Book 5 reflects the legislator’s aim to increase legal certainty by codifying important principles of Belgian contract law developed over the years by case law and legal doctrine. At the same time, Belgian contract law is modernized by the legislative recognition of certain legal principles which were already present in other jurisdictions.
In this article, we give a high-level overview of certain selected topics, which we believe may be of relevance for borrowers, lenders, and other finance parties:
- information requirements during the negotiation phase and pre-contractual liability;
- abuse of circumstances when negotiating terms or exercising rights;
- unfair clauses;
- change in circumstances (hardship) during the performance of the financing arrangement;
- assignments of receivables and debt;
- assignments of contract; and
- compound interest.
Information duty during contractual negotiations and pre-contractual liability
The new Book 5 of the Civil Code codifies parties’ obligations and liabilities during pre-contractual negotiations. While there is not a general obligation to pass on all information, it is now confirmed in law that parties must, during the negotiation phase, provide each other with such information as is required by law, good faith and custom, considering the professional capacity of the parties, their expectations, and the subject matter of the contract. While this as such does not derogate from already established case law, it can be anticipated that the explicit confirmation in Book 5 will give increased attention to pre-contractual information duties and their resulting liabilities.
It is now also confirmed that a wrongful termination of contract negotiations can lead to extra-contractual liability. The injured party should in such case be put back in the position where it would have been in the absence of these negotiations (for instance, costs associated with the negotiations could be reimbursed at such time).
In case legitimate expectations were created that the contract would in any event be concluded, the injured party can also claim any missed net benefits expected from the contract.
Parties should as such be mindful of sharing in good faith any information which can be reasonably expected to be relevant to the other parties for taking considerate decisions and should avoid that any documents exchanged during the pre-contractual phase, such as term sheets and suggested language, can be viewed untimely as binding proposals or acceptances. To mitigate the chances of incurring any extracontractual liability, parties could include wording such as ‘for discussion purposes only’ or ‘subject to diligence, credit committee approval and satisfactory documentation’ in their draft documents.
Abuse of circumstances
An abuse of circumstances is now listed as a separate fourth defect of consent (wilsgebrek / vice de consentement) in addition to the traditional defects of “error”, “fraud” and “violence”. Belgian case law had already cautiously accepted the application of this defect, only recognising it in exceptional and obvious cases of abuse. Now that it has become a codified defect, the question will be whether courts will more broadly accept its application.
An abuse of circumstances is an event where, at the time of entering into a contract, there is a significant imbalance between the obligations of the parties as a consequence of the abuse by a party of circumstances related to the weak position of the other party. In case of abuse, the other party can request the adjustment of its obligations in court or, if the abuse was decisive, the (relative) nullity of the contract. A mere imbalance or disadvantage for one party is however by itself no ground for nullity.
The parliamentary works further mention that the inferior position of a party can result from the financial distress of such party or, more generally, from the economic superiority of the other party, especially if such party has a monopoly position.
Needless to say, this provision can become specifically relevant in cases where distressed debtors, who have few to no alternatives, are subjected to highly onerous conditions which could widely be seen as unfair or off-market, or as mainly serving the interest of the credit providers instead of the going concern of the debtor.
Unfair clauses in financing arrangements
The new Book 5 of the Civil Code introduces a general prohibition on “unfair clauses”, which are clauses that cannot be negotiated and that create an obvious imbalance between the rights and duties of the parties to the contract.
The question whether a clause creates an obvious imbalance remains a factual question to be ultimately decided by the court, which must consider all circumstances surrounding the conclusion of the contract. The parliamentary works clarify that the use of the term ‘obvious’ (kennelijk / manifeste) limits court intervention to a marginal assessment, in order to only sanction manifest imbalances.
The non-recognition of “unfair clauses” (onrechtmatige bedingen / clauses abusives) is not new. It was already included in specific Belgian B2C and B2B legislation. However, credit and finance contracts were, due to their special nature, excluded from the scope of the prohibitive B2B legislation.
As from 1 January 2023, finance and credit contracts will also be subject to the new general provision on unfair clauses. The new provision on unfair clauses does not, however, apply to the definition of the main performances of the contract, nor to the determination of equivalence between the main performances (i.e., the “core clauses” of a contract, which in a loan context would typically include any agreed interest and repayment obligations).
The sanction of a possible non-recognition by an obvious imbalance only applies to clauses which ‘cannot be negotiated’. The court will have to decide whether the debtor has been given adequate room to negotiate these terms. Interestingly, the parliamentary works provide that the mere fact that a contract was not negotiated does not necessarily mean that it was imposed on the other party without any possibility to negotiate its content. On the other hand, the fact that there were negotiations on certain aspects of the contract (e.g., the price or the quantity of the goods), will not necessarily prevent other clauses from being qualified as clauses which could not be negotiated.
This provision is specifically relevant in a context where credit providers use general terms and conditions, which cannot be derogated from. To reduce the risk of a court ruling that a clause was non-negotiable, credit providers should:
- ascertain that their borrowers, having no adequate inhouse expertise, seek assistance when negotiating their agreements;
- allow parties the opportunity to review and negotiate all contractual terms;
- explain the rationale behind provisions which are presented as standard and must-haves, if the borrower requests such information;
- keep track of and document the negotiation progress.
It is uncertain whether the provisions on unfair clauses should be seen as an overriding mandatory provision of Belgian law since it is clearly aims at protecting the weak. If so, the question arises whether the enforceability of certain provisions of internationally accepted standard documentation, such as the ISDA, or Loan Market Association (LMA) formats could not become compromised in application of article 9 of the Rome I Regulation, even if such agreements are governed by foreign law.
The ISDA and LMA agreements include several provisions which are not systematically subject to negotiations, if already negotiable. While the question is a legitimate one, the risk that certain of the standard terms of said documents would not be upheld for such mere reason, seems rather remote. Considering that such market standard documents are the end-product of consultations between various user groups and stakeholders of the particular industry and that the templates aim at establishing widely supported best market practices, it is difficult to see how they would constitute an obvious imbalance of rights and obligations. Indeed, the relevant court should consider all circumstances of the conclusion of the contract when determining whether there is an obvious imbalance and, according to the parliamentary works, this includes common practices (toepasselijke gebruiken / usages applicables). We believe instead that the standard provisions and documents may become increasingly important indicators for benchmarking what is to be seen as unfair, and that this may necessitate parties to be increasingly mindful if imposing departures from the standard provisions and deliverables which at first sight can be disproportionately erroneous.
Change in circumstances (hardship)
In principle, each party must honour its contractual obligations, even if the performance of such obligations has become more onerous.
This has been the rule since long, despite there being potentially unforeseen circumstances. With the new Book 5 now, this is no longer the case. Book 5 introduces a hardship provision entitling debtors to request a revision of their contract terms if the following five conditions are cumulatively met:
- a change in circumstances makes the performance of the contract excessively onerous to such an extent that the performance cannot be reasonably required;
- the change was unforeseeable at the time the contract was concluded;
- the change is not attributable to the debtor;
- the debtor did not contractually assume such risk; and
- the right to renegotiate is not excluded by law or contract.
During the renegotiations, the parties must continue to comply with their obligations. If renegotiations between the parties fail within a reasonable period, a court (in summary proceedings) can decide to amend or even terminate the contract.
The new hardship provision is limited to exceptional circumstances only and the above conditions must be applied strictly. The hardship provision creates a new legal ground for a party to request a renegotiation of its contract, outside of any restructuring or other insolvency proceeding. It not being a mandatory rule, parties can, while being mindful that such would not be treated as an unfair clause, exclude hardship in their agreements or tailor its requirements, in mutual agreement.
While hardship clauses are typically less relevant in loan arrangements, they may be a useful instrument in supply and offtake agreements, and credit providers and takers will need to carefully consider how the application or exclusion of hardship clauses can potentially interfere with the debt service.
Assignment of receivables
The new Book 5 of the Civil Code provides for a legal framework for the assignment of receivables and assignment of debts.
The articles on assignment of receivables are largely confirming the principles that were already included in the old Civil Code, supplemented with articles which reflect accepted case law and legal doctrine. It is now codified that an assignment of a receivable in breach of a contractually agreed restriction shall nevertheless be enforceable against the relevant debtor, unless in case of third-party complicity to the breach of contract by the assignee. The debtor has of course a claim for damages against the assignor.
The prevailing view that an assignment of receivables includes any ancillary rights relating to such receivables, such as security interests, is now also expressly confirmed. Specific legislation can include further requirements (e.g., the Belgian Pledge Act confirms that a transfer of a security interest in scope will only be enforceable if such transfer is also registered in the Belgian Pledge Register).
As under the old Civil Code, the assignment of receivables will be effective against the relevant debtor as soon as the debtor has been notified of, or has acknowledged, the assignment.
For more information on the assignment of receivables under Belgian law, we refer to our Q&A article on factoring: Factoring and receivables financing in Belgium: frequently asked questions | Loyens & Loeff (loyensloeff.com)
Assignment of debt
Contrary to the old Civil Code, the new Book 5 includes specific provisions on the assignment of debts. Book 5 distinguishes three types of assignment of debt:
- a complete assignment: when an assignee takes over the debt with the approval of the creditor, and the assignor is fully released of its future obligations. The assignor remains liable for its due and payable debt, unless otherwise agreed between parties. All security rights in relation to the debt are terminated unless parties have agreed otherwise (and subject to a specific regime applicable to mortgages). Creditors should therefore be careful to include in the assignment agreement (or generally any assignment document) that any security rights prevail and are not released, to the extent this is of course the parties’ intention. It is possible for the creditor to grant its approval in advance on a future transfer of the debt. Careful drafting is required to avoid obvious imbalance between the parties.
- an incomplete assignment: when a creditor is notified by the assignee of its intention to take over the debt of an assignor, while the creditor has not (yet) agreed to the assignment or the release the assignor. In such case, the assignee and the assignor will become jointly and severally liable for the debt. To avoid a situation where the assignor and assignee become jointly and severally liable, it is advisable to notify the creditor that the assignment will only take effect once the creditor has confirmed its approval.
- an internal debt assumption (interne overname van schuld / reprise interne de dette): where an assignee agrees to take over the debt of an assignor, without however committing itself towards the creditor, i.e., it is the intention of the assignor and assignee that this assignment only has effect between themselves.
Assignment of contract
Book 5 of the Civil Code now also explicitly recognises an assignment of contract, subject to the consent of the other contracting party. More than a mere assignment of receivables and/or debts, the assignment relates to the entire contractual position of a party.
The assignment of the contract will release the assignor of its debt which becomes due and payable after the assignment, unless agreed otherwise. The parliamentary works confirm that the rules on the assignment of debt (see above) are applicable in relation to debt which has become due and payable before the assignment.
If the contracting party has not agreed to the assignment of the contract, the Civil Code confirms that:
- the assignee can in such case exercise the rights in relation to the contract; and
- the assignor and the assignee will become jointly and severally liable for the consequences of the exercise of such rights.
The possibility to transfer an entire contractual position will allow a new lender to replace an existing lender without terminating the existing loan agreement, provided of course that the borrower so agrees.
It is specifically relevant in financing arrangements whereby a structure is set-up to keep a project ongoing in the event of a failure by a party in the structure (e.g., the appointment of a sub-servicer or back-up servicer in securitisation structures or step-in rights included in direct agreements in project financing arrangements). The new regime will now for instance allow a security agent to contractually replace a party and assume its rights and obligations in case certain conditions are fulfilled, subject to the provisions of the relevant (direct) agreement.
Compound interest (anatocism)
Book 5 of the Civil Code also contains specific sections on payment of debts. Noteworthy for the finance practice is that the Belgian legal regime on compound interest (interest-on-interest) is re-confirmed.
Compound interest is only permitted under Belgian law if:
- there is a formal notice in writing or a specific agreement between parties; and
- the relevant interest is due for a period of at least one year.
In practice, when parties to a loan arrangement intend for interest to be compounded, they typically confirm in writing once a year that the interest outstanding at such time is compounded.
Considering that compounding interest is a valuable instrument to structure subordinated debt, it is regrettable that the legislator has not taken the opportunity to revisit the above strict and burdensome conditions, which are in many ways outdated and not in line with widespread international practice or the requirements of financial markets. We can only hope that this provision will be re-considered when the new Book 7 of the Civil Code (relating among others to loans) is drafted and debated in parliament.