost structure at the time of application and should only be linked to objective and concrete parameters. The application of the above conditions usually results in a formula which will allow the parties to determine the actual price applicable (in a very accurate manner). Our best wishes to the lawyers with this piece of higher maths!

Agoria reference wages are often used as a parameter for wages which are to be taken into account. The parties often refer to the material prices established by the Commission for Market Prices of Materials (FPS Economy) for the parameter of material costs.

Creative alternatives/solutions

Force majeure and hardship: The ‘hardship clause’ is a variant of ‘force majeure’ whereby it is not impossible, but disproportionately hard to perform the contract under the agreed (price) conditions. In such a case, a hardship clause allows the parties to renegotiate, for example, the price. However, an explicit contractual arrangement is required (whereas ‘force majeure’ is a general principle). In addition, an agreement must be found between the parties (whereas in the case of a price adjustment clause this happens automatically). It goes without saying that given the uncertain economic context, any situations involving either force majeure and/or hardship risk generating some serious discussions unless this has been provided for in very clear contractual clauses.

The right to terminate: If one of the parties is nonetheless given the right to change the price conditions unilaterally, this will often be accompanied by the right for one of the parties to terminate the contract (which is often less desirable than concluding the contract under less favourable price conditions).

‘Back to back’: This is a clause which states that if your supplier increases their prices, you are allowed to increase your own prices towards your client euro per euro. This might seem simple, however, it is hard to negotiate. Plus, if this clause is to pass the B2B Act objectivity/clarity test, the counterparty should at least be given a ‘right to audit’ supplier price increases.

Shorter term contracts: The division of a long-term agreement into several short agreements may also offer a solution, although this would also require repeated renegotiations.

Minimum guaranteed profit margin: If no impediments arise under competition law, it might be possible to mitigate price rises from your supplier by building in a minimum profit margin entitlement in your client contracts. You could justify this by using the current prohibition to sell at a loss as an argument.

Jurisdiction shopping: Article 57 of the Restoration Act, which is of public order, applies only to ‘Belgian contracts’. Thus, agreements with a foreign element are not in scope, except when they (1) relate to services/products to be provided/delivered in Belgium and (2) were concluded between companies who have their registered/statutory office in Belgium. It would be interesting to see how and if a foreign court might apply Article 57 but that is outside the scope of this newsflash.