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Revision And a Look at The Future: Unlawful Terms

A contract is a legally enforceable agreement that creates, defines, and governs mutual rights and terms among its parties. A contract typically involves the transfer of goods, services, money, or a promise to transfer any of those at a future date.

We have already touched upon the fact that, since 1 December 2020, the B2B Act of 4 April 2019 has ensured that consideration is given to the imbalances which may exist between contracting companies and that, for this purpose, provisions have been introduced, among other things, regarding unlawful terms which are not possible, or sometimes only under strict conditions, in such contracts.

The new law on obligations now seeks to extend this to common law and thus to C2C contracts as well. We will first briefly recall the main principles of the B2B Act and then look at the Draft Law and its possible impact.

The B2B-Act

Scope

The provisions of the B2B-Act apply to enterprises as defined in Book VI of the Economic Code. Thus, the new concept of an enterprise is not used in this book and the condition of “the durable pursuit of an economic objective” is still required. A remarkable consequence of this is that the local non-profit association will more than likely not be entitled to the protection of the B2B-Act.

As far as contractual terms in relations between undertakings covered by this definition are concerned, the B2B Act which entered into force on 1 December 2020 will be applicable as far as agreements concluded, renewed or amended after 1 December 2020 are concerned.

Unlawful terms

Very similar to consumer law, B2B-Act has attempted to deal with terms that create an apparent imbalance between the rights and obligations of parties. Specifically, this was done by introducing a general testing standard on the one hand and by working with the so-called specific “grey” and “black” list of unlawful terms on the other hand.

General testing standard

Article VI.91/3, §1 WER incorporates this general testing standard as follows: “For the purposes of this Title, any contractual term concluded between enterprises which, alone or in conjunction with one or more other terms, creates an obvious imbalance between the rights and obligations of the parties is unlawful.”

The “imbalance” should be read in terms of a “legal imbalance”. The economic balance, i.e. what parties agree on at what price, still depends on the free market in which, among other things, commercial customs are an important parameter. Paragraph 2 of the aforementioned article clarifies that this apparent imbalance must always be assessed in concrete terms in the context of all the circumstances
surrounding the agreement. Finally, the last paragraph makes it clear that the core terms, insofar as they are clear and intelligible, are not subject to this testing standard.

Black list

Article VI.91/4 contains four terms which deviate so much from the basic principles of civil law and create a serious imbalance between the rights and obligations of the parties that they are considered to be absolutely prohibited terms, hence the need for a very strict interpretation.

  1. Purely discretionary clauses
  2. Terms giving the right to unilaterally interpret the contract.
  3. Clauses excluding any means of redress
  4. Clauses establishing in an irrefutable manner the knowledge or acceptance of the other party

Grey list

Article VI.91/5 contains the terms which are presumed to be unlawful unless proven otherwise, and reads as follows:

  1. granting the company the right to change unilaterally the price, characteristics or conditions of the contract without valid reason;
  2. tacitly extend or renew a fixed-term contract without giving a reasonable notice;
  3. without compensation, transferring the economic risk to one party when it would normally be transferred to the other company or another party to the contract;
  4. inappropriately exclude or limit the legal rights of a party in the event of total or partial non-performance or defective performance by the other undertaking of any of its contractual obligations;
  5. without prejudice to Article 1184 of the Civil Code, to bind the parties without giving reasonable notice;
  6. to release the company from its liability for its wilful misconduct, its gross negligence or that of its agents or, except in cases of force majeure, for non-performance of the essential obligations that are the subject of the agreement;
  7. to limit the means of proof that the other party can use; and
  8. in the event of non-performance or delay in performance of the other party’s obligations, to fix amounts of compensation that are manifestly disproportionate to the prejudice that may be suffered by the enterprise.

In practice, this article means a reversal of the burden of proof to the strong contracting party.

The principle of this list is fairly easy to explain by means of a very actual topic. The first type of unlawful clause in the grey list is the one that grants the right to unilaterally change the price, characteristics or conditions of the contract without good reason. This clause will therefore be unlawful and considered null and void, unless the enterprise can prove that there is a valid reason and that no manifest imbalance is created between the parties. If we apply this to price alteration clauses, which are very topical in view of, among other things, the COVID-19 pandemic and today’s very unfortunate situation in Ukraine, then valid/objective reasons must be at the basis of such a clause. In principle, a price alteration clause that makes this dependent on, for example, changes in the price of resources, suppliers, regional taxes or charges, etc., will contain a sufficient objective justification so that such a clause will not be unlawful, which is to be welcomed. When including such a clause, the enterprise is well advised to be as specific and clear as possible about the criteria for changes. If one wishes to include a term which normally falls under the grey list, the parties can let their freedom of contract prevail if they can demonstrate that they really wanted to make this arrangement for legitimate economic reasons.

Sanction

Article 91/6 reads as follows: “Any unlawful term is prohibited and null and void. The contract shall remain binding on the parties if it can continue to exist without the unlawful terms.”

In principle, therefore, only the unlawful clause itself is null and void and the contract can continue to exist without it. Only if the relevant term is so crucial that it affects the entire contract will the latter be null and void.

Draft of new law on obligations

Scope

The legislator is rightly so of the opinion that it is problematic that since the B2B-Act unlawful terms have been prohibited in both B2B and B2C relationships, yet they can still be used in C2C relationships. This is seen as a possible conflict with the constitutional principle of equality.

The Draft Law provides for the application of the unfair terms doctrine to B2B, B2C and C2C relations.

Furthermore, Article 5:52 of the Draft Law reads:

“Any non-negotiable clause which creates an obvious imbalance between the rights and obligations of the parties is unlawful and will be considered as not written.

When assessing the apparent imbalance, all circumstances surrounding the conclusion of the contract are taken into account.

Paragraph 1 shall not apply either to the determination of the main terms of the contract or to the determination of the equivalence of those terms.”

In the original version of this article in the Draft Law, its effect was limited to accession agreements. In the meantime, the legislator has abandoned this. It was clarified that the previous version was too restrictive of the effect of the prohibition, which, according to the legislator, should have a supplementary effect on the existing specific regulations that already exist in contracts between companies and consumers and between companies.

Article 5:13 of the Draft Law clarifies that it does not affect the application of specific legislation, as the Draft Law concerns so-called lex generalis. As far as B2B and B2C are concerned, the existing legislation will continue to apply without prejudice and the Draft Law can at most have a supplementary effect.

General testing standard without lists

It is clear that the proposed Law seeks to achieve the same as the B2B-Act, namely to prohibit terms which create an apparent imbalance between the rights and obligations of the parties to a contract. In the preparatory works of the Draft Law, we read that this is pursued without affecting the principle of contractual freedom or legal certainty. In other words, freely negotiated contract terms should not be affected by the doctrine of unfair terms. Partly for this reason, only ‘manifest’ imbalances are targeted, as a result of which the court can only apply a marginal review and must always look at the contract as a whole.10 In this respect, the Draft Law creates more clarity than the B2B-Act, since the latter does not exclude negotiated agreements from its application.

As in the B2B-Act, the court will not be able to touch “the main provisions of the contract, nor the equivalence of these main provisions”. Thus, for example, the agreed price will not be affected.

Sanction

Under the Draft Law, an unlawful term will have no effect by being deemed unwritten and will leave the remainder of the contract unaffected if it can continue to exist without the invalid term.

Conclusion

It is clear that the legislator wanted to resolve a possible disparity in the application of the doctrine of unfair terms by introducing it into the Civil Code in a general provision applicable to all relations, without prejudice to more specific regulations already in existence.

The result is that there are three possible sources of legislation on unfair terms, which is hardly beneficial to clarity. In addition, it appears that although the intention is the same, the situation is not entirely identical.

One can and does wonder whether, as regards the relationship with B2B legislation, after the entry into force of the provisions of the Draft Law in the New Civil Code, the interaction will not become unnecessarily complex and whether the provisions in the Civil Code may suffice. The main point of criticism is that the lists, and in particular the grey list, in the B2B-Act do not provide the intended guidance and legal certainty due to the rather vague wording, which is open to interpretation.

In any event, the legislator itself seems to be of the opinion that the Draft Law constitutes a more adequate implementation of the doctrine of unlawful terms than the B2B Act:

“In that context, the proposed text aims at introducing into Belgian contract law a general provision to prohibit abusive terms, while ensuring that their effects are limited in accordance with the principles of freedom of contract, proportionality and legal certainty. It will be up to the legislator to decide, in the light of the planned evaluation of the Act of 4 April 2019 and its assessment by the doctrine, whether this law should be maintained or whether the interests of companies are not already sufficiently protected by the general provision inserted in Book 5.”

With this, the legislator alludes to the four-yearly evaluation provided by the B2B Act in Article VI.91/7 WER.

As it now appears, the Draft Law returns to the essence, striking a balance between protecting against and combating unlawful terms without unduly restricting the contractual freedom of the parties to negotiate deviations from the “standard balance” of rights and obligations between the parties.

In that respect, the planned evaluation of the B2B-Act seems an ideal moment to take a closer look. Until then, everyone will have to find their way through the multitude of legislation on unlawful terms.

We will follow up on the developments after the above-mentioned provisions of the Draft Law come into effect.

We can assist you in reviewing the terms of your agreements and in drafting them so as to avoid, as far as possible and foreseeable, any revision.

For further questions and information, please contact us by phone at 03/216.70.70 and by e-mail at [email protected].

Unilateral Termination of an Agreement for Services for a Fixed Term

Termination of employment refers to the end of an employee’s work with a company. Termination may be voluntary, as when a worker leaves of their own accord. Involuntary termination occurs when a company downsizes, makes layoffs, or fires an employee.

Agreements involving the provision of services are entered into every day and there are countless models for this type of contract, which are used in day-to-day business.

It so happens that, precisely because they are so commonplace, the contracts are frequently adapted to the specific needs of each business, which leads to a number of distortions and technical improprieties, culminating in the generation of certain risks, which go unnoticed at the time of formalisation of such contracts.

One of these situations, frequently observed, is the provision for the possibility of unilateral and unjustified termination of contracts for a fixed term, free of any penalty. Thus, it is common to see clauses establishing that either party may put an end to the relationship, at any time, simply by communicating their decision to the other party, often the only obligation being to give a certain period of notice, without the need to respect the term initially established for such relationship.

This type of provision can lead the parties into real traps, since they are under the impression that the agreement may be terminated unilaterally without any consequences. However, many jurists take the view that premature termination without cause always entitles the innocent party to compensation, as provided in the Civil Code, in articles 602 and 603, as follows:

Art. 602. A service provider hired for a fixed period of time, or for a specific job, cannot take leave of absence or quit without cause, before the time has elapsed or the work has been concluded.

Sole paragraph. If he quits without cause, he shall be entitled to payment for the work done, but shall be liable for damages. The same shall occur if he is dismissed for cause.

Art. 603. If the service provider is dismissed without cause, the other party shall be obliged to pay him in full for the work done, and one half of the amount that would be due from then until the end of the contractual term.

The Brazilian courts have not yet reached a unanimous position on the matter, and the Superior Court of Justice is in fact currently discussing the need to determine (i) whether a clause in an agreement for services for a fixed term, authorising unilateral termination with a waiver of any type of indemnity, is legal, provided there is prior notice from the other party, and (ii) whether the party that enters into this type of legal transaction, agreeing to an express clause waiving any indemnity in the event of unjustified and premature termination, is guilty of contradictory behaviour (violation of objective good faith) if he seeks compensation in court.

Currently, there are many decisions that impose an obligation on the party that made the decision to leave the relationship prematurely to pay compensation, even if the contract expressly excludes any penalty or indemnity.

Accordingly, it is evident that something that appears to be simple may conceal an important contingent liability.

Thus, for as long as there remains no uniform opinion of the courts, it is recommended that the parties pay extra attention when entering into their contracts, and assess potential risks that may arise from a premature termination of relationships for a fixed term.

An alternative could be to enter into agreements for an indefinite term, with a provision for termination on giving a certain period of prior notice stipulated jointly by the parties, which may eliminate the risk of paying compensation on termination. However, the suitability of this alternative should be verified in each specific case with the advice of a legal professional, because even agreements for an indefinite term may give rise to additional obligations if, for example, the period of notice is not compatible with expectations created at the beginning of the term or investments made by the parties.

The discussion of termination of agreements for an indefinite term will be the subject of a future article.

Author Charles Wowk

Author Charles Wowk

Contact: Charles Wowk
Title: Partner in the Civil Area at Stüssi Neves Advogados – São Paulo
Email: [email protected]