Breach of contract in long-term service contracts: is a high severance payment always valid?

Many business owners and liberal professionals sign long-term contracts for services such as IT support, website hosting or printer leasing. But what if you want out early? Often the supplier then claims a sky-high fee, sometimes as much as 60% of the outstanding monthly amounts due. Is such a clause legally watertight? The short answer is: no, not always. Judges look right through the naming of the clause. If a fee is in reality intended to punish breach of contract, the judge may moderate it if the amount is unreasonable, even in a B2B context.

The facts: a dentist against an IT vendor

The case before the Brussels Court of Appeal concerned a classic dispute between an IT services provider (Proximedia) and a dentist.

• The contract: The dentist signed a contract in June 2015 for a website, hosting and related services. The term was set at 48 months, “irrevocable and irreducible”.
• The breach: Shortly after the start, in September 2015, the dentist expressed his desire to terminate the contract because he did not have time for input.
• The claim: The supplier invoked a contract clause. This stated that the customer could terminate the contract early, subject to payment of a “severance fee” of 60% of the remaining monthly amounts.
• The defense: The dentist refused to pay, arguing that this amount was excessive. However, the supplier argued that this was a “reciprocal termination clause,” which is the price for the right to get out of the contract, and therefore should not be reduced by the court.

The decision: requalification and mitigation

The Brussels Court of Appeal did not follow the supplier's reasoning in its judgment of September 20, 2024.

The Court found that the clause offered no real right of choice to the customer, but was primarily intended to deter the customer from not exercising the contract. Because the same 60% fee was payable in the event of any breach of contract, the Court held that this was in reality a damages clause and not a mere termination fee.

The consequence of this recharacterization is important: damages clauses are within the court's power of review. The Court held that 60% of the remaining invoices was excessive, as the supplier also saved costs (such as hosting and maintenance) through the discontinuance. The compensation was halved by the Court to 30% of the remaining monthly amounts.

Legal analysis and interpretation

This ruling goes to the heart of contract law and the fine line between a notice clause and a damages clause.

The distinction between a notice clause and a damages clause

In legal doctrine and case law (see, e.g., Cass. Sept. 6, 2002, C.00.0150.N), it is assumed that a notice clause is the price one pays for being allowed to unilaterally terminate a contract. Because this is the ‘price’ for a right, in principle the court has no mitigation power over it. A damages clause, on the other hand, is a lump sum compensation for damages for breach of contract.

Suppliers often try to circumvent judicial review by formulating damages clauses as termination clauses. The Court of Appeal pokes through this when the “choice” to terminate is actually illusory because of the deterrent amount.

Criteria for requalification

In this case, the Court used specific indicators to reclassify the clause to a damages clause:

1. Context: The contract was presented as irrevocable (“irrevocable term”).
2. Uniformity: Compensation was identical (60%) for both voluntary termination and faulty breach of contract.
3. Objective: The clause clearly had an imperative to sit out the ride, rather than provide a flexible exit option.

Old Civil Code vs. Civil Code (As of Jan. 1, 2023)

In the judgment discussed, the Court was still applying article 1231 old Civil Code because the contract predated 2023. Under that old regime, the court was allowed to mitigate if the amount manifestly exceeded the potential damages.

However, for contracts entered into after Jan. 1, 2023, the new Article 5.88 of the Civil Code is applicable. This article anchors judicial review even more firmly and modernly:

“Nevertheless, the court ... mitigates the damages clause if it is manifestly unreasonable , taking into account the damage and all other circumstances, especially the legitimate interests of the creditor.” (Art. 5.88 §2 CC)

What has changed? Whereas judges used to be sometimes straitjacketed by the “foreseeable damage at the time of contracting,” Article 5.88 now explicitly gives them leeway to test for manifest unreasonableness. The court may now look more broadly at “all circumstances,” including actual damages and the legitimate interests of the creditor (e.g., the deterrent effect to prevent default). This confirms the trend that excessive lump sums, detached from any reality, will not be tolerated.

B2B vs. consumer law

Importantly, the dentist in this case was considered a business because the website served his practice. Thus, he could not invoke consumer law (and the right of withdrawal). Nevertheless, general contract law (via the mitigation power) also provides a safety net for entrepreneurs against abusive clauses.

What this specifically means

This case law and the new legislation have direct implications for your contract strategy.

• For the buyer (entrepreneur/free profession): Are you facing a claim for a high severance fee for breaking a contract? Don't pay blindly. Even if the contract speaks of a “severance” or “termination fee,” a judge may intervene if the amount is “manifestly unreasonable.” A fee that serves only to punish you financially without commensurate damages stands a good chance of being mitigated.
• For the supplier: Merely renaming a clause to “severance pay” is not enough. If you include liquidated damages, make sure they are defensible as a reasonable estimate of your damages (including lost profits and administration, but excluding unincurred expenses). Under the new law, if you include a “manifestly unreasonable” clause, you risk the court reducing it to a reasonable amount (but never lower than that). A percentage of 30% to 40% is more likely to hold up in the courts than 60% or more.

FAQ: Frequently Asked Questions

What is the difference between a damages clause and a notice clause?
A notice clause is an amount you pay to buy the right to end the contract early. A damages clause is compensation for breach of contract. The main difference is that a judge can reduce a damages clause if it is too high, whereas with a pure notice clause, he usually cannot.

What is the difference between the old and new rules for damages clauses?
Since January 1, 2023 (Art. 5.88 CC), the court tests a damages clause against the criterion “manifestly unreasonable.” He looks not only at the damage, but at all the circumstances and the interests of the creditor. For older contracts, the test of “potential damage” (Art. 1231 old Civil Code) still applies, although in practice the outcome is often similar.

As a business owner (B2B), can I also be protected from high fines?
Yes. Although consumer law (which is very strict) does not apply, general contract law (both old and new) provides protection. Judges have the mandatory power to mitigate damages, regardless of whether you are a consumer or a business owner.

What should be the maximum amount of a severance payment?
There is no fixed legal percentage. The judge makes a specific assessment. In the case discussed, the judge found 60% too high and 30% reasonable. For new contracts, the King can theoretically set maxima for certain sectors through a Royal Decree (Art. 5.88 §4 CC), but the customary judicial test remains the norm.

Conclusion

The label placed on a contract clause is not sacrosanct. A supplier cannot camouflage an excessive penalty as a “termination fee” to sideline the courts. With the introduction of Article 5.88 in the new Civil Code, the gate is wide open for the courts to correct “manifestly unreasonable” clauses.