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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.