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Price reduction as an alternative to contract termination

Price reduction as an alternative for contract termination

Liezl Steyfkens – 24/10/2022 – The new Belgian Civil Code (CC) adds a brand-new remedy for creditors whose debtor does not fulfill his contractual obligation: the price reduction. In this article, we explore this remedy, its requirements, and how it works in practice.

The price reduction resembles the remedy of contract termination in the sense that it is a judicial or extra-judicial remedy in case of a serious contractual breach by a counterparty. Evidently, price reduction sounds less drastic compared to contract termination. Its requirements, which we discuss below, seem practical at first glance as well.

Two types of contractual breaches

First of all, a price reduction will only prove possible in case of a serious breach of contract. That means the debtor must have committed a serious, non-remediable fundamental obligation.

Note that two types of contractual breaches are captured by the new provisions, namely qualitative and quantitative shortcomings. Let’s say a tailor promises to sell a customized suit consisting of 90% wool and only 10% synthetic fabrics. Eventually, he delivers a customized suit consisting of 70% wool and 30% synthetics. This constitutes a qualitative shortcoming. The use of more synthetics significantly lowers the value of the suit. This results in a difference in value between the promised good and the one delivered, and therefore constitutes grounds for a price reduction.

The shortcoming can also be of a quantitative nature. For example, a laptop manufacturer promises to sell 10 laptops to an electronics shop for 10.000 EUR. The manufacturer, however, only delivers 9 laptops.

PROPORTIONALITY

Secondly, the price reduction must be proportionate to the difference in value between the received performance of the contract and the value of the one that was promised. The price reduction does not aim to compensate damages caused by a contractual breach. It is merely a tool to restore the balance between contract parties.

Let us reconsider our second example. The electronics shop could claim a price reduction proportionate to the value of the missing laptop.

Furthermore, the reduction must -in principle- be pronounced by a judge. However, the CC allows the creditor to proceed with an extrajudicial and unilateral price reduction by written notice to the debtor. This type of unilateral price reduction can be brought before a judge afterward upon request of the debtor. Therefore, it can be overturned if it is considered unlawful. The unilateral notification of price reduction, while being an effective and swift sanction for contractual breach, therefore carries a certain risk.

The new CC thus provides the creditor with a more moderate and less invasive way to react to contractual breaches. In certain circumstances, the termination of contract would do more harm than good. Parties may prefer to keep collaborating, even if the performance of the contract is not as promised. The possibility to then claim a price reduction is an easy way to re-align with the actual performance and restore the balance.

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