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Print articleFive pitfalls to Avoid in your Belgian Contracting Agreements
December, 2009 - William Timmermans - ALTIUS
In Belgium, contracting agreements are subject to the Belgian Civil Code (‘BCC’) plus several other regulations. In this article, we briefly discuss five rules which foreign investors or principals may be surprised apply to Belgian contracting agreements. Make sure you avoid these pitfalls!
1. Tax and social security debts of your contractor
At the moment the principal pays the contractor’s invoices, it has to verify whether or not the contractor owes any social security or tax payments. There is an easy online system for this. If there are no such debts, the principal can go ahead and pay. If the contractor has such debts, the principal (as the contractor’s employer) has to pay 15% of the invoice amount to the tax authorities and/or 35% to the social security authorities. Failure to do so renders the principal jointly and severally liable for the contractor’s tax and/or social security debts.
2. Risk of direct claims by the sub-contractors
Principals should be aware that Article 1798 BCC gives sub-contractors the right to claim payment from the principal, if they have not been paid by the contractor and if the principal has not paid the contractor. The principal can raise any argument that he could raise against the contractor against the sub-contractors, to the extent the argument predates the direct claim. As this right cannot be avoided by the terms of an agreement between the principal and the contractor, the principal should insist that any sub-contractors be approved by him, and may wish to insert a specific clause in the agreement to deal with such direct claims by sub-contractors.
3. Price review formulas
To ensure the risk of price fluctuation of wages and materials is shared between the parties, contracting agreements often contain price review formulas. However, not all of these formulas are legal. The 1976 Economic Recovery Act contains three strict rules for price formulas: First, they must be limited to 80% of the agreed price. Second, they must only be linked to the relevant indices for the work or services performed under the agreement (e.g. index of wages or raw-material costs). Third, the share of the indices in the review formula should correspond to their actual share in the cost of the work or services. Any price review formula that does not comply with these rules is absolutely null and will not be upheld by the Belgian courts.
4. Incompatibility of the professions of architect and contractor
Architects and building contractors are both subject to a 10-year liability regime for the stability of their buildings. Parliament wanted both the architect and the building contractor to be liable, to ensure they checked each other’s work. The 1939 Architect’s Act states that no person can be both an architect and a building contractor. Any contracts entered into in breach of this rule are null and void. This also means that an architect cannot be a sub-contractor of a building contractor. In view of this rule, we recommend that you seek legal advice before signing any sort of “design and build” agreement subject to Belgian law.
5. Terminating a contracting agreement without cause
Principals can terminate a Belgian contracting agreement at any time by paying the fees due, plus any costs caused by the termination, plus compensation for any loss of profit as a result of the termination (Art. 1794 BCC). The obligation to compensate the contractor for loss of profit does not apply in several other jurisdictions and can surprise non-Belgian parties to Belgian contracts. It is possible for both parties to derogate from this rule in the contract. Often the letter of the law is replaced with an agreement for the principal to pay the contractor a fixed percentage of the fees for the unperformed works or services (e.g. 10%) by way of compensation for loss of profit.
This is only a brief summary of some of the pitfalls to avoid when making Belgian contracting agreements. Please don’t hesitate to contact us for any further information or advice you may require.
1. Tax and social security debts of your contractor
At the moment the principal pays the contractor’s invoices, it has to verify whether or not the contractor owes any social security or tax payments. There is an easy online system for this. If there are no such debts, the principal can go ahead and pay. If the contractor has such debts, the principal (as the contractor’s employer) has to pay 15% of the invoice amount to the tax authorities and/or 35% to the social security authorities. Failure to do so renders the principal jointly and severally liable for the contractor’s tax and/or social security debts.
2. Risk of direct claims by the sub-contractors
Principals should be aware that Article 1798 BCC gives sub-contractors the right to claim payment from the principal, if they have not been paid by the contractor and if the principal has not paid the contractor. The principal can raise any argument that he could raise against the contractor against the sub-contractors, to the extent the argument predates the direct claim. As this right cannot be avoided by the terms of an agreement between the principal and the contractor, the principal should insist that any sub-contractors be approved by him, and may wish to insert a specific clause in the agreement to deal with such direct claims by sub-contractors.
3. Price review formulas
To ensure the risk of price fluctuation of wages and materials is shared between the parties, contracting agreements often contain price review formulas. However, not all of these formulas are legal. The 1976 Economic Recovery Act contains three strict rules for price formulas: First, they must be limited to 80% of the agreed price. Second, they must only be linked to the relevant indices for the work or services performed under the agreement (e.g. index of wages or raw-material costs). Third, the share of the indices in the review formula should correspond to their actual share in the cost of the work or services. Any price review formula that does not comply with these rules is absolutely null and will not be upheld by the Belgian courts.
4. Incompatibility of the professions of architect and contractor
Architects and building contractors are both subject to a 10-year liability regime for the stability of their buildings. Parliament wanted both the architect and the building contractor to be liable, to ensure they checked each other’s work. The 1939 Architect’s Act states that no person can be both an architect and a building contractor. Any contracts entered into in breach of this rule are null and void. This also means that an architect cannot be a sub-contractor of a building contractor. In view of this rule, we recommend that you seek legal advice before signing any sort of “design and build” agreement subject to Belgian law.
5. Terminating a contracting agreement without cause
Principals can terminate a Belgian contracting agreement at any time by paying the fees due, plus any costs caused by the termination, plus compensation for any loss of profit as a result of the termination (Art. 1794 BCC). The obligation to compensate the contractor for loss of profit does not apply in several other jurisdictions and can surprise non-Belgian parties to Belgian contracts. It is possible for both parties to derogate from this rule in the contract. Often the letter of the law is replaced with an agreement for the principal to pay the contractor a fixed percentage of the fees for the unperformed works or services (e.g. 10%) by way of compensation for loss of profit.
This is only a brief summary of some of the pitfalls to avoid when making Belgian contracting agreements. Please don’t hesitate to contact us for any further information or advice you may require.
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