The indexation clause explained in under 5 minutes
Rising prices of raw materials and food products: inflation is reaching record levels! In Luxembourg, the annual inflation rate for 2022 was estimated at 5.9%. The government has introduced numerous support measures, including a temporary VAT reduction for 2023, but the situation is unlikely to improve in the near future.
How can businesses protect themselves against rising costs in their commercial relationships? An indexation clause is a legal mechanism that allows parties to anticipate significant price fluctuations and secure their contractual relationship from the outset. Nicolas Thieltgen explains how this mechanism works.
The Concept
An indexation clause allows prices or any other financial elements (remuneration, rent, etc.) to be adjusted according to changes in a specific index or another reference value defined in the contract.
Two elements are essential:
- The index: Price adjustments depend on changes in a reference indicator, most commonly an external index reflecting the value of goods or services outside the main contract. The most widely used is the national consumer price index calculated by STATEC.
- The frequency: The clause specifies how often prices will be revised (monthly, every six months or, most commonly, annually).
In principle, parties are free to include such a clause in their contracts. Unlike certain neighbouring countries, Luxembourg has no general legislation governing indexation clauses in business-to-business (B2B) contracts. However, specific legal regimes do exist.
Specific Cases and Special Legal Regimes
In certain circumstances, the law or established practice may provide for automatic indexation by operation of law, as is the case, for example, with employee remuneration under the Labour Code.
In other situations, such as public procurement contracts or natural gas agreements, the law allows parties to include an indexation clause but regulates its application.
Lease agreements represent a particular case. The law expressly prohibits automatic indexation clauses for rent under standard residential leases, whereas rent indexation applies as of right to commercial and office leases, unless otherwise stipulated in the contract.
Outside these specific situations, parties are free to draft their own indexation clauses.
In Practice
It is advisable to consider including an indexation clause from the outset of contractual negotiations and to seek professional legal advice.
This can avoid the need to negotiate an amendment to the contract in the event of a new pricing crisis, which one of the parties might refuse to accept.
An indexation clause may be drafted as follows:
“The price shall be revised in accordance with changes in [insert index] published by [source]. It shall be automatically adjusted each year, upwards or downwards, in the same proportion as the change in the index recorded during the previous year. Such adjustment shall take effect automatically, without any formalities or prior request.”
Do not hesitate to seek assistance from a lawyer to draft this clause with confidence and ensure its proper application.
Brucher Thieltgen & Partners remains at your disposal for any advice relating to contractual matters.
DISCLAIMER: The information contained in this article is provided for informational purposes only and does not constitute legal advice.
For Further Information, Please do not hesitate to contact:
N’hésitez pas à contacter en particulier :
Nicolas Thieltgen, Managing Partner : nicolas.thieltgen@btplawyers.lu