Legal Alerts / 3 Oct 2012

Legal Alert – Index Clauses In Contracts Allowed As Of 2013

On September 25th, the Finnish Ministry of Finance announced that the Act on Index Restrictions in Contracts (1195/2000) (“Act”) will not be extended after December 31st 2012. The Act will thus still be applied to contracts which are concluded during 2012.

Generally, Finnish contract law follows the principle of nominalism whereby changes in the value of the currency between the contract and its enforcement or performance are not taken into account. This would call for separate index clauses where, following inflation, the nominal value of the contract would adjust automatically based on a contract clause or stipulation. However, previously under the Act, use of such index clauses has been denied due to their perceived negative impacts and effects on e.g. price stability and inflation. The Act has been in force since 1968. Some benefits and payments have nevertheless been tied to the index by legislation, e.g. pensions, maintenance allowances and lease agreements which are valid until further notice or at least for three years.

Until now, the restriction has applied only to contracts, which means that the index clause has been allowed if it was based on e.g. a will, statute of associations or court decision. Further, e.g. international contracts which have concerned the sale or purchase of goods or services to or from abroad have been exempted from the scope of the restriction. The Ministry of Finance has been able also to grant an exemption based on application . The exemption procedure enabled inclusion of an index clause in an individual contract or multiple contracts, which are based on a standard contract irrespective of its term, if deemed reasonable.

The motivation for not extending the validity of the Act was based on the changed environment and nature of monetary policy. As a member state in the Euro area, Finland has to follow the general target level of low inflation which renders the original purpose of the Act somewhat unnecessary. The Ministry argued that in the long run, inflation in Finland, exceeding the average inflation in the Euro area, would be unsustainable. Some in favor of maintaining the Act stated, however, that allowing index clauses could accelerate inflation despite of the change in monetary policy.

Restraining from extending the Act means effectively that all contracts which are concluded as of the start of 2013 may include an index clause. Accordingly, index clauses can be included in fully domestic contracts as well as transactions.

Share on LinkedInTweet about this on TwitterShare on Facebook