The current events confront us with shortagesof raw materials, disruption of the global transport chain… As a result, we see prices of raw materials and materialsthat (continue to) increase...
However, often the selling price of products or services is contractually fixed. As a manufacturer or supplier, can you then unilaterally pass on these substantial price increases to your customers? Or can you adjust them at least annually to the index?
A long, prosperous trading relationship?
Market-based pricing is critical in providing products and services. Typically, you set the price according to the costs required to deliver a product or service. However, costs can fluctuate over time, making the implementation of price changes imminent.
In “one-shot deals” this need is not acute. But in the case of long-term business relationships in which deliveries have to be made periodically over a longer period of time, this is definitely important. . How do you contractually ensure that the prices you use are not only ‘correct’ at the start of the collaboration but that they also remain so throughout the collaboration’s lifecycle? How can you adapt your prices to changing market conditions? How do you ensure sufficient flexibility in long-term agreements?
Pacta sunt servanda
When you provide products or services, it is at a price that the parties mutually agreed upon. This pre-negotiated price is an essential part of the agreement with your customer. Based on the legally embedded principle ‘pacta sunt servanda‘, you cannot simply change the price without the customer’s consent. In simple words: an agreement is an agreement.
Changing prices without the customer’s agreement is only possible if you have a valid price revision clause in your general terms and conditionsor in the contract with the customer. Such a clause can give you the right to revise the agreed prices in case of unexpected price increases. To be effective, however, you have to take a lot into account!
Revising the price is just indexing, right?
Thus, a price revision clause is a clause that allows the price of the products or services to be adjusted according to objective parameters. Objective parameters are measurable, and are independent of the will of the parties. Thus, this type of clause allows for price adjustment without negotiation or new agreement by the contracting parties on that price.
Price revision clauses come in all shapes and sizes. Often you will read in general terms and conditions that the supplier reserves the right to “adjust prices according to the evolution of the prices of raw materials” or you will find the general statement that “prices are linked to the consumption index.”
However, clauses that provide for automatic indexation in function of the consumer price index, or clauses that are formulated (too) generally by stating, for example, that a price adjustment is possible “in function of the economic conjuncture” are invalid and can even be annulled.
So how do I index my prices?
Indexation “à la Belge”
Article 57 of the Economic Recovery Measures Act (Act of March 30, 1976 on economic recovery measures) is very precise:
- the price revision may under no circumstancesbe linked to the consumer price index (or any other index);
- the price revision may only relate to 80% of the final price. In other words, 20% of the final price must remain unchanged;
- general costs cannot be passed on: the price revision formula must refer to concreteparameters that represent the real costs;
Example: link price increase to raw material prices published by sector organizations or reference hourly wages published by employer federations in a specific sector.
- Moreover, the parameter mentioned above can only be allocated to the specific part of the price that is represented by that concrete parameter.
Example: if the final price is composed of personnel costs + wood raw material + aluminium raw material, you cannot pass on the price increase of wood on the total cost, but only on the actual share of wood. Or: if the personnel cost amounts to 10% of the total cost, a possible price increase of this labour cost will not have a major impact on the total price since 90% of it is determined by other components.
Thus, it is important to find out what the proportion of a parameter is in the total price. This should not be strictly mathematically correct, but the estimate should be sufficiently realistic. In doing so, you must exclude general elements (such as, for example, “the economic conjuncture” or “the daily price”) and link them only to objective parameters.
Indexation clauses that do not meet the conditions of the Recovery Act are invalid. At best, the judge will “reduce” them to what is acceptable, but you run an equal risk of having them declared null and void.
B2B Act (Act of April 4, 2019)
When drafting price revision clauses, we have recently also had to take into account the B2B Act. This Act makes it impossible to impose “unfair” contractual terms. Granting yourself the right to unilaterally change the price, terms or conditions of the contract without a valid reason are clauses that this law explicitly rejects.
Thus, Art.91/5 concretely states: “In the absence of proof to the contrary, shall be presumed to be unlawful: terms that give the company the right to unilaterally change the price of the contract without valid reason.”
How does this article relates to price revision clauses?
The parliamentary preparations for the B2B Act make it clear that price revisions can only be made on the basis of external, objectively justifiable factors. Clauses that place too much discretion on the supplier by allowing prices to be adjusted unilaterally without such objectification are out of the question.
Since the Restoration Act imposes this objectivity (by requiring concrete parametersto be linked to real costs), one may assume that price revision clauses drafted in accordance with the Restoration Act’s criteria will also pass the test of the B2B Act.
No (valid) price revision clause? But it is force majeure!
Suppose that your general terms and conditions do not contain a price revision clause, but do contain a force majeure clause or an imprevision clause. Can you then possibly invoke these clauses to pass price increases on to your customers?
A clause about imprevision (also called a “hardship clause”) can be an interesting avenue. This clause tries to cover the risks of an unforeseeable situation. Important here is that the economic balance between the parties is seriously disturbed. In other words, when the performance of the contract has become extremely disadvantageous for one of the parties. Prices that are skyrocketing are precisely the examples that make it economically untenable for the supplier to continue to deliver at the originally agreed price.
An imprevision clause does combine with the obligation to renegotiate. In such a case the parties can jointly adjust the price according to the changed circumstances.
The big difference with a price revision clause is that in the case of imprevision, the price can only be changed after the approval of both parties, whereas with a valid price revision clause, you can do this unilaterally, without the approval of your customer.
Price revision clauses are a useful tool to build flexibility into a long-term trading relationship. Prices can thus be adjusted to rising labour costs or production costs without the need for a renegotiation between parties.
Please note the importance of the opposability of general terms and conditions (so that such a clause is accepted by the customer) and the limitations imposed by the Restoration Act and the new B2B Act.
In addition, you can combine the price revision clause with an imprecision clause to always keep the door open for (re)negotiation if external factors would upset the economic balance between the parties.
Do you not yet have a price revision clause in your general terms and conditions or contracts? Or do you doubt the validity of your price revision clause? Contact us without obligation at firstname.lastname@example.org.
Written by Sarah Dello, Senior Legal Adviser theJurists, and Kris Seyen, Partner theJurists