Everything is getting more expensive. The Russian-Ukrainian war and (the aftermath of) the corona pandemic have both contributed to this, but today's fierce inflation is perhaps the biggest culprit. Among other things, suppliers of goods (B2B) are facing a steep increase in production costs as high as 30 percent as a result! But the annoying thing is the fact that many suppliers are entering into so-called duration agreements in which fixed amounts are agreed upon. If a supplier enters into a five-year term agreement with its customer in 2020, and inflation causes a 30 percent price increase, the supplier will be stuck with these costs until the term is over. In principle, the fixed price agreement included in the duration agreement makes passing on the increased (production) costs impossible.
Inflation has always been there and will always be there. Therefore, this blog will discuss whether a supplier has the possibility to modify a duration agreement and/or pass on the price increase to its customer on the basis of "unforeseen circumstances".
As a starting point, the contract and any applicable general conditions will need to be examined. Certain circumstances may already be (implicitly) factored into the contract or general terms and conditions. For example, the contract may provide that possible natural disasters do not affect the obligation of either party to the contract to deliver goods. However, this circumstance cannot be considered unforeseen, because if the contracting parties have discounted the possibility of the circumstance occurring in the contract, it can rather be considered a foreseen circumstance. Therefore, it is important to first look at the agreements between the parties.
Furthermore, the agreement may contain a so-called hardship clause. This is a provision that creates the possibility of amending an agreement (after renegotiation) if unforeseen circumstances arise. If such leads are missing, the law will have to be invoked.
Unforeseen circumstances in the law
The doctrine of unforeseen circumstances is regulated in Article 6:258 of the Dutch Civil Code. This article provides that the court may amend a contract on the basis of unforeseen circumstances of such a nature that the other party cannot expect unaltered maintenance according to standards of reasonableness and fairness. It should be noted that these criteria are not easily met. One reason for this is that the court must test the requirement of reasonableness and fairness with restraint.
Article 6:258 of the Dutch Civil Code is applied in any case where there is a serious disturbance in the value ratio between the mutual performances in reciprocal agreements, such that the balance between performance and consideration is completely broken. This test is also strict. In practice, such an appeal is often rejected, especially in the case of duration agreements. For example, an energy supplier who had agreed on a fixed price for a long period of time could not get out of this agreement when energy prices rose sharply. The fact that bankruptcy was imminent for the supplier did not change that. This has to do with the (tacit) risk allocation discounted in the duration agreement. Precisely because parties make agreements for a longer period of time, the risk of price fluctuations is often considered to be discounted in the agreement. As a result, in the event of inflation, for example, unforeseen circumstances cannot easily be spoken of. This makes it important to include a clause for possible adjustment of prices precisely when entering into a duration agreement.
For a successful reliance on unforeseen circumstances pursuant to Section 6:258 of the Dutch Civil Code, the circumstances must be of such a nature that unchanged maintenance of the contract would be unacceptable according to standards of reasonableness and fairness.
However, the court should be very cautious with this test. To rely on unforeseen circumstances, it will have to be shown that there is a serious disruption in the value ratio.
Want to know more?
It is of course always possible to enter into (re)negotiations with your counterparty. We will gladly assist you with this. Do you have questions about the doctrine of unforeseen circumstances or about contract law in general? Feel free to contact one of our lawyers.