1.Corona Crisis: a humanitarian and economic disaster
The Corona crisis is not only a humanitarian disaster, but also an economic one. For example, shops and companies no longer have a supply of products from China. Major events may no longer take place. The export of flowers and other goods from the Netherlands is stalling. The demand for all kinds of products and services is decreasing significantly. In many sectors, working time reduction has been requested for employees. The necessary freelancers are without work. The economy is slowing down.
But what do you do with signed commercial contracts? Can you get rid of agreed purchase or delivery obligations due to the Corona crisis?
Human solidarity and taking each other into account in times of need also has a legal counterpart: in my opinion, the contracting parties have the obligation, when referring to unforeseen circumstances (see article 6:258 of the Civil Code), which the Corona crisis can be considered part of, to in first instance renegotiate a contract. If the parties themselves still cannot resolve this, then the parties must go to court in order to have the contract adjusted. In my opinion, the starting point in this matter should be for the disadvantage to be divided on a 50/50 basis. One can deviate from this guideline if the contract itself has a different risk distribution taken up in it (for example when the contract was concluded on (less) favorable conditions than the market conditions at the time). Only in a limited number of cases does the Corona crisis give rise to an act of God (see article 6:75 of the Civil Code).
2. Corona crisis and force majeure within the meaning of article 6:75 of the Civil Code); contractual force majeure and unforeseen circumstances clauses
Does the Corona crisis lead to force majeure within the meaning of article 6:75 of the Civil Code? This is only the case if legal Corona measures prevent the relevant debtor from performing the performance (on time). For example, no goods or services can be provided due to an export or import ban, catering cannot be provided in a café due to the compulsory closure of the catering industry, a large event cannot take place due to the prohibition thereof. Force majeure does not include the situation that the performance can be delivered, but that the contractual balance after the conclusion of the contract is (seriously) disturbed, such as when the price of the performance to be performed by the debtor has risen sharply or the value of the performance for the creditor has fallen seriously. In those cases, there is no force majeure within the meaning of article 6:75 of the Civil Code (whereby the provision of the performance itself is not obstructed). In that case, the only relief may then be to appeal to unforeseen circumstances (see article 6:258 of the Civil Code) (see also Asser-Sieburgh 6-I (2016), no. 340)
What is the consequence of force majeure within the meaning of article 6:75 BW of the Civil Code? The creditor is then not entitled to compensation due to a shortcoming in the performance. Nor can he claim fulfillment of the contract due to its (practical) impossibility. In case of force majeure, the creditor can still dissolve the agreement due to a shortcoming. In the event of force majeure, the debtor may also demand full or partial dissolution or amendment of the agreement if there are unforeseen circumstances within the meaning of article 6: 258 of the Civil Code. (see Asser-Sieburgh 6-I (2016), no. 379)
Furthermore, the contract may contain a force majeure or unforeseen circumstances clause (hardship clause, material adverse change clause). In that case, the interpretation of those clauses in accordance with the “Haviltex”- standard determines whether the Corona crisis or its consequences qualify as force majeure or as an unforeseen circumstance within the meaning of the contract and, if so, what the legal consequences thereof are (such as for example (temporary) suspension, obligation to renegotiate, (partial) dissolution or change).
3. First: renegotiation obligation in unforeseen circumstances
The performance of a contract is governed by reasonableness and fairness (article 6:2/6:248 of the Civil Code). Reasonableness and fairness mean that parties, including commercial parties, must take into account each other’s legitimate interests. (see Supreme Court of the Netherlands, HR October 19, 2007, NJ 2007/565 (Vodafone / ETC))
Reasonableness and fairness may require a negotiating obligation in the event of unforeseen circumstances. (see Tjittes, Contracteren, 2012, p. 98 and Schelhaas, ORP 2018, p. 25)
Internationally, a renegotiation obligation in case of unforeseen circumstances is not uncommon (see article 1195 of the French Civil Code, article 6: 111 of the Principles of European Contract Law and article 6.2.3 of the UNIDROIT Principles for International Commercial Contracts).
It is my preference to make this renegotiation obligation a priority in the event of an unforeseen change of circumstances within the meaning of article 6:258 of the Civil Code. However, a contracting party is not automatically obliged to accept a reasonable offer by the other party to amend in the event of unforeseen circumstances. If renegotiations conducted in good faith lead to nothing, then there is no other option but to go to court.
4. The Corona crisis as an unforeseen circumstance (article 6: 258 of the Civil Code)
In the following, I will discuss the situation that due to loss of demand from customers as a result of the Corona crisis, a creditor no longer has an interest in the delivery of a good or service or that the delivery of a good or service has become much more expensive for the debtor.
An eligible instrument to (temporarily) amend or (partially) dissolve the contract is the provision of unforeseen circumstances (art. 6: 258 of the Civil Code). This provision is applied in three steps.
Step 1: are there unforeseen circumstances?
Unforeseen circumstances within the meaning of article 6: 258 paragraph 1 of the Dutch Civil Code applies if circumstances arise after the conclusion of the agreement that are not included in the contract.
The foreseeability of circumstances is not important in itself. The fact that it is known in history that an occasional pandemic breaks out (Spanish flu, SARS) does not mean that the pandemic due to the Corona virus is not an unforeseen circumstance. The question is whether parties have taken this risk into account in their contract. It seems to me that, as a rule, the parties have not taken the Corona pandemic into account with the far-reaching consequences it has now. So there is an unforeseen circumstance. Similarly, a natural disaster in parliamentary history has been identified as an unforeseen circumstance. But also circumstances that are more specific to an individual contract can qualify as unforeseen circumstances, such as when the agreement has (partly) lost its meaning, if the value relationship between the mutual performances has been seriously disturbed (the costs for compliance for the debtor have risen sharply or the value of the performance for the creditor has fallen exceptionally sharply) or if performance has become extremely objectionable (Parliamentary History, Book 6, p. 969)
Step 2: is unaltered fulfillment of the contact unacceptable by standards of reasonableness and fairness?
In order for a contract to be amended or terminated by the court on the basis of unforeseen circumstances, those circumstances must be such that the counterparty cannot expect that that the contracted remains unaltered in accordance with the standards of reasonableness and fairness (article 6: 258, paragraph 1 of the Dutch Civil Code). This is, in fact, an application of the restrictive effect of reasonableness and fairness (with the high unacceptability threshold). If the circumstances under the nature of the agreement or the accepted views by society are for the account of the party relying on them, alteration or dissolution is not possible (article 6: 258 paragraph 2 of the Dutch Civil Code).
The starting point in the case-law is that an appeal to unforeseen circumstances must be cautiously accepted (see Supreme Court of the Netherlands , HR 20 February 1998, NJ 1998/493, Briljant Schreuders / ABP and HR 13 October 2017, ECLI: NL: HR: 2017: 2615, Bronckhorst). Contract is contract. For example, as a rule, an economic crisis is not accepted as a circumstance that may lead to termination or amendment of the agreement due to unforeseen circumstances. The jurisprudence rules that in principle there is an entrepreneurial risk that remains for the account of the party that takes it. (see, for example, the Court of Appeal ‘s-Hertogenbosch, May 30, 2017, ECLI: GHSHE: 2017: 2299 , legal consideration 6.5.7)
Another example: the market for raw materials is subject to frequent price fluctuations, which as a rule is also an entrepreneurial risk and not an unforeseen circumstance that entitles one to contract adjustment, unless there is such a disturbance of the value ratio that a discounted risk can no longer be spoken of. The latter is the case if, due to the unforeseen circumstance with a contract that remains the same, a party would be faced with major financial and/or business problems. (see Court The Hague, August 24, 2011, ECLI: NL: RBSGR: 2011: BT2510 , legal considerations 4.18 and 4.19).
If, as a result of the Corona virus, a company gets into serious financial and/or business problems, there is no normal entrepreneurial risk that the injured party must bear according to the accepted views of society. The disadvantaged party is then entitled to change or to dissolve the contract.
Step 3: how should the contract be amended by the judge?
The judge has great freedom in changing or dissolving the contract. The change or dissolution can be pronounced in whole or in part, and also temporarily. A change to a contract can also include temporary (mutual) suspension thereof.
In addition, retroactive effect can be granted to changes or dissolution (article 6: 258, paragraph 1 of the Dutch Civil Code). The judge can also attach conditions to the change or dissolution, such as the award of compensation if (partial) dissolution. The ultimate issue is for the judge to restore the contractual balance disturbed by the unforeseen circumstance, taking into account the changed situation.
In its decision, the judge must be as close as possible to what the parties originally intended and to the risk distribution that was initially included in the agreement (Parliamentary History. Book 6, p. 970 and 974). For practical purposes, I hereby give a number of points that are relevant in my opinioWith long-term contracts, a temporary change (including a suspension) or partial dissolution is more obvious than a permanent change or complete dissolution. After all, the influence and consequences of the Corona virus on the fulfillment of contracts is temporary.
– As a starting point, it can be accepted that now that both parties are not blamed for the Corona crisis, the setback must be shared equally between both parties. Leiden professor Nieuwenhuis has already argued for this in 1995 (WPNR 6165, p. 41)
– However, the contractual risk distribution initially agreed between the parties must be maintained. A party may not profit commercially from the adjustment of the contract. Anyone who has concluded a commercially advantageous or unfavorable contract must proportionally retain that advantage or disadvantage in the event of a change or dissolution. That is one reason to deviate from the 50/50 distribution of the disadvantage. (see Parliamentary History, Book 6, p. 970. Compare. Arnhem-Leeuwarden Court of Justice June 18, 2013, ECLI: NL: GHARL: 2013: 4326, legal consideration 4.14)
-In determining the disadvantage, any benefits must also be taken into account as a result of any compensatory government measures. This may necessitate a readjustment (retroactively) once a party has enjoyed this benefit.
This article was written in Dutch by Rieme-Jan Tjittes and has been translated by Ecury | Crouch and republished with his written permission, for which we thank him. Rieme-Jan is a very experienced litigation and arbitration attorney (‘advocaat’). He is considered to be one of the leading authorities in (international) commercial contracts in The Netherlands.
His clients are national and international companies, which are confident to let him handle their most complex and high risk disputes to reach satisfactory solutions. His litigation and arbitration work encompasses a wide array of legal topics and business activities, such as post M&A warranty and indemnity disputes, the termination of distribution and licensing agreements, gas and electricity supply contracts, high tech and construction contracts and setting aside (international) arbitral awards. Rieme-Jan is frequently asked to be arbitrator in national and international institutional arbitrations (NAI, ICC, AAA) as well as ad hoc arbitrations. In addition, Rieme-Jan is admitted to the Dutch Supreme Court bar and has as such achieved an inter alia Tier 1 Ranking in Chambers for many years in a row.
Before joining BarentsKrans, Rieme-Jan worked as an attorney in the Litigation & Arbitration Department of Allen & Overy LLP. Prior to that he was a fulltime Justice of Courts of Appeal and knows as such what arguments will convince a judge. It is important to note that every situation is different and as such no rights can be derived from this article. The Civil Code in this article refers to the Dutch Civil Code, which in general coincides with the Civil Code of Aruba.
By Darin Crouch