- price indexing , B2B contract , price fluctuation of materials , price revision , indexing clause , contractual price indexation , revision clause , law firm in Brussels , law firm in Belgium
Major price fluctuations of materials globally had recently a major impact on existing contracts and the parties involved. In sectors operating on small margins, the viability of some companies can be firmly compromised.
Hence, under these circumstances, it is very useful to take a closer look at the possibilities of indexing clauses and the conditions to be observed.
1. Why is it interesting to stipulate an indexing clause?
A commercial relationship is often long-term. In addition, the economic situation, such as the current price increases, may jeopardise the economic balance of a contract or even the viability of one of the parties concerned. In order to keep up with these developments, it is important that the contract is designed accordingly.
In order to ensure a sustainable business relationship, it is often necessary to include a price revision or indexing clause in contracts.
The purpose of such a clause is to ensure that the initial prices evolve according to the economic fluctuations that may affect the main elements of the contract for the supply of goods or services. Thus, the price initially agreed will follow the economic environment within the limits of what is agreed in the contract.
These clauses are quite common and have never raised any problems until the significant inflation that the world has experienced in the last months.
2. What references can be included in an indexing clause?
In most cases, the indexing clause will refer to an index directly related to the subject matter of the contract or to the activity concerned.
As the contract is the law between the parties, it is without saying that the contractual price indexation applies automatically in accordance with the evolution of the referenced index .
While this is indeed the case in certain restrictively listed contracts, such as rental agreements, salaries and wages, allowances or social security contributions and the fees of the liberal professions, it is not the case for the vast majority of contracts between businesses (B2B).
The law prohibits referencing to any index and any price indexing clause that refers to an index may be considered null and void.
For example, a contract for the provision of HR services with a price revision clause based on the consumer price index is null and void, as is a contract for the supply of wooden frames that indexes its prices based on the raw materials price index.
In other words, an indexing clause is lawful but it is not allowed that it is based on classically used indices as a reference.
What are the conditions for the validity of an indexing clause?
If a contract provides for an indexing clause, the revision of the price by applying such a clause is lawful. However, to be valid, a price indexing clause must comply with the following legal criteria:
- It is forbidden to adapt more than 80% of the initial price;
- The clause must refer exclusively to concrete criteria that justify the price revision.
In addition to the prohibition to refer to indices, the price revision clause may only relate to 80% of the price initially agreed in the contract. The balance of 20% of the initial price must remain unchanged.
More importantly, such indexing clause must expressly refer to concrete elements that justify the price change. In practice, it will be associated with an arithmetic formula for calculating the revision. This formula will vary from sector to sector and from contract to contract, as it must specifically refer to concrete elements related to the contract.
These strict conditions, however, are subject to exceptions in certain specific sectors of activity. For example, a company active in the "security guard" sector may, among other things, revise up to 90% of the initial price, whereas in the context of a B2B contract in the "technical management and facilities management" sector, the clause must refer to the evolution of salaries and the cost of goods.
The principles set out in this article are not new, as they exist since 1976.
However, they were generally ignored in most contracts or in the performance of contracts since indexing was not always a major element of contractual negotiations.
But, the reality is different since the pandemic, the war in Ukraine and the exponential inflation of recent months.
Given the multiple uses of existing indexing clauses in contracts, questions and challenges to the validity of these clauses have arisen in many cases.
Therefore, a lot is at stake both legally and economically.
Given the diversity of situations and the economic challenges involved, legal advice is a matter of prudence. Our team of business law specialists has developed several concrete and practical formulas in numerous contracts and will be able to assist you in your endeavours to receive answers to your questions. Please do not hesitate to contact us: +32 (0)2 747 40 07 or firstname.lastname@example.org.