Enterprise & Business
Commercial end-user contracts
Commercial contracts may also relate to the sale of products and/or services. In this category you have direct sales and indirect sales agreements.
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GESPECIALISEERDE ADVOCATEN
Dit zijn onze advocaten die gespecialiseerd zijn op dit gebied.
Rob Steenhoek
Fiscal support measures during Corona crisis
On the 17th March 2020, the Cabinet announced a large number of measures. These measures are aimed at supporting companies and freelancers. The measures include measures to maintain employment on the one hand and measures to ensure that companies do not go bankrupt and that self-employed people can maintain an income on the other hand.
The package of measures includes the following elements:
– A reduction in employers’ wage costs to avoid redundancies
– Temporary income support for the self-employed
– Relaxation of tax deferrals
– Increase in the guarantee for business financing
– Interest rebates for loans contracted with Qredits
– Widening the guarantee for SMEs – Agricultural Credits
– Extension BMKB scheme
– Open emergency counter for entrepreneurs in affected sectors.
What can LVH’s lawyers help you with?
We can advise you on all measures. Ultimately, most measures are measures that have an effect and offer support in the somewhat longer term.
Measures that may have an immediate effect
Postponement of payment
In the short term, the measure of requesting deferral of payment of the various taxes in particular has a direct effect. This measure makes it possible to request deferral directly. It frees up resources that can be spent on keeping the company afloat.
Reduction of provisional assessment
At the beginning of the year, a large number of companies were subject to a provisional assessment of income tax (for IB entrepreneurs) or corporate income tax. This assessment relates to the tax year 2020 and is based on an expected profit for the year 2020. For a large number of the companies that have received such an assessment, it now appears that, as a result of the corona crisis, they will make no or significantly less profit than previously estimated. On this basis, the provisional assessment can be reduced.
If the amount of the provisional assessment has already been paid, the reduction will result in a refund.
We would be pleased to discuss with you which measures can help you further and how we can support you in doing so. For questions and/or advice you can contact David Harreman via harreman@lvh-advocaten.nl or 010-2092756.
Terminating a commercial contract
This article will explain in which way commercial agreements can be terminated under the Dutch Civil Code (DCC).
The general rule in the Netherlands is that there is substantial freedom of parties to enter into an agreement. There are however specific agreements such as rental agreements, employment agreements, agency agreements and franchise agreements, referred to as specific agreements in the DCC where additional rules are set out. In the event that you are contemplating the cancellation of specific commercial contracts, as referred to above, then there are specific provisions regarding termination that need to be adhered to. Furthermore, the DCC makes a distinction between compulsory law and regulatory law, meaning that if a provision in the DCC states this is compulsory law, the article in the DCC is overriding to anything agreed to between the parties by way of a contract.
In this article I will deal with the non-specific agreements as regulated within the DCC, and how these type of agreements may be ended under the DCC.
Parties may agree to terminate the legally binding commercial agreement by:
- Cancelling the agreement in accordance with the terms as set out in the agreement entered into between the parties. For example, this could be by way of an agreed notice period set out in the agreement. Termination is also possible, where both parties agree to terminate the agreement based on mutual consent.
- Contracts for a fixed term – with or without an early termination clause – are generally regulatory law, meaning there is substantial freedom to contract. Agreements such as these can be terminated in accordance with the terms of the agreement, provided they are sufficiently clear and also provided the terms are complied with.
- Terminating a commercial contract with an indefinite term which does not contain a provision regulating the termination of the agreement is also possible, but only in accordance with the rules set out by the Supreme Court. However, such termination may require a certain notice period based whereby there are sufficient grounds based on reasonableness and fairness that a notice period for termination is required or where damages need to be paid to compensate the non-terminating party for their loss. This can be quite tricky especially as parties need to agree on a reasonable notice period, and each party has a different interest. For example a distributor will have greater interest in a longer termination notice to compensate for the loss than the principal.
- Rescission, which is regulated in 6:265 DCC is also a ground for termination. Recission is where the contract is cancelled and parties are placed in the situation where the performance of the commercial contract is reversed. For example where goods have been delivered, and they are returned. However, there are situations where this is not possible and then the other party is awarded damages. The above-mentioned article dictates that there must be a breach of the agreement, and this breach is such that it justifies recission of the agreement, so it needs to be a material breach. The breach is such that it cannot be remedied, either temporarily or permanently or where the party is in formal breach as set out in article 6:82 and 6:83 DCC. For example when a fatal deadline has been exceeded or where the party has been notified to be in breach and has not remedied the breach within a certain time-limit. An agreement can be rescinded by obtaining judgment of the court or by way of an extra-judicial declaration of rescission. Rescission is not compulsory law and is therefore often excluded in commercial contracts, so please check the commercial contract.
- Revocation, which is where parties are put in the situation as if the commercial contract had never existed. This is a strict legal principle, where the intent to enter into the agreement was not correct. Under the DCC there are four grounds for revocation of the agreement. These grounds are mistake, threat, deception and abuse of circumstances.
Damages are due and payable in the event that one of the parties is in formal breach. The DCC sets out what is considered to be damages, and this includes material loss and other loss. Contractual damages is regulated in article 6:95 to 6:106 DCC and is not compulsory law, which means that parties can deviate from this by agreement. Material breach under the DCC includes loss and loss of profits. Reasonable costs for mitigating the damages as well as reasonable costs to determine or limit damage and liability and extra-judicial legal costs to determine the damage and extra-judicial costs to exercise your rights. Furthermore, article 6:101 DCC states that in the event that the person suffering damage has contributed to the damages due to his or her own fault, then the damages awarded may be reduced by this amount.
Legal advice on terminating international commercial agreements
Again, if your business enterprise is contemplating cancelling an existing commercial contract, the above shows you how important it is to do this correctly from a legal point of view.
If you have any questions, please feel free to contact Madelon van Breemen.
Bill on Homologation Private Placement Significant change in insolvency law is imminent
A very important change in insolvency law is imminent. This change concerns the possibility of a debtor’s offering a composition to creditors. In the current situation, there is only an arrangement for the compulsory imposition by the court of an arrangement with creditors in suspension of payments or bankruptcy. In the Bill on the Homologation of Private Agreements (WHOA), the possibility has been included that a compulsory composition without a moratorium or bankruptcy can be concluded. This will drastically change the possibilities for resolving problematic debts. This change is important for debtors, but also for their providers of capital, such as creditors and shareholders.
Changes to insolvency law in the area of composition with creditors
In Dutch insolvency law, the main focus is still on bankruptcy. Most suspensions of payment end in bankruptcy. Bankruptcy is aimed at liquidating the debtor’s assets. In only a few cases is an arrangement offered and approved (homologated) by the court.
Scientists and the government have been thinking for some time about ways of enabling debtors to restructure problematic debts so that there can be continuity instead of liquidation. In this respect, inspiration has been drawn from foreign regulations, such as the chapter 11 procedure of the United States Bankruptcy Code. In 2014, there was the preliminary draft of the Continuity of Enterprises Act II in the Netherlands, which also provided for a compulsory arrangement other than suspension of payments and bankruptcy. In July of this year, the European Directive ‘Preventive Restructuring Schemes’ came into force. This Directive obliges member states to introduce pre-insolvency proceedings within two years. As a result of the Directive, amendments have been made to the Dutch bill. The bill was submitted to the House of Representatives on 5 July 2019.
Homologation agreement outside suspension of payments and bankruptcy
The WHOA provides that a debtor may offer a settlement if he ‘is in a condition where it is reasonably likely that he will not be able to continue to pay his debts’. In this situation, any creditor and shareholder, as well as the debtor himself, can apply to the court for the appointment of a restructuring expert, who can then offer a settlement. As long as the expert is appointed, the debtor himself cannot offer a settlement.
The proposed arrangement will entail a change in the rights of the parties concerned (creditors and shareholders). For example, a creditor will have to accept only partial payment of his claim. The parties concerned are divided into classes and are entitled to vote on the arrangement. It would be going too far to go into the details of this now, but it is important to note that under circumstances a minority in a class that votes against can still be imposed on the arrangement for the reason that the majority has agreed to it. It is also possible under certain circumstances that a class that votes against can still be imposed the agreement by the court. This is called cram down.
Introduction of legislative changes to debt restructuring
As already mentioned, the WHOA is under discussion in the House of Representatives. Whether the law will be introduced in the form of the current proposal cannot be predicted, but due to the fact that the European Directive must be implemented by July 2021 at the latest, it is clear that drastic changes to insolvency law are imminent.
If you have any questions about restructuring and creditor agreements, please contact one of our insolvency lawyers.
Directors and officers liability towards third parties: The Beklamel-Standard
The corona crisis can cause difficulties for your company. It may not be able to supply all its customers with products, pay all its suppliers on time or otherwise fail to meet its obligations towards its contracting parties and other third parties. As a director of such a company, you may wonder which agreements you can still enter into and which risks you can still take with a view to the continuity of the company you manage.
On top of this, the question may arise as to whether the decision you take may have consequences for your private situation. Can a situation arise in which you are held personally liable for debts of the company?
As a director of a legal entity, you are in principle protected against liability for the company’s debts towards a contracting party or other third parties. However, this protection is not absolute. In some cases, the liability of the company may be transferred to you as a director, so that you are personally liable.
Director’s liability towards third parties
As a director, you may be held liable by the company itself, by the receiver in the company’s bankruptcy estate, but also by creditors of the company. This article discusses this third form of directors’ and officers’ liability.
What is the Beklamel standard?
In principle, directors’ and officers’ liability always requires that the director himself or herself is personally and seriously at fault. The Supreme Court has ruled that there can be such a serious personal accusation if the director is accused by a creditor of having entered into obligations in the name of the company towards the creditor when he knew or should have known that the company would not be able to meet its obligations and would not be able to recover the damage suffered by the creditor as a result. The Beklamel standard is this standard formulated by the Supreme Court for the acceptance of a personal serious accusation, on the basis of which directors’ liability can be established.
The application of the Beklamel standard
As a director, it is therefore important that you do not enter into such obligations on behalf of the company. It is understandable that, especially at a time like this, this can cause a director concern. As a director, are you still allowed to make risky decisions? When will you know, or should you know, that the company will no longer be able to meet the obligations you enter into? In some cases, difficult decisions have to be made, but if this can lead to personal liability, you as a director may be deterred from doing so. The following are therefore some examples of the application of the Beklamel standard in legal practice. The aim is to show how the Beklamel standard is applied in practice so that the somewhat cryptic description of the Supreme Court becomes more tangible.
1. Hopeless situation and insufficient continuity perspective in the case of directors’ and officers’ liability
In the case of a company which, clearly for the director, was in dire straits and placed new orders while in the meantime older invoices were left unpaid, the judge ruled that the Beklamel standard had not yet been met. There was no serious personal accusation to be made against the director. The judge ruled that personal liability requires that the company is in a hopeless situation at the time of entering into the obligation and actually has insufficient prospects of continuity.
The latter criterion was also used in a judgment from 2006, in which the court ruled that the circumstance that the company on whose behalf the commitment was entered into had negative equity capital and the parent companies and subsidiaries associated with this company also had negative equity capital does not yet mean that there was a hopeless situation and an insufficient continuity perspective. This required additional circumstances, which were lacking here. The director was not personally to blame.
2. Complaint standard and serious personal blame
A ruling from October 2019 concerned a case concerning directors who had already been involved in several bankruptcies. They always made use of several interconnected companies that at first sight looked alike, with one company being used to win orders and collect amounts of money while the obligations were entered into by another company and subsequently not complied with. In this situation, the court logically ruled that the directors were personally to blame and personally liable for the debts.
3. Complaint standard and obligations towards creditors
The court ruled in 2008 that the fact that the liquidity position of the company in question was precarious and the tax authorities had seized the ground does not necessarily mean that the director should know that the company will not be able to fulfil the obligations it has entered into, at least not within a reasonable period of time. However, at the time when the company no longer complied with the settlement with the tax authorities, this company (and also its director) had to assume that the tax authorities would proceed with the enforceable sale of the goods affected by the seizure of the land and that, as a result, it would have to discontinue its business operations. From that moment on, the court ruled, the director should reasonably have known that the company would no longer be able to fulfil its obligations towards its creditors entered into after that date. The director was personally liable for the damage suffered by the creditors in question.
Taking entrepreneurial risk does not lead to personal liability
The text of the Beklamel standard is sharper than its application in practice. Moreover, it is not always the case that where there is smoke, there is also fire. At least, that is difficult for creditors to prove. As a director, you therefore need not fear that taking a – not even negligible – entrepreneurial risk may lead to your personal liability. According to case law, restraint is required in deciding whether the director knew or should have known that the company would not be able to fulfil the obligations entered into. The mere knowledge of a risk is not sufficient for directors’ and officers’ liability. However, if at the time of entering into the obligations the management board member knew or should have known that the risk would turn out incorrectly and the company would not be able to recoup the damage suffered as a result, he can be blamed personally and severely. In that case, the director should not have taken the decision and should not have entered into any obligations. If a company is in a critical phase, the dividing line is thin and it is wise to obtain legal advice on whether you still have to conclude a certain agreement and to what extent there is a risk of private liability.
Lawyer director’s liability
Do you have questions about your director’s liability or your risk as an entrepreneur? Please feel free to contact Justin de Vries for further advice.
You can find more corona information in our helpdesk.
Liability for acting on behalf of a private company in formation
Legal acts can already be performed on behalf of a private limited company in incorporation. However, caution is required, because the person who has performed the acts on behalf of the B.V. under formation may be personally called upon to fulfil the obligations entered into.
First, I will go into the legal regulations and then discuss a recent example from the jurisprudence.
Statutory regulation acting on behalf of B.V. in formation
Legal acts can already be performed on behalf of a private limited company in incorporation. The company can only become bound to this if it ratifies the legal acts after its incorporation. The ratification can take place explicitly or tacitly. As long as no ratification has taken place, the persons who performed the legal act on behalf of the private limited liability company to be incorporated will remain jointly and severally bound, unless expressly stipulated otherwise. The term ‘jointly and severally liable’ means that all connected parties may be sued by the creditor for the full amount.
The Arnhem-Leeuwarden Court of Appeal has rendered a judgment on this arrangement. It concerned the following.
Case: no confirmation of a legal act performed on behalf of B.V. in formation.
On behalf of a B.V. in formation, lease agreements have been concluded concerning vehicles. The person who performed these legal acts on behalf of the B.V. under formation (hereinafter referred to as ‘the intended driver’) has hereby stipulated that a third party (a Swiss company) is jointly and severally liable for the obligations arising from the agreements.
The B.V. is ultimately not incorporated and therefore no ratification can take place. The lease company appeals to the intended director.
The intended driver defends himself by stating that it has been expressly stipulated that he is not jointly and severally liable. This would appear from the agreement that the Swiss company guarantees compliance with the obligations. The Court had to assess whether this defence was valid.
Liability for juridical act performed on behalf of B.V. in incorporation, despite stipulated guarantee of third party
The Court of Appeal is of the opinion that the fact that it has been stipulated that the third party is jointly and severally liable does not mean that the intended director has stipulated that he is not (also) liable. If the proposed director had wished to stipulate that he is not liable, he should have done so explicitly. He is therefore ordered to pay to the lease company.
If you wish to exclude liability for legal acts on behalf of a B.V. under formation, you must explicitly stipulate that you are not liable.
This shows that a great deal of caution is required when acting on behalf of a company to be incorporated. If the person performing the legal act on behalf of the B.V. under formation wishes to exclude that he is (jointly and severally) associated, he must explicitly stipulate so.
Should you have any questions about legal acts on behalf of a B.V. in formation, please contact one of our corporate lawyers.
Request for debt restructuring and Corona: the tax collector thinks along
Request for debt restructuring and Corona: the tax collector thinks along
Requests for restructuring of tax debt
Until further notice, the Tax Authorities will approach requests for restructuring of tax debts with a flexible attitude. This applies in particular to requests from entrepreneurs whose businesses are fundamentally sound and who have been affected by the Corona crisis. For these entrepreneurs, the generous corona deferral policy may prove to be of no avail. But other entrepreneurs are also eligible for the more flexible approach. The flexible approach applies to all tax debts.
What does the flexible approach entail?
An important condition for the restructuring of tax debts is the existence of a viable enterprise. Whether this is the case must be assessed by an external party deemed suitable. This party should be the bank, an auditor or a restructuring expert. The assessment will include a forecast of the capacity to meet the costs of running the business, (re-)financing the business and the company’s remuneration. In addition, the forecast must show that the costs incurred during the reorganisation can also be paid. In some cases, the recipient may investigate the viability on his own initiative.
Entrepreneur cannot pay the tax debt
In addition to the fact that a viable enterprise must be present, it must also be shown that the entrepreneur is not or not fully able to pay the tax debts. Not even with the help of the generous deferral scheme in connection with the corona crisis. It should be noted, however, that the tax debt for which the restructuring is requested may not have arisen as a result of serious culpable acts or omissions on the part of the entrepreneur.
What is a debt restructuring proposal?
There is a reorganisation proposal. This means that unsecured creditors must also agree to the restructuring of the debts to those creditors. Only when that condition is met and the offer to the recipient is substantial and at least double the percentage offered to the unsecured creditors, can one speak of reorganisation of the debts.
How can the reorganisation be requested?
A request for debt restructuring can be submitted to the tax authorities using a prescribed form. A request will only be processed if it is actually complete. If the request is not complete, the tax collector will give the applicant 90 days to complete or rectify it.
What does a request for remediation comprise?
A complete request for restructuring includes, in addition to the prescribed form, a positive external assessment of the viability, an agreement from all creditors, a motivated statement from the entrepreneur about the cause of the financial problems and a liquidity forecast for the next 24 months. If the entrepreneur is also included in the COVID-19 deferment scheme and the associated payment scheme, the forecast must show that this payment scheme will also lead to the full payment of the tax debts.
When will a request for restructuring be granted?
A complete request will be assessed by the recipient, whereby the recipient may also examine the viability of the enterprise. If all conditions are met, the recipient will grant the application. The tax collector will reject the request if there is evidence of bad faith on the part of the taxpayer. In addition, the tax collector will reject the request if during the application no new obligations have arisen, the required declarations have not been submitted, there are multiple taxpayers, the taxpayer has been granted a moratorium on payments or is in a state of bankruptcy, and/or the Dutch Natural Persons Debt Rescheduling Act (WSNP) applies to the taxpayer.
In addition to a request for restructuring for a company that is being continued, the tax collector can also process a request for restructuring if there is a desire to terminate the company.
Granting the request for reorganisation
If the request meets the conditions and the recipient agrees with the request, the recipient will grant the reorganisation by means of a decision. This decision includes the condition that the reorganisation amount must be paid in one lump sum. In addition, in specific cases, it is possible to request a payment scheme in which the agreed amount is paid in 12 equal monthly instalments.
When can the decision be revoked?
The decision to grant remission is a conditional decision and can be revoked if it appears that the entrepreneur provided incorrect information which he knew or should have known was incorrect, if the entrepreneur is declared bankrupt, is granted a suspension of payments or is admitted to the WSNP. In addition, the decision can also be withdrawn on the basis of other conduct on the part of the taxpayer. For example, not meeting the tax obligations and not complying with the payment scheme for the agreed amount.
The tax collector can, however, give the entrepreneur the opportunity to rectify the shortcomings within a certain period of time.
In the end, a nice arrangement has been made whereby the recipient has the motto: in case of doubt, grant. Although collecting in case of doubt is not always the most sensible thing to do, at times it may be really necessary to try and avoid bigger problems.
Need advice from a lawyer in Rotterdam?
Do you have any questions about the collection rules regarding the tax debt arising from the corona postponement? Then please contact our lawyers Rob Steenhoek and David Harreman.
The shareholders’ agreement: what if agreements are not kept?
In my previous contributions “A shareholder agreement to make your startup investor-proof” and “The shareholder agreement: some practical tips” I already wrote about the usefulness and necessity of the shareholder agreement. In order to avoid conflicts with, for example, future investors, it is wise to make good agreements about the cooperation. Not only agreements about the positive aspects of the cooperation, but above all agreements about what should happen if the cooperation does not go as expected.
The inclusion of such agreements in a shareholder agreement is important. But what if one of the parties refuses to comply with the agreements in the shareholder agreement? This scenario must also be taken into account when drawing up a shareholder agreement.
Penalty clause in the shareholder agreement
A self-evident way of enforcing compliance with agreements from the shareholders’ agreement is the inclusion of a penalty clause. A penalty clause is a clause stipulating that the party who fails to fulfil his or her obligation is obliged to pay a sum of money (or another performance). A penalty clause can serve as compensation for any damage or only as an incentive to perform. If a shareholder, who is a party to the shareholders’ agreement, violates an agreement in the shareholders’ agreement, it is possible for the other shareholder(s) to enforce a fine. Very high fines are often agreed upon, which in principle also have to be paid. However, at the request of the shareholder who has to pay the fine, the court can, if fairness so requires, mitigate the stipulated fine. This follows from Article 6:94 of the Dutch Civil Code. However, this power of moderation is applied with restraint. It is not possible to contractually exclude the reliance on moderation.
Agreements from shareholders’ agreement also valid after transfer of shares?
Shares can be transferred to other parties in different ways. This can be via general title or via special title.
Transfer of shares under general title
One obtains goods under ‘general title’ among other things by partition, merger or division of the estate. If shares are transferred by universal title, the obligations arising from the shareholders’ agreement follow the shares in question. In this way, the penalty clause, with a few exceptions, will also apply to new shareholders.
Transition of shares under special title
Shares may also be transferred by ‘special title’. A transfer by special title includes the sale or purchase of shares. In the case of the sale of shares by special title, the obligations arising from the shareholders’ agreement may not, as in the case of general title, be enforced against the new shareholder. This therefore also means that the penalty clause cannot be invoked against the new shareholder. This is an unfavourable situation for the incumbent shareholders.
Chain clause in the shareholders’ agreement
The situation that a new shareholder cannot be held to the agreements in the shareholder agreement can be prevented by including a chain clause. By including a chain clause in the shareholders’ agreement, it is hoped that the current shareholder will also impose the obligations from the shareholders’ agreement on the shareholder who has purchased the shares (and then the new shareholder will also impose them on his legal successor, if any). The shareholders are thus obliged to ‘pass on’ the shareholders’ agreement and the obligations arising from it. Incidentally, when including a chain clause, it is advisable to agree on a penalty in the event that the shareholder who sells his shares does not comply with the chain clause.
Enforcing compliance with shareholder agreement obligations
This article provides various practical recommendations for enforcing the obligations arising from a shareholder agreement. However, many issues have not yet been discussed, such as the effect of the shareholder agreement and the non-competition clause. It is advisable to seek expert advice when assessing a shareholder agreement. Do you have questions about the shareholders’ agreement or other company law issues? If so, please contact Justin de Vries.
Michelle Reevers
Dissolution of contract: What is a reasonable period for performance?
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.
Justin de Vries
Gentia Niesert
When does a commercial agreement become a legally binding agreement?
It may be that your commercial enterprise was still negotiating the terms of a commercial contract and the negotiations did not result in an agreed written contract. At least that is what you thought until you received an invoice. When does a commercial agreement become legally binding according to the Dutch Civil Code (DCC)?
An agreement is constituted by offer and acceptance, after an offer has been made which has been accepted (article 6:217 – 6:225 DCC).
This seems to be quite straightforward, but a lot of discrepancies can arise between an offer and acceptance, in addition to confusion as to whether the offer was a legally binding offer, or whether the acceptance was a legally binding acceptance. Under the DCC there are 3 requirements that need to be met before an offer or acceptance is legally binding and after which they constitute a legally binding agreement. These relate to the intention of the party making the offer, the manner in which it is declared and the alignment between the offer and the acceptance. Intention, declaration and alignment of the offer/acceptance all need to be in accordance with the legal requirements in the DCC and subsequent case law.
In order to establish whether the offer and the acceptance are aligned, the offer needs to be directed to the party for which it is intended. The offer and acceptance both consist of an intent and of a declaration which has been disclosed and has been understood by the receiving party in the same way as how it was intended by the disclosing party, based on the circumstances that the receiving party could reasonably have understood (3:33 and 3:35 DCC). The declaration is form free (3:37 DCC), so this can be verbally or in writing.
The alignment of the offer and acceptance is often the reason for a dispute between the parties, because of the parties have understood the offer or acceptance to have been something different. For example, you are contemplating selling your company and a buyer has appeared wanting to buy your company subject to certain terms and conditions to be agreed upon during the discussions. It may be that an agreement is in place already, and negotiations have not started yet or have not started at all. A consequence for the seller may be that he may no longer be permitted to sell the company to another party. A consequence for the buyer may be that he is under a duty to pay the purchase price plus delivery of what is being sold.
In some situations it may happen that the negotiations break down, and then the question is what are the consequences of stopping the negotiations?
There is set case law on this originating from Plas/Valburg where the Supreme court defined three defined pre-contractual stages, being the following:
- The negotiations have broken down without any obligation to compensate the costs of the other side.
- The negotiations have progressed to such a stage that stopping the negotiations would lead to substantial costs being incurred. In this stage, damages are due and payable by the withdrawing party.
- The negotiations are in such an advanced phase that stopping the negotiations would be in breach of good faith. The parties may each rely on the fact that the negotiations would have resulted in an agreement. The withdrawing party is then under an obligation to pay the costs incurred by the other party and in some cases even loss of profit.
This judgment had an enormous impact in the legal world and resulted in a draft amendment in the DCC which was never implemented, but was applied by the Supreme court in VSH/Shell. So, based on case law, it became more and more accepted to apply the above stages.
In the Supreme Court judgment CBB/JPO however, these phases were amended in such a way that the rights to compensation of the non-withdrawing party were reduced. So the protection for the non-withdrawing party became less. Thereafter the Supreme Court ruled in Greenib/Van Dam that damages were payable for broken down negotiations. So, therefore re-instating the Plas/Valburg stages, whereby compensation for the costs incurred by the non-withdrawing are to be compensated by the withdrawing party.
The facts in this case were that the negotiations regarding a Hyundai dealership were in such a phase that the other party could reasonably have relied on the fact that a legal agreement would have been entered into. The court decided that negotiations could not just stop without any consequences, and therefore order the payment of damages to compensate the other party.
So, as you might understand, the formation of a legally binding agreement is quite complex and there are a lot of issues to take into consideration starting from the point where parties are commencing the negotiations to the point where both parties believe that a legally binding agreement has been entered into.
Are you negotiating the terms of an agreement, and are you concerned about any of the above, then please contact Madelon van Breemen.
The statutory regulation of conflicting interests in a B.V. (and the foundation and association)
Since 2013, the private limited liability company has a statutory regulation with Article 2:239 (6) of the Dutch Civil Code for the situation where one or more directors have a direct or indirect personal interest that conflicts with the interest of the company and its affiliated business.
The regulation concerns an internal decision-making scheme. If a board member has a direct or indirect personal interest, he is required under Article 2:239(6) BW to abstain from the deliberations and decision-making.
When is there a conflict of interest?
To determine whether there is a conflict of interest, the standard set out in the Bruil judgment must be applied. There is a conflict of interest – within the meaning of Article 2:239(6) of the Dutch Civil Code – if a management board member is unable to protect the interests of the company with integrity and impartiality because of a direct or indirect personal conflict of interest.
How should the Bruil criterion be interpreted?
In the literature it is sometimes thought that the Bruil criterion should be understood more broadly than the legislator does and that a conflict of duties, a qualitative conflict of interest, should also be included in the Bruil criterion. A conflict of duties may exist if a managing director enters into an agreement on behalf of a company with another company, of which he is also a managing director, and, given the factual circumstances, he must be considered unable to safeguard the company’s interests with integrity and without prejudice. There may also be parallel interests. The mere fact that a director enters into an agreement on behalf of a company with another company, of which he is also a director, does not mean that there is a conflict of interest. It must be a conflict of duties.
The conflict of duties is not part of the statutory regulations (Article 2:239(6) of the Dutch Civil Code). This means that a board member does not have to abstain from the deliberations and decision-making in the event of a conflict of duties.
The Linders-Hofstee rules and other case law of the Enterprise Chamber
However, in addition to the statutory rules of Section 2:239(6) of the Dutch Civil Code, there is also case law of the Enterprise Chamber. In the Linders Hofstee judgment, the Supreme Court formulated a number of rules that a management board member must observe in the event of a conflict of interest. For example, if a management board member believes that there is a conflict of interest or potential conflict of interest, he must disclose this to the other management board members (and/or to the Supervisory Board, and if there is no Supervisory Board, to the General Meeting) and he must ensure that the agreement that is intended to be entered into is at arm’s length and that an expert is engaged if necessary. By applying these rules, the conflict of interest could be ‘resolved’.
The Linders-hofstee rules must always be followed, so not only in case of a personal conflict of interest, but also in case of a conflict of duties. Think of the situation in which there is a qualitative conflict of interest (a conflict of duties), but the board member concerned does not disclose the conflict to his fellow board members and still participates in deliberations and decision-making. If there is a conflict of duties, the director need not abstain. However, in view of the reasonableness and fairness of Article 2:8 BW in conjunction with Article 2:15 BW, the resolution would be subject to annulment.
It has also been assumed in several decisions of the Supreme Court in Enterprise Chamber cases that a director (or supervisory director) must refrain from decision-making in the event of a conflict of duties. In addition, there may be mismanagement if there is a conflict of interest – not only in the context of decision-making rule (in the past there was also a representation rule). An example is the Zwagerman II judgment, in which mismanagement was assumed when there was a conflict of interest (this judgment was rendered before Bruil) among the directors and the minority shareholders were insufficiently informed about transactions entered into by the director. In the Verstatel judgment it was assumed that the members of the Supervisory Board of Versatel, who were also directors of Tele2, had a conflict of interest and had to refrain from making decisions.
Advice to directors
The advice to directors is therefore to always apply the Linders-Hofstee rules and in addition, even in the event of a conflict of duties, to refrain from decision-making. Whether it is reasonable that a director can be blamed for not abstaining from the deliberation and decision-making process in the event of a conflict of duties is of course questionable. After all, the law does not prescribe it. However, the Enterprise Chamber considers the statutory decision-making scheme too brief. Incidentally, the articles of association can also provide for a regulation in the event of a conflicting interest. Acting contrary to the statutory regulation of Art. 2:236 (6) DCC also provides a rebuttable presumption of improper management within the meaning of Art. 2:9 DCC (Berghuizer-Papierfabriek HR). Acting contrary to a provision in the articles of association that aims to protect the interests of the legal entity can have the same effect.
The statutory decision-making scheme has internal effect
For the record, the decision-making rule of Art. 2:239(6) DCC only has internal effect. A decision taken contrary to Article 2:239(6) of the DCC therefore cannot be invoked against a third party (unless there is a so-called ‘Bibolini exception’).
Conflict of interest for foundations and associations
With the entry into force of the Management and Supervision Act on 1 July 2021, the same decision-making rules of Art. 2:239 (6) of the Dutch Civil Code will also apply to all other legal entities. In the case of the association, therefore, the representation rules of Section 2:47 of the DCC will be changed to decision-making rules. In the case of foundations – partly in view of the one-tier structure of this legal entity – no conflict-of-interest rules existed yet. However, this is often already provided for in the articles of association, if there is a supervisory body.
Contact a specialist
Conflict of interest is a complex subject. Should you have any conflicts of interest, please contact Justin de Vries. You cannot be blamed for the mere existence of a conflict of interest. What matters is how you deal with it.
Peter Verheijden
Peter de Graaf
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