Impact of the new Belgian Civil Code on technology agreements
Less than two years ago, the Belgian legislator introduced a new legal regime of unlawful clauses in agreements between companies. It required several technology providers to review and update their standard terms and conditions and other contract templates (although we often still see terms and conditions not aligned with the new rules). This year, the awaited new Book V “Obligations” of the Belgian Civil Code has been published, replacing as from 1 January 2023 a large part of the old Civil Code. Its objective is to make Belgian contract law more accessible, more modern, and more balanced.
It will come as no surprise that this new set of contracting rules will affect the drafting, negotiating and conclusion of technology agreements. In this article we’ll outline the key changes we think are particularly relevant to the contracting of technology products and services.
Overview of key changes
Claims in relation to the precontractual liability of a party are dealt with in accordance with tort law, but the Civil Code now further clarifies the consequences of unlawfully terminating contract negotiations. The party that unlawfully terminates contract negotiations will have to compensate the other party so it’s in the same situation it would have been without negotiations. However, if there was a legitimate expectation that the contract would be concluded without any doubt, the other party can claim compensation for the loss of the expected net benefits that it would have received if the contract had been concluded. In this respect, it becomes more relevant than before to clearly express the preliminary status of the negotiations and to also label any draft documents as “non-binding” and/or “for discussion purposes only.”
Battle of forms
The Civil Code aims to solve the problem of the “battle of forms” which arises when two parties are discussing a contract and each party wants to contract on the basis of its own terms (eg the software vendor attaches its own terms and conditions to its offer whereas the corporate customer does the same to its order confirmation or purchase order). In the past, case law has gone in different directions applying different principles (eg first-shot, last-shot or knock-out), which has led to legal uncertainty.
The Civil Code now chooses the “knock-out” rule, which means that both parties’ general terms and conditions will apply, except for the incompatible clauses, which will be eliminated on both sides. In deviation from this principle, the contract will not be concluded when a party informs the other party explicitly – in advance or without undue delay following receipt of the other party’s acceptance and not through terms and conditions – that it does not wish to be bound by such a contract.
The codification of this “knock-out” rule requires sales and procurement teams of technology providers and customers to be much more attentive when concluding a contract and “punishes” parties who just sit and wait until a conflict arises. Where parties typically include a statement in their terms and conditions that the other party’s terms are not accepted and not considered part of the contract, that will no longer be effective considering this new rule. If no explicit objections are raised at the time of entering into the contract, the terms and conditions of both parties will apply where conflicting clauses will not be considered part of the contract. In most cases this will lead to unpleasant surprises later on when there’s a liability discussion and the liability provisions appear to have been knocked out.
As indicated in the introduction, Belgian law is one of the legal systems that already knows a dedicated legal regime of unlawful clauses in agreements between companies (B2B). Until further notice, this will continue to exist. But the Civil Code now introduces a general rule on unlawful terms according to which any clause that cannot be negotiated and constitutes a manifest imbalance between the rights of the obligations, is considered unlawful. To assess whether there is a manifest imbalance, all circumstances surrounding the conclusion of the contract need to be considered.
Given the existence of the more specific B2B rules, this general clause will be mainly relevant for situations not covered by those B2B rules, such as public procurement contracts or financial services contracts.
Belgium was one of the few jurisdictions that did not know or recognise the concept of hardship. This is now changing with the introduction of a “change of circumstances” clause. To allow an intervention, a number of conditions need to be met, ie:
- the change of circumstances makes the execution of the contract so excessively difficult that it can no longer be reasonably expected that a party will fulfil these obligations;
- the change was unforeseeable at the moment of concluding the contract;
- the change is not attributable to the affected party;
- the affected party did not accept to bear this risk; and
- the law nor the contract exclude an intervention.
If the conditions are met, the affected party is entitled to ask the other party to renegotiate the contract to amend or terminate it. If the renegotiation is rejected or fails within a reasonable period of time, the court may, at the request of either party, either modify the contract to bring it in line with what the parties would have reasonably agreed at the time of contracting if they would have taken into account the changed circumstances. The court may also terminate the contract in whole or in part on a date that may not precede the change of circumstances and according to modalities determined by the court.
It’s important to note that the scope of the criteria is not crystal clear, and discussions are likely to arise as to how far a judge can go in interpreting them, ie could further negotiations be required by a court, or how will a court be able to determine the parties’ intentions in case of a discussion on increased costs.
Unilateral contract termination
The Civil Code now introduces the possibility for a party to terminate a contract unilaterally and out of court. Termination requires:
- that the contractual breach is sufficiently material;
- that useful measures have been undertaken by the terminating party in advance to determine the contractual breach;
- that a written notice is provided by the terminating party; and
- that the termination notice is motivated and describes the contractual breaches.
Unilateral contract termination is at the terminating party’s risk. If a court determines that the conditions were not fulfilled, or the termination is to be considered as abusive, the court can judge that the termination is to stay without effect.
This new provision could question the relevance of including an express termination clause (uitdrukkelijk ontbindend beding or clause résolutoire expresse). These clauses will still be important as they modulate the above by softening the conditions, formalising the process, or excluding a possible termination in certain situations.
Contract extension vs. renewal
In Anglo-Saxon inspired technology contracts the concepts of contract extension and contract renewal are commonly used. But as Belgian law did not explicitly define these concepts as such, using them in Belgian law governed contracts could lead to confusion and misunderstandings. The Civil Code now clarifies the distinction between both concepts.
A contract extension, which needs to be agreed upon before the expiry of the contract term, merely entails a continuation of the existing contract, which remains in place. A contract renewal, which can take place tacitly when parties continue to execute a fixed-term contract that expired, leads to the constitution of a “new” contract that’s identical to the previous one, except for the contract term, which will be considered indefinite. Given the difference in meaning, it’s now even more important than before to use the appropriate wording in term and termination clauses.
From “penalty clause” to “liquidated damages clause”
The Civil Code moves away from the concept of a “penalty clause” (boetebeding or clause pénale) to the concept of a “liquidated damages” clause (schadebeding or clause indemnitaire). In terms of technology agreements, this is particularly relevant for service credit clauses linked to service level failures or delay payment clauses linked to a failure to meet certain milestones.
Apart from a linguistic change, a few new elements are being introduced. Like before, a court can still mitigate clauses but based on a new criterium, notably the “manifestly unreasonable” character of the clause, whereby all circumstances, including the actual and potential damage suffered and the legitimate interests of the claimant are to be considered. Moreover, the clause cannot be mitigated below a minimum level that is to be considered reasonable.
Similar principles apply to late payment interest clauses. The court cannot mitigate such clauses below the legal interest rate (where applicable, determined by the law of 2 August 2002 on combating late payments in commercial transactions). And the government is given the authority to impose by Royal Decree a maximum clause/interest rate for terms and conditions of accession agreements (per sector and per type of contract).
A court is not entitled to increase a liquidated damages clause that’s unreasonably limited. Such clause is to be requalified as an exoneration clause to be assessed from the perspective of the rules applicable to the limitation of exclusion of a party’s liability.
The concept of an anticipatory breach is well-known in Anglo-Saxon law systems and frequently used in international technology contracts but did not exist under Belgian law. This is now changing. The Civil Code now states that, in exceptional circumstances, a contract can be terminated when it’s clear that the defaulting party, after having been given notice to provide sufficient guarantees for the proper performance of its obligations within a reasonable period, will not perform its obligations on time and that the consequences of non-performance are sufficiently serious for the claimant.
Similarly, the Civil Code now also allows an anticipatory suspension by the non-defaulting party of its obligations (the exception non adimpleti contractus or enac) subject to a number of strict conditions.
Price reductions as a sanction
Whereas several technology contracts already contain clauses entitling the customer to a price reduction in case of a delayed performance or a bad performance (eg service level failures of partial delivery/acceptance of deliverables), the concept of a price reduction now becomes a default sanction codified in Belgian law. The Civil Code specifies that when a contractual non-performance is not serious enough to justify the termination of the contract, the claimant may request a proportionate reduction of the price to compensate for the difference in value between the performance delivered and the agreed performance level. A price reduction can be claimed in court or applied unilaterally by the claimant, through a simple written notice stating the reason for the reduction.
Survival clauses are common ground in many technology contracts but are not included in all. The Civil Code now takes away further uncertainty and specifies that the termination of a contract does not affect those obligations and clauses, which, considering the intention of the parties and the reason for termination, are intended to continue to apply after termination. Typical examples include a confidentiality clause or a “liquidated damages” clause in relation to a damage that has not yet been compensated.
Some other considerations
In addition to the above topics, there are a few other important points.
First, it’s key to keep in mind that several of the new rules introduced in the Civil Code are to be considered “suppletive law.” This means that, for example in the case of hardship or anticipatory breach, parties are allowed to contractually exclude the principles or to further modulate the conditions in their contract.
Secondly, we should keep in mind that the new rules will enter into force on 1 January 2023 and will be applicable only to contracts that are concluded from that date. But courts might, in the case of disputes in relation to old contracts, interpret certain clauses in line with the principles in the (new) Civil Code, in particular where such rules aim to codify prior case law.
Finally, the above changes in our view require technology providers and customers of technology products and services to review their standard terms and conditions and other contract templates to update them in line with the changes brought by the Civil Code. Not undertaking any action may lead to certain clauses becoming invalid or to certain principles in the Civil Code – which may not be per se desirable in the way they are written in the Civil Code – becoming applicable as part of implied law.
If you require further information or legal advice in this respect, please contact the authors.