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Contract breach in (international) commercial contracts on the grounds of force majeure and unforeseen circumstances. What happens now?

dinsdag 9 november 2021

What are your rights if you have entered into an agreement and your company can no longer perform the obligations under the contract, through no fault of your company? 

In principle, when a party does not perform its obligations under a contract, this constitutes a breach of the contract, and if this breach results in damages for the non-breaching party, then the breaching party will need to pay damages to the non-breaching party. This is the basic rule. However, certain exceptions are regulated in the DCC to cover cases that are often not addressed in the terms of commercial agreements. These exemptions are further explained below.

Force Majeure

Force majeure is a situation where one of the contracting parties is unable to perform its obligations under the contract due to circumstances outside of its control. In the event that a situation is judged to be force majeure, this party can invoke the relevant clause in the contract or its statutory right under the Dutch Civil Code.

Under the Dutch Civil Code (DCC) article 6:75, force majeure is defined as being as any form of contract breach that is not attributable to the breaching party in the event that there is no fault, or accountability pursuant to law, legal act or generally accepted practice.

In order to qualify for this provision, the breaching party needs to prove the following:

  1. That there is a breach of contract;
  2. The breaching party is not at fault, and;
  3. The breaching party holds no accountability pursuant to the law, legal act or general accepted practice.

The above conditions are cumulative and need to be proved by the breaching party, i.e. the party that should have performed under the contract, and the facts and circumstances play a large role in determining whether the above qualifications are met.

Article 6:75 DCC is not compulsory law which means that parties can deviate from this provision by contract. Therefore, it is important to consult the contract that has been entered into to determine whether there is a force majeure clause in there, and whether Dutch law is applicable.

In the event that there is no such provision in the contract, the breaching party can rely on article 6:75 of the DCC.

Fault/Hindrance

The breaching party needs to be prevented or hindered from performing its obligations under the contract. This is the case where performance of the contract by the breaching party is impossible or practically impossible. The hindrance does not need to be absolute, and may be relative to the breaching party. Therefore, it is sufficient if the hindrance is such that performance is so detrimental for the breaching party, that based on reasonableness and fairness it cannot be expected that the contract should be performed.

Accountability

It may be that the party responsible for the contract breach cannot successfully invoke force majeure, even if there is no fault on the breaching party. Liability may also flow from accountability pursuant to the law, legal act or general acceptance. For example, it may be that there are certain guarantees in the contract or a disclaimer in the contract whereby the breaching party cannot invoke force majeure. Alternatively, it may be that, in certain sectors, it is not the norm to invoke force majeure in certain situations as there may be cover for the force majeure situation by way of insurance cover or standard accepted guarantees for that particular sector.

Effect of a force majeure

If the qualifications of 6:75 DCC are met, the party responsible for the contract breach is not liable to pay damages. Therefore, the non-breaching party cannot claim any damages as a result of the breach of the contract. The contract may be suspended (article 6:262 DCC) in the event that the force majeure situation is temporary by nature. The suspension will cease once that party can resume its obligations.

The contract may be rescinded (article 6:265 DCC), in which case there is an obligation of both parties to undo their performance under the agreement. Please be aware that suspension and recission of the contract may be excluded in the contract or its applicable General Terms and Conditions. 

However, please note that the principle of reasonableness and fairness prevents a party being placed in a better position than they would have been in if the contract was performed according to its terms. If this does happen, then the other party can claim for unjust enrichment.

International Sale of Goods Convention

If the commercial contract is entered into with a professional party that is registered in or trading from another country, then it may well be that the Vienna Convention (UN Convention on the Sale of Goods (CISG)) is applicable to the contract in addition to the applicable law chosen by both parties. This depends on whether the relevant countries of the contracting parties have ratified the CIGS. The CIGS contains a provision (article 79 CIGS) for force majeure which supersedes article 6:75 DCC in the event that Dutch law is applicable and parties have not excluded the CISG in their international contract.

Unforeseen circumstances

In the event that the breaching party does not have the protection of force majeure either by contract or by law, then the breaching party may be able to claim successfully under article 6:258 of the DCC which deals with unforeseen circumstances.

Again, this provision under the DCC is not compulsory law meaning that this right can be regulated in the contract. Therefore, the breaching party should consult the contract first. In the event that there is no such provision in the contract, then 6:258 DCC may be invoked.

In order to qualify for this provision under the DCC, the following needs to be proved by the breaching party.

  1. The unforeseen circumstances have to take place after the contract has been entered into.
  2. The Parties have not covered this event in the commercial contract.
  3. The event is so serious that the suffering party cannot reasonably be expected to meet the conditions of the contract.
  4. The event is so unique that it cannot be considered to be the normal commercial risk of a business enterprise.

Consequences of unforeseen circumstances

Again the principle of unforeseen circumstances is also governed by the principle of reasonableness and fairness. The court has the authority to vary the contract in the event that unforeseen circumstance is applicable in addition to the right to (partly) revoke the agreement, provided that such a request is filed with the court. The general consensus is to apply the “share the pain” principle advocated by Prof Tjittes regarding unforeseen circumstances as cited in a judgment or the Netherlands Commercial Court where the focus is to preserve the parties” contractual equilibrium in the current circumstances despite the unforeseen circumstances. The court in this instance agreed that this was the correct approach, but the court in this instance did not apply this principle. The case related to a company that wanted to purchase 50% of the shares in another company. The agreement contained a break-up of Euro 30 million. The judge awarded full payment of the break-up fee because “the harm to the buyer – paying the Euro 30 million as agreed – is outweighed by the harm the seller faces. Viewed in this way, the fee is a modest contribution by the electing party to help the non-electing party deal with the crisis”.

Information

As becomes apparent from the above, in the case of contract breach there are many steps to be taken by your attorney in order to determine your rights and also remedies. Please contact Madelon van Breemen.

Madelon van Breemen

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