Examples of hardship
This type of situation is more frequent than you might expect. For example:
- a contract where one party has to execute some reparation works to a building but the price of the raw materials significatively increases between the time of conclusion of the contract and the execution thereof;
- a lease agreement with an indexation clause whereby the index has increased significantly;
- a share purchase agreement with differed signing and closing or deferred payment with an earn-out clause;
- a joint-venture agreement with put/call options to be exercised at a later date; …
Hardship was not recognized under Belgian law
Until now, hardship was not recognized under Belgian law, meaning that the parties had to execute the contract, even if the general balance of it was modified due to an extraordinary change in circumstances beyond their control.
For example, a contractor still had to execute the reparation works, even if the raw materials price he had to pay, was higher than the price the other party paid as consideration. Except for one decision, case law also denied the application of hardship invoked by tenants to request a decrease of the rent during the Covid-19 crisis.
It was only if the change in circumstances made it impossible for the debtor to perform his obligations, that he could invoke the force majeure principle, exonerating him from his obligations to perform.
When the change in circumstances only entailed an increased cost of performance or a decreased value of counter-performance, the parties had, in theory, the obligation to execute the contract.
Attenuation in practice by case law and explicit contractual protection
Case law progressively reduced the consequences of the non-acceptance of the hardship theory under Belgian law – either by applying the principle of the abuse of right prohibition, or by assessing with more flexibility the condition of impossibility required to apply the force majeure principle. This however led to many uncertainties since it entirely depended on the judge subject to a final ruling of the Supreme Court.
The parties could also decide to insert contractual protection to deal with any adverse consequences of unforeseeable circumstances in their contract. For example, in the transaction practice, parties usually include in their contract MAC (material adverse change) or MAE (material adverse event) clauses. This type of clauses gives (one of) the parties the right to terminate the agreement if material adverse changes/events occur between signing and closing.
Book 5 now recognises the principle of hardship
Book 5 now recognises the principle of hardship in exceptional cases where a change in circumstances would make the performance of the obligations of the contract excessively costly, such that demanding contract performance would be unreasonable.
Under the new provisions, the debtor has the right to request the creditor to renegotiate in order to either amend the contract or terminate it, if the following conditions are cumulatively met:
- a change in circumstances makes the performance excessively onerous to such an extent that the performance cannot be reasonably required;
- the change was unforeseeable at the time of the conclusion of the contract;
- the change is not imputable to the debtor;
- the debtor did not assume that risk; and
- the law or the contract does not exclude this possibility to renegotiate.
For example, in case a lease agreement would become extremely onerous for the tenant because of the indexation of the rent, the tenant could ask the landlord to renegotiate the contract and to agree on a cap on indexation.
It is important to note that during the renegotiations, the parties must continue to perform the contract as initially concluded – for example, the tenant must continue to pay the rent.
If the renegotiations fail within a reasonable period of time, one of the parties (who is not necessarily the debtor) can decide to initiate summary proceedings in front of a judge. The judge has the power to adapt the contract to align it with what the parties would reasonably have agreed to at the time the contract was concluded if they had taken the change in circumstances into account. The judge can also decide to terminate the contact, in whole or in part, as of a date not prior to the change in circumstances and according to modalities to be determined by the judge.
This new regime is of supplementary law and the parties can decide to exclude the hardship entirely from their contractual relationships. Such exclusion could however be considered as an abuse of rights if one party is stronger than the other. It is likely that case law will rule about this in the next few years. The parties could also specify, in their agreement, the key conditions required to apply the principle of hardship. They could for example qualify the concept of “excessively onerous” and decide that it only applies if the performance of the obligation by a party is x % more onerous than the estimated cost at the time of conclusion of the contract.