As from 1 January 2023, provisions of the new law of contracts will apply. These (new) provisions will have an impact on several aspects of IT contracts concluded after that date. In this blog post, we explain 7 important changes on IT contracts.
What will change and when will the changes take effect?
The laws introducing Book 1 and Book 5 of the new Civil Code were published in the Belgian Official Gazette on 1 July 2022:
- Book 1 contains general principles of civil law,
- Book 5 contains the rules of the new law of obligations. This book is certainly not a revolution in the field of contract law, but rather a codification of the evolution of case law and legal doctrine, while also anchoring a number of disputed issues by the legislature.
These rules have entered into force on 1 January 2023 and will apply to contracts concluded after 1 January 2023. Existing contracts that are extended, renewed or executed after this date will continue to be governed by the old regime, unless the contracting parties agree otherwise.
Below, we highlight some salient provisions that may have a particular impact in the context of IT contracts and electronic commerce:
- Notification by electronic means
- Conflicting general terms and conditions
- Unlawful clauses and abuse of weak position
- Price reduction as a contractual remedy
- Changes concerning the termination of an agreement
- Substitution ("step-in")
- Termination of depending related contracts
1. Notification by electronic means (Article 1.5 of the Civil Code)
1.1. Article 1.5 of the Civil Code: the principle of notification
Article 1.5 of the Civil Code deals with the principle of notification, which may be relevant for the notification of a contract proposal (binding or non-binding) to a negotiating partner and the acceptance (binding or non-binding and proven) of a proposal by the addressee. This principle is also relevant for the notification of legal acts such as the termination or unilateral dissolution of a contract. It is traditionally accepted that a notice reaches the addressee when the addressee takes note of it or could reasonably have taken note of it.
1.2. A notification via e.g. e-mail requires prior acceptance
For notifications made by electronic means (e.g. e-mail), there is an element of legal uncertainty, as there is a possibility that an electronic address may no longer be used by the addressee. Therefore, Article 1.5 Civil Code stipulates that notification to an electronic address is only deemed to have reached the addressee if the addressee has previously accepted the use of that electronic address or any other electronic means of communication.
1.3. How the acceptance of the communication medium should be made and whether it can be implied is not determined by law
The law does not specify how such acceptance must be made, nor whether such acceptance must be explicit. An e-mail address, together with the other coordinates of contacts, can be mentioned as contact details in a classic written agreement. However, it is unclear whether acceptance of a particular means of communication or an electronic address can also be inferred implicitly, e.g. when a person has used the means of communication itself to communicate proposals or legal acts. During the parliamentary preparation, it was mentioned that the use of an electronic address is only accepted within the context in which the use was agreed upon. This would then e.g. only be accepted as a means of communication in the context of one particular contract for which this means of communication was agreed. This limits the possibilities of implied acceptance. If no electronic address or means of communication was accepted, the sender will have to prove knowledge of the electronic communication.
2. Conflicting general terms and conditions ("battle of the forms")
2.1. Article 5.23 Civil Code: the negotiated contract prevails and conflicting general terms and conditions cancel each other out
Article5.23 Civil Code regulates the so-called "battle of the forms". When parties submit their mutual contract proposals during negotiations and they both declare their general terms and conditions applicable - which by definition will be contradictory on many points - the question arises which general terms and conditions will apply when the contract is concluded. Under the old regime, different solutions to this conflict were applied.
Article 5.23 Civil Code first states the logical rule that the negotiated contract prevails over the general terms and conditions. As for the application of the general terms and conditions, the rule is that the conflicting clauses of both sets of general terms and conditions cancel each other out.
2.2. For almost unavoidable gaps, common law applies
Since typical terms of sale and terms of purchase are contradictory in most respects, not many clauses will remain after the "knock-out" of the contradictory clauses. The parties are then linked by a main agreement (sometimes just an order form or the like), and decimated general terms and conditions. So, there may be significant gaps:
- For example, a clause of limited liability in terms of sale or terms of service may lapse if the purchase conditions contain a contradictory clause. In that case, the common law on liability would apply, which means that no limitation of liability would apply, although this is always an important provision in an IT contract.
- Similarly, provisions relating to delivery terms (whether strictly binding or not), fixed pricing, intellectual property rights, etc., could lapse, with common law rules to be applied to fill in the gaps.
If one of the negotiating parties does not wish to be bound by a contract with such loopholes, that party must notify the other party in advance or as soon as possible after receiving the proposal and general terms and conditions. If so, no contract will be formed.
2.3. Declaring general terms and conditions of the other party inapplicable cannot be done through its own general terms and conditions
In any case, a clause in the general terms and conditions that simply states that the other party's general terms and conditions do not apply is no longer a solution. Such a clause can, however, be validly included in a master agreement that is negotiated and signed.
3. Unfair terms and abuse of a weak position
3.1. Article 5.52 of the Civil Code: a clause that creates a manifest imbalance is held to be unwritten
By analogy with the B2B Act (the current Article VI. 91/3 Code of Economic Law (WER)), Article 5.52 Civil Code provides that a clause that creates a manifest imbalance between the rights and obligations of the parties is held to be unwritten. This rule applies not only to unilateral entry contracts (as is sometimes erroneously said), but to any clause in an agreement that could not be negotiated.
3.2. Only applicable in C2C relationships or specific sectors
However, in B2B relationships, the specific, rather similar rule of Article VI.91/3 WER applies. In B2C relationships, the specific rule of Article VI.82 WER applies. These specific provisions regulate the issue of abusive clauses in a B2B and B2C context, and they take precedence by virtue of their specificity, so that the general rule of Article 5.52 of the Civil Code is put out of play, and is only important in C2C relationships and some special sectors, such as the financial sector, to which the specific rules do not apply.
3.3. Article 5.37 of the Civil Code: the party in a weaker position can request an adjustment of its obligations or the nullity of the contract in case of abuse
When there is a manifest imbalance between the obligations of the parties because one party abused circumstances related to the other party's weak position when concluding the contract, the weak party can ask the court to adjust its commitments, or request the nullity of the entire contract if the abuse was decisive to conclude the contract (Art. 5.37 Civil Code).
A "weak position" may arise from a particular emergency or constraint (e.g. an urgent need for an IT solution or an emergency that needs to be remedied urgently), but it may also be related to a certain ignorance or inexperience, e.g. regarding the operation of software or IT problems.
A difference in knowledge is not in itself sufficient to invoke the provision; there must be an abuse of this ignorance or inexperience. This provision is not new; under the old regime, abuse of a weak position was sometimes sanctioned on the basis of the "qualified detriment" theory or on the basis of a failure of the specialised professional to fulfil his duty to advise or inform the inexperienced client. Especially in the 1980s and 1990s, a considerable volume of case law and legal doctrine appeared that offered strong protection to the inexperienced clientele regarding IT contracts. Over the years, the knowledge gap between IT service providers and the clientele is no longer that absolute (depending, however, on a company's resources and the complexity of a project). The provision of Article 5.37 Civil Code could possibly be used if lack of knowledge or inexperience is abused. There is a certain parallel with Article IV.2/1 WER, which sanctions the abuse of a position of economic dependency as a rule of unfair competition.
3.4. Article 5.16 of the Civil Code: possible pre-contractual information duty for specialised IT service provider
Moreover, Article 5.16 of the Civil Code underlines that during pre-contractual negotiations, the parties may be bound by a duty to disclose sufficient information if such duty arises from good faith and custom, taking into account the capacity of the parties, their reasonable expectations and the object of the contract. Depending on the circumstances, in particular the knowledge and experience of the client, and the possible assistance of an external consultant, the duty to disclose sufficient information may apply to the specialised IT service provider.
4. Price reduction as a contractual remedy
4.1. Two classic sanctions: dissolution and enforcement
Traditional contract law provides two main remedieswhen a party fails to properly honour its obligations:
- on the one hand, the dissolution (termination)of the agreement,
- on the other hand, its enforcement (forced execution), if necessary with a penalty payment in case of continued non-performance.
If the breach of contract causes damage, damages can also be claimed. Moreover, the parties can agree on a lump-sum or minimum compensation in a liquidated damage clause (e.g. think of a lump-sum compensation per week of delay in the delivery of a software project).
4.2. Article 5.97 of the Civil Code: basis for price reduction as remedy
Besides dissolution and enforcement , the Civil Code now also contains a legal basis to request a price reduction (Art. 5.97 Civil Code). The reduction then amounts to the difference between the value of the agreed performance and the value of the performance received. This can be a useful sanction when the shortcoming is insufficiently serious to justify dissolution of the contract. For example, consider software with some missing functionalities that are of minor importance, or failure to meet SLA levels that are not explicitly sanctioned with fixed service credits.
5. Changes concerning the termination of the agreement
5.1. Dissolution out of court via an express resolutive clause
Under classic contract law, in the event of a sufficiently serious breach by the other party, a party can claim the dissolution of the contract in court. In an express resolutive clause, the parties can explicitly state which shortcomings or facts may give rise to dissolution without having to claim dissolution in court. These are the typical clauses that refer to a "material breach" (whether or not after a notice granting a grace period to remedy the breach), bankruptcy, winding up, etc.
5.2. Unilateral out-of-court dissolution without express resolutive clause also accepted by jurisdiction but at own risk
Under the old law, if a party wished to terminate the contract because of a material breach not explicitly mentioned in such clause, it was obliged to demand the dissolution in court proceedings. Given the long duration of legal proceedings, the case law accepted, for several decades, that in case of a material breach that is sufficiently serious, a party could unilaterally terminate a contract without legal proceedings. This would be done at its own risk. If the other party were to challenge the unilateral termination, and this termination is found wrong by the court, the party that took the decision wrongly would be liable.
5.3. Article 5.93 of the Civil Code: legal basis for unilateral dissolution outside court
The above case-law rule is now consolidated in Article 5.93 of the Civil Code. A party can therefore unilaterally, by means of a letter, dissolve the contract. The condition for this is that the breach is sufficiently serious to justify dissolution. The possibility of applying this rule in the context of an IT project is important. If a project fails, and this would be considered as a breach of contract, the client should have the option to immediately terminate the contract without having to wait for court proceedings.
The law does not require a situation of urgency to unilaterally proceed to termination. Nevertheless, it is clear that the party terminating the contract this way is taking a risk, because the other party may take the matter to court and argue that the termination is unjustified, e.g. because the invoked failure is not sufficiently serious to justify a termination, or because the other party itself is wholly or partly responsible for the failure. The court may then possibly find a wrongful termination and nullify the termination or award damages. If necessary, the court will appoint an expert witness to assess the facts. Such court proceedings can be lengthy. In the meantime, however, the project in question has been terminated, and possibly replaced by an alternative project with a different service provider. However, the financial consequences of the termination - justified or not - may remain uncertain for years.
5.4. Article 5.90 of the Civil Code: termination due to foreseeable serious breach after notice ("anticipatory breach")
Article 5.90 of the Civil Code now also provides that termination can take place when, strictly speaking, there is no serious breach yet, but it is sufficiently clear that the co-contractor will not fulfil its commitments in time (e.g. when the deadlines set are strict and important, and it is clear that they cannot be met). The other party can thus anticipate a default that will occur with sufficient certainty. In the Anglo-Saxon world, this is known as an "anticipatory breach". However, the law requires that the defaulting party was given notice to provide sufficient guarantees for the proper performance of its obligations within a reasonable period of time. Thus, a realistic chance must be offered to still comply with the commitment. Moreover, the consequences of the non-performance must be sufficiently serious for the party proceeding to the contract termination.
5.5. Article 5.94 of the Civil Code: the contract revives in case of faulty unilateral termination
Article 5.94 of the Civil Code now provides that if a unilateral termination is wrongly applied, the court decides that the termination is "ineffective". Under previous law, this was not the case, and a termination always remained a termination. As a sanction, damages were then awarded, calculated mainly on lost sales or lost profits. If a termination is declared ineffective, it would mean that a contract revives and thus would have to be performed. If that happens after several years of litigation, it no longer makes any sense. Hopefully, with sufficient flexibility, the court can strike the most appropriate sanction.
5.6. Article 1794 of the Old Civil Code remains in force for the time being (until Book 7 Civil Code is introduced)
With regard to termination options, it is important to note that Article 1794 of the old Civil Code will remain in place for the time being. The special legal rules of the old Civil Code on purchase, lease, contracts for works, service contracts, and other particular contracts will remain in place until when Book 7 of the Civil Code (on particular contracts) will be introduced. At the time of writing, it is unclear when Book 7 will be introduced as the texts have not yet been approved in the Council of Ministers. Article 1794 of the Old Civil Code implies that a principal of a service contract or contract for works with a fixed price may always unilaterally terminate this contract subject to payment of the works performed, costs and lost profit.
6. Substitution (step-in)
6.1. Step-in clause: replacement of the defaulting party at his expense
If a contracting party fails to properly perform its obligation, the other party may proceed with a price reduction, contract termination or forced performance. An alternative arrangement of "forced performance" consists of the creditor (principal) having the obligation performed by a third party at the expense of the defaulting debtor (service provider). In IT contracts, this is often regulated by a "step-in" clause, which can thoroughly regulate the modalities of such substitution. Such substitution usually results in additional costs, as the new service provider has to familiarize himself with a project unknown to him.
6.2. Article 5.85 of the Civil Code: "step-in" via unilateral notice in case of urgent default (at own risk)
If the parties have not included a step-in clause, the creditor can invoke the new article 5.85 of the Civil Code. Under this article, the creditor (principal) can, at his own risk, replace the defaulting party (service provider) by means of a unilateral notice stating the deficiencies and justifying the replacement. The default must also have previously been established in a notice. It is curious, however, that the article provides this possibility only "in cases of extreme urgency or other exceptional circumstances", while on the other hand the law does not require urgency for the unilateral termination of the contract. On the other hand, Article 5.85 of the Civil Code does not require a serious breach, which is the case for unilateral termination.
7. The termination of related accessory contracts
7.1. Accessory contracts are terminated upon termination of the main contract (existing case law)
IT contracts are often related to other contracts. A main contract such as a project agreement is closely related to accessory contracts such as licenses and maintenance contracts, which have no useful existence outside the context of the project. Maintenance contracts are always accessory contracts to license contracts or hardware contracts. When a main contract such as a project agreement is terminated, e.g. because of the failure of the project, the question arises what happens to the accessory contracts concluded with third parties such as licensors or support service providers, who are not responsible for the failure. In the past, case law usually ruled that accessory contracts should also be terminated as they had lost any utility.
7.2. Article 5.142 of the Civil Code: existing case law confirmed
Article 5.142 of the Civil Code now expressly provides that the termination of the main contract constitutes a tacit resolutive condition and thus confirms existing case law. Thus, when it appears with certainty from the intention of the parties that a contract is to end upon the termination of another contract, on which the parties have made the fate of the contract dependent, that contract will also be terminated. The nature of the contract and the intention of the parties will be decisive.
Many more provisions impacting IT contracts
There are, of course, many more provisions that may have an impact on IT contracts. Among other things, new rules have also been introduced regarding the wrongful termination of negotiations and the impact of seriously changed circumstances on the contract (“imprevision”), and some provisions have been rather subtly amended (such as the regulation of liability clauses and the liquidated damage clause). In the overview, however, we have focused on important changes regarding aspects that frequently occur in negotiations and disputes concerning IT contracts.
Authors: Stefan Van Camp and Bernd Fiten, attorneys-at-law at Timelex
