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Dissolution of contract: What is a reasonable period for performance?

donderdag 9 januari 2020

Suppose your contracting party does not deliver the quality you had agreed, how much time should you give them to improve their performance? In other words, when can you say: "I have lost my patience and I want to dissolve the contract"? These questions were addressed in the judgment Fraanje vs. Alukon (ECLI:NL:HR:2019:1581) of the Supreme Court on 11 October 2019. An important judgment in the field of contract law, in particular for parties who are dealing with an opposing party who does not fulfil his obligations under the contract.

When can a contract be dissolved?

Dutch law includes article 6:265 of the Dutch Civil Code as a starting point for the dissolution of a contract. By virtue of this article any failure of a party to fulfil one of its obligations gives the other party the power to dissolve the contract in whole or in part. This unless the failure, in view of its special nature or minor importance, does not justify this dissolution and its consequences. Paragraph 2 of this Article adds that where performance of the contract is not permanently or temporarily impossible, the power to terminate the contract only arises when the debtor is in default. If no time limit has been set for the performance of the contract, according to Section 6:82(1) of the Dutch Civil Code, default only commences after the debtor has been put in default by means of a written reminder - whereby a reasonable time limit for performance has been given - and performance is not effected within this time limit.

Fraanje vs. Alukon: legally valid dissolution of contract?

In the case of Fraanje vs. Alukon, Fraanje has, as general contractor, among other things ordered frames and glazing from subcontractor Alukon for a new sports park to be built by Fraanje in Goes. Initially Alukon delivered too late and subsequently not the quality agreed upon by the parties. Correspondence between Fraanje and Alukon takes several months and discussions take place about the, according to Fraanje, non-timely and qualitatively unsatisfactory performance of Alukon. Subsequently, Fraanje dissolves the agreement. According to both the District Court and the Court of Appeal, this dissolution is not legally valid because Alukon is not in default. Fraanje allegedly set unreasonably short deadlines for performance, which meant that there was no default and the agreement could not be dissolved. Fraanje did not leave it at that and appealed to the Supreme Court. The Supreme Court ruled that the Court of Appeal had not done its work properly, annulled the judgment of the Court of Appeal and went into the doctrine of default in detail.

Notice of default in the event of failure to comply with contract agreements

What's a notice of default? According to Section 6:82 of the Dutch Civil Code, a written statement containing a reminder (summons, notice) to perform in accordance with the agreements in the contract within a reasonable period indicated in the statement.

The purpose of the notice of default is to give the debtor a final term for performance of the contract. If the debtor does not comply with the notice of default, the default shall take effect at the time indicated. The length of the term for performance of the contract to be given to the debtor depends on the circumstances of the case.

The Supreme Court notes that the relevant circumstance to be taken into account is how much time the debtor has had to prepare himself prior to the reminder. Deadlines set earlier and any earlier summonses may therefore, in the opinion of the Supreme Court, be important in assessing the reasonableness of the period referred to in the reminder. If earlier periods have been set or a summons has been sent, the period given in the final notice of default may be shortened, after which the debtor will be in default.

Default without notice of default

Default may also occur without notice of default. Article 6:83 of the Dutch Civil Code lists three cases in which default occurs without notice of default, but this is not an exhaustive list. It is therefore good to know that invoking the absence of a notice of default can be unacceptable according to standards of reasonableness and fairness. In a number of judgments it was even concluded that a notice of default could be omitted altogether and that the debtor was in default due to the circumstances without a notice of default.

Absence of debtor in case of inadequate response

The Supreme Court considers that the debtor's default may also occur if the debtor does not respond or does not respond adequately to a request by the creditor to undertake to perform within a set, also reasonable, term. Default may also arise where the debtor fails to make a statement within a reasonable time as to how and when he will remedy defects in the performance of the contract as described by the creditor. What constitutes a reasonable period of time for the debtor to make a statement in that regard depends on the circumstances. Whether or not the set period is customary in the industry in which the parties are active may also play a role in this respect.

The requirements that may be attached to the creditor's response also depend on the circumstances. According to the Supreme Court, one of the important factors in this respect is how concretely the creditor has indicated the defects to be remedied and how specifically he has insisted on notification from the debtor. Subsequent facts and circumstances (such as communications) may also be relevant when assessing whether the creditor has been able to deduce from the debtor's reaction or attitude that the debtor would not perform or would not perform on time.

Legal rules on notice of default and default

However, perhaps the most important consideration of the Supreme Court is that set out in paragraph 3.2.2 above. which states that the statutory provisions on notice of default and default in Sections 6:82 and 6:83 of the Civil Code are not so much strict rules that must be applied by the creditor according to the letter of the law, but should rather be seen as a guide; 'The purpose of these provisions is rather to enable the court to reach a reasonable solution in cases where the parties - as is usually the case - have acted without detailed knowledge of the law, in accordance with what could reasonably be expected of them in the given circumstances'. In fact, this is a solid deformalization of the legal rules regarding notice of default and negligence and gives the jurisprudence ample opportunity to colour a case with "the circumstances of the case", which is a very open standard. The Supreme Court has referred the case of Fraanje vs. Alukon to the Court of Appeal of Arnhem-Leeuwarden for further consideration and has given it the clean task of taking all circumstances of the case into consideration and weighing them against the interests of both parties. To be continued.

Do you have questions about an opposing party who does not fulfil his contract or delivers too late and do you want to get rid of the contract? Please feel free to contact Michelle Reevers for further questions. Tel: 010-2092775 or email: reevers@lvh-advocaten.nl.

Michelle Reevers

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+31 (0)10 209 27 75
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Peter Verheijden

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