A (welcome?) novelty in Belgian civil law
The doctrine of hardship does not currently exist under Belgian law. This will change with Article 5.74 of the Civil Code, entitled “Change of circumstances”. The new provision addresses circumstances arising after conclusion of a contract and rendering contract performance excessively onerous for a party, but not impossible. Hardship differs from force majeure, which requires contract performance to be impossible. The new provision was inspired by hardship provisions such as that introduced in French law in 2016.
Hardship before the new book 5 of the Civil Code
In the past, the Supreme Court held there was no doctrine of hardship under Belgian law. The principle of good faith does not imply, the Supreme Court held, an obligation to reconsider contractual terms when an unforeseeable event makes contract performance more onerous. That has not prevented the Belgian Courts from sporadically allowing claims regarding changed circumstances on the basis of the prohibition of abuse of rights. Some Courts have effectively accepted hardship on the basis of force majeure (with a flexible interpretation of the requirement for impossibility). The Belgian legislator has interpreted some of the Supreme Court’s more recent case law as making a foray into admitting hardship in Belgian civil law.
Conditions for hardship
When will a debtor be able to claim hardship under the new Article 5.74 of the Civil Code? The new provision starts by reasserting the binding force of contracts – parties must perform their contractual obligations even if performance has become more costly. As stated in the legislative history, hardship is meant to be recognised only in exceptional cases.
Article 5.74 of the Civil Code sets five conditions to rely on hardship. The first relates to the consequences of the change of circumstances invoked. The change of circumstances must make the performance of the contract excessively onerous, such that requiring performance would be unreasonable. The change of circumstances must also have arisen after the contract was concluded.
The second and third conditions pertain to the nature of the change of circumstances invoked. This change:
- must have been unforeseeable at the time the contract was concluded, and
- must not be attributable to the debtor.
Thus, following the new Article 5.225 of the Civil Code, the change of circumstances must not have been caused by the debtor’s fault or give rise to the debtor’s liability by virtue of the law or a legal instrument.
The last two conditions relate to the absence of grounds for excluding hardship. Hardship will be denied if the debtor has assumed the relevant risk, or if the contract or the law excludes this possibility.
Invoking hardship: a two-step process
To make use of the new provision, Article 5.74 of the Civil Code foresees a two-step process consisting of:
- legal proceedings, if necessary.
The uncertainty inherent to court proceedings should encourage parties to find a solution through negotiation.
The debtor must first request its counterparty to renegotiate the contract in a bid to adjust its terms or terminate the contract. Parties must continue to perform their contractual obligations during these renegotiations.
If negotiations have failed or not taken place within a reasonable time due to the contract party’s refusal to negotiate, any party may submit the matter to the courts in a fast-track procedure. The court’s task will be to bring the contract into line with what it would have provided had the parties foreseen and considered the change of circumstances when the contract was concluded. The court may also terminate the contract, partially or in full. If termination is given retroactive effect, its date cannot predate the date on which the change of circumstances occurred.
Contractual arrangements for hardship
What impact is hardship likely to have on contract negotiations? Importantly, parties may derogate from both the principle of hardship and its modalities.
However, parties must pay attention to the new prohibition on unfair clauses of Article 5.52 of the Civil Code. Should the exclusion of hardship or its modalities be set out in a non-negotiable clause and create a manifest imbalance between the parties’ rights and obligations, the court may amend the clause or declare it null and void.
For instance, fully excluding hardship for one party without limiting it for the other might create an imbalance between the parties’ rights and obligations. An alternative to excluding the doctrine of hardship could be to set a monetary threshold, (e.g. an impact of MEUR per year), and to provide for a binding third party expert decision, in case of failure to agree (instead of court proceedings).
Hardship in public contracts: new possibilities?
In the energy and infrastructure sector, contractors frequently contract with public authorities. The Belgian rules on the performance of public contracts (the General Performance Conditions) have always included changes of circumstances as a ground for modifying a public contract. Such changes of circumstances can affect the contracting authority or the contractor.
The General Performance Conditions also specify what the contractor can obtain where certain thresholds for hardship are met. The contractor can obtain an extension of time for the completion of the contract. Contract modification or termination are considered as a suitable outcome only when the contractor has suffered very significant harm.
The public contract must in principle include a review clause laying down the procedures for dealing with hardship. The contractor may rely on the review clause provided it demonstrates that contract review is made necessary by circumstances that it could not reasonably have foreseen at the time of its offer, and whose consequences it could not escape. The circumstances in question must not be attributable to the contracting authority.
In the absence of a review clause, the standard provision in the General Performance Conditions will apply, provided that the harm suffered by the contractor reaches a certain threshold. For most contracts, the harm suffered by the contractor must be equivalent to at least 15% of the initial contract value.
In contrast, the new Article 5.74 of the Civil Code will require contract performance to have become excessively onerous and limits the application of hardship to exceptional cases. In addition, the standard for the foreseeability of the change of circumstances is in principle more lenient under the public procurement rules: it is sufficient that the contractor could not reasonably have foreseen the changes.
The conditions for applying hardship appear more favourable to a contractor in a public contract than in a private contract. However, the procedural rules for invoking a change of circumstance in a public contract may represent a greater challenge than under civil law. Indeed, activating a review clause is subject to the completion of specific procedural acts within strict timeframes. Failure to observe these procedural rules may lead to forfeiture of the right to invoke the change of circumstances.
The Civil Code applies, on a subsidiary basis, to public contracts. Where a contractor is prevented from invoking hardship based on a review clause due to procedural rules, the new Civil Code provision may provide additional possibilities for redress.
Hardship in energy contracts
Hardship clauses are often found in energy contracts, for instance Power Purchase Agreements (PPAs) – agreements for the purchase of energy.
Hardship clauses in PPAs are quite varied, both in substance and in length, but common features are a fairly narrow scope and recourse to an independent expert.
Comparing typical hardship clauses in PPAs to the ‘change of circumstances’ provision of the Civil Code uncovers notable differences.
Most clauses are limited to changes made to the legal and/or regulatory framework, leading to a substantial disruption of the economic balance of the contract. Some hardship clauses also apply to changes made to the “design of the energy market”.
Whilst PPA hardship clauses tend to have a narrow scope, Article 5.74 of the Civil Code envisages any unforeseeable change of circumstances beyond the parties’ control. What is noteworthy is that this unforeseeability condition is not always included in PPA hardship clauses. Particularly for long-term PPAs, it may be more likely than not that the regulatory framework will change over the lifetime of the contract. Hardship clauses in PPAs are typically intended to cover (also) such changes, insofar as they substantially disrupt the economic balance.
Another noteworthy difference pertains to how a dispute regarding this ‘change of circumstances’ is handled. Having a court amend a contract is far reaching, as parties delegate their negotiation freedom to that court.
What is often seen in PPAs is that hardship claims are first submitted to the senior management. If no agreement is reached at that level, the matter is deferred to an independent third party expert who must rule both on whether there is hardship and, as the case may be, what changes must be made to the contract.
Appointing an independent third party expert to decide on the matter has certain advantages. The procedure will (most likely) be shorter than legal proceedings. An expert also usually has specialised first hand knowledge of the market (which a court might not have, causing it to appoint a court expert). This can be highly relevant for assessing changed circumstances in markets such as the purchase and sale of energy.
Under the new Civil Code, the doctrine of hardship will apply by default but can in principle be disapplied.
Parties to energy contracts should carefully consider whether it is their interests to exclude the doctrine or to foresee specific modalities.