March 26, 2020 – In Lexence’s attempt to make a contribution, no matter how small, to slowing the spread of the corona virus, the first week of working at home resulted not only in a part-time job as substitute teacher, but also in many questions regarding failures to perform commercial contracts.
Resolving the problem: do it together
While the government’s measures aimed at combatting the virus have slowed the economy on the macro level, as a result of disappearing demand, supply problems or the complete lock-down in sectors such as leisure and the catering industry, on the micro level commercial contracts are being tested, as performance of the agreed purchase or supply obligations has sometimes become impossible due to the corona crisis.
In many of the cases that have come to my attention in the past week – ranging from cancelled events to difficulties in the supply of goods from Southeast Asia or from European countries or regions that have been locked down – clients were seeking legal advice in the event that no solution could be found in consultation with their counterparties about amending the contractual arrangements. Meaning a worst-case scenario. Jointly arriving at a reasonable solution and sharing the negative consequences was considered the best-case scenario. This is an approach that appeals to me, not only an average citizen, because no one has asked for this situation and because – keeping the words of our Prime Minister in mind – these times necessitate collectively solving problems more than ever before, but also as a lawyer, because that approach is supported in the law.
In my twenty-five years as an attorney, I have seldom heard the term force majeure used so many times as during the calls I conducted in the past week. This is logical: major forces are at work that cannot be influenced by the parties. However, whether the corona measures will always justify reliance on force majeure remains to be seen.
Force majeure according to the law
The premise in our law is that commitments by virtue of a contract must be performed. A party that attributably fails to do so forfeits compensation to the other party (Article 6:74 of the Dutch Civil Code (DCC)). The failure to perform must therefore be attributable if compensation is to be forfeited. Force majeure removes the attributability of a failure. Article 6:75 DCC says: “A failure to perform cannot be attributed to the debtor if the debtor is not to blame for it and cannot be deemed responsible by virtue of any law, a juridical act or generally accepted principles.” As a result of this, performance cannot be sought from the party failing to perform, and the failing party does not forfeit compensation to the other party. However, its counterparty may annul the agreement as a result of the failure to perform. When invoking the right to annul, attributability plays no part. In principle, a failure to perform is sufficient.
In the case of the corona measures, force majeure only applies if the party failing to perform cannot perform its commitment to the other party as a result of those measures. Sticking to the practical examples given above, this may involve a failure to supply goods under a supply agreement as a result of a corona-related import prohibition, or the cancellation of an event because the government’s measures simply prohibit it. If the commitment can be performed but a party is of the opinion that it may no longer be required to do so, because the measures entail much higher costs or because some other disadvantage is involved in the commitment, and the commercial premises intended by the parties when entering into the contract are no longer accurate, there is no force majeure in a legal sense. If the performance involves the payment of an amount, reliance on force majeure will seldom succeed.
Contractual force majeure
Commercial contracts often contain provisions concerning force majeure that deviate from the statutory provisions. This is permitted as Article 6:75 DCC is regulatory law and deviations are allowed. The wording of the statutory definition of force majeure is rather abstract and more favourable for creditors than for debtors, as a result of which debtors have an interest in stipulating a division of risks that is more to their advantage. When I draw up a contract for a party that I know that to be highly dependent on third parties for its performance, I often attempt to include the failure by a third party to perform, at least in good time, in the contractual definition of force majeure or, if this fails, to define force majeure as any circumstance beyond the debtor’s reasonable control. That definition is significantly broader than the definition from Article 6:75 DCC. (When I am drawing up a contract on behalf of the creditor, I usually say nothing about force majeure and prefer to rely on the law.)
If a contract contains a force majeure clause, whether the corona crisis qualifies as force majeure within the meaning of the contract and, if so, the contractual consequences attached to it remain to be seen.
As indicated, the law supports the idea that the parties to the contract should consult in a joint search for a reasonable solution when confronted with circumstances as a result of which performance in accordance with the premises and with the value relationship between the performance on each side that they had in mind when entering into the agreement is no longer possible.
The performance of a contract under Dutch law is governed by the principles of reasonableness and fairness. The parties to the contract must take each other’s legitimate interests into account. Reasonableness and fairness may necessitate renegotiations in the event of unforeseen circumstances, after which, if the parties fail to reach a consensus, they may request the court to amend or annul the agreement in part or in full (Article 6:258 DCC).
Foreseeability of a pandemic
Unforeseen circumstances occur within the meaning of Article 6:258(1) DCC when after an agreement is concluded, circumstances occur that the parties did not incorporate into the arrangements agreed in the contract. Although the corona pandemic is not the first pandemic in history – SARS and MERS have only just been overcome – application of Article 6:258 DCC does not really relate to foreseeability in that sense. What is concerned is that in their contract, the parties did not take the risk into account that a circumstance may lead to a serious disruption of the value relationship between the performance on each side. In my opinion, the corona crisis is such a circumstance.
Successful reliance on Article 6:258 DCC by a party to a contract requires that the circumstance that was not taken into account to be of such a nature that according to the standards of reasonableness and fairness, the counterparty may not require the contract to be maintained without amendment. However, the second paragraph of Article 6:258 DCC provides in this regard that an amendment or annulment of the agreement is not possible if, by virtue of the nature of the agreement or according to generally accepted principles, the circumstances must be at the expense of the party relying on them.
Application by the court
According to case law, the court is required to observe restraint when applying Article 6:258 DCC. In principle, an economic crisis as such is not an acceptable circumstance justifying amendment or full or partial annulment. Circumstances of that type must always be deemed a risk of doing business which remain at the expense of the party that is affected by them.
However, if, as a result of the corona measures, a party to a contract is no longer able to perform in accordance with the value relationship between the performance of each of the parties that was applied as premise when the agreement was entered into, then this is not a normal business risk that is borne by the party affected by it according to generally accepted principles. In that event, the injured party is entitled to an amendment or full or partial annulment of the contract.
Although the court must observe restraint in the application of Article 6:258 DCC, once it has overcome that obstacle it has considerable discretion to amend or annul the agreement. The article leaves the substance of the court’s decision to its discretion, but various types of amendments are imaginable, including temporary mutual suspension of obligations, complete annulment and various forms of partial annulment, all under any terms and conditions to be determined by the court. In its decision, however, the court must seek to align to the extent possible with the legal consequences already agreed between the parties.
When continuous supply agreements or other continuing performance contracts are involved, a temporary suspension of performance on both sides is logical, possibly followed by annulment, in part or otherwise, of the performance if there is no longer any sense in performance post-corona. In that case, the agreement can be continued once corona has been overcome. When a one-off event is cancelled, annulment is more logical, with Article 6:258 DCC making it possible to attach retroactive effect to the annulment; in this regard the authority to annul under Article 6:258 DCC goes further than the general annulment provision under Article 6:265 DCC.
It must be remembered that reliance on Article 6:258 DCC or the occurrence of the unforeseen circumstance as such does not relieve the debtor of its obligation to perform, nor give entitlement to any right to suspend performance. Without an amendment or at least partial annulment, the debtor will end up in default and will forfeit compensation pursuant to Article 6:74 DCC, unless the unforeseen circumstances also constitute force majeure and a lack of attributability of the default.
The division of risks initially agreed between the parties must be maintained, so that the amendment of the agreement does not place one party in a more favourable commercial position than the position as entailed in the agreement. Furthermore, any advantages – e.g. state aid to the sector – must be taken into account in any amendment of the agreement and must be weighed where applicable against the disadvantages resulting from the unforeseen circumstances.
Assistance in determining your position
It would be a pleasure for my team and I to help you determine your position in commercial contracts that cannot be performed as intended by the parties as a result of the corona crisis, and to assist in overcoming any impasse that may have arisen. Please free to contact me at the coordinates below.
About the author
This white paper was written by the attorney Pieter van Dijk. He is a partner with Lexence Advocaten & Notarissen N.V. and has provided legal assistance for many years to businesses in the retail, entertainment, food and technology sectors. He is specialised in commercial contracts, cooperative partnerships and joint ventures.