Covid-19: Impact on commercial contracts – The Netherlands
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”). Under Rome I, the general rule for B2B international contracts is that parties can choose the governing law even if it has no connection with the contract. The validity of choice-of-law clauses is governed by Articles 10, 11 and 13 Rome I, which set out the form requirements for choice-of-law clauses.
The choice of law is limited in the following cases:
- Domestic contracts: If the parties choose a foreign law as applicable to the contract, whilst all of them and all other elements pertaining to the contract are located in the Netherlands, Article 3 Rome I specifies that their choice shall not prejudice the application of those provisions of the “domestic” law which cannot be derogated from by agreement.
- Intra-EU contracts: Similarly, in contracts where all elements other than the choice of law are related to one or more EU Member States, the parties’ choice of law will not prejudice the application of provisions of EU law which cannot be derogated from by agreement.
Further restrictions apply in case of consumer, insurance and employment contracts.
In the absence of an express choice-of-law clause, Article 4 Rome I provides default rules which aim at designating the law which bears the “closest connection” to the contract at issue.
Are there any statutory provisions relating to force majeure?
In the Netherlands, the legal concept of force majeure (overmacht) is incorporated in Article 6:75 of the Dutch Civil Code (“DCC”). According to Dutch law, force majeure exists when a breach of contract cannot be attributed to the debtor because the breach did not arise due to his fault pursuant to the law, a legal act or generally accepted market practices. Some contracts may also be governed by the 1980 United Nations Convention on Contracts for the International Sale of Goods (“CISG”), which expressly addresses force majeure (see separate CISG chapter).
In the absence of a specific contractual arrangement and the application of the CISG, the following criteria must be met for a party to rely on force majeure pursuant to Article 6:75 DCC: (i) there must be an inability to perform; and (ii) it is not possible to attribute the failure to perform to the party which has to perform the obligation(s), i.e. the failure should be beyond the party’s control and the failure should not come for its account pursuant to the law, a legal act or generally accepted market practices. Notably, it is not required under Dutch law that the performance of the contractual obligation has become impossible. In the end, the application of force majeure will always depend on a case-by-case analysis of the facts and the contractual relationship between the parties.
Pursuant to Article 6:75 DCC in conjunction with Article 150 of the Dutch Civil of Code Procedure (“DCCP”), the party invoking force majeure will need to assert and prove facts and circumstances which imply that the shortcoming is not its fault and that the alleged shortcoming is not for its account by virtue of law, legal act or common sense. Thus, the debtor will need to prove that circumstances are beyond its control and that the circumstances qualify as force majeure within the meaning of Article 6:75 DCC. Recently, a Dutch preliminary relief judge ruled that a decrease in income due to the COVID-19 pandemic does not justify a reliance on force majeure in respect of due and payable rent payments (Oost-Brabant District Court, 23 March 2020, ECLI:NL:RBOBR:2020:1763).
A successful reliance on force majeure will have the following consequences during the force majeure period: (i) a claim for specific performance will be rejected; and (ii) a claim for damages will be rejected. The creditor should normally be allowed to suspend its own performance of its corresponding obligations under the contract or to set aside the contract.
As will be explained in the following chapter, when contracting under Dutch law, the parties are free to agree on a specific force majeure clause in their contracts or exclude force majeure in its entirety, therewith setting aside the statutory arrangement. It is common that commercial parties include such a provision which usually provides for suspension of performance in certain pre-agreed circumstances which qualify as force majeure. These provisions should be carefully analysed to determine whether the Covid-19 outbreak falls within their scope.
How are force majeure clauses in commercial contracts applied and interpreted in practice?
The interpretation and application of contractual force majeure clauses by Dutch courts is made on a case-by-case basis, and will depend heavily on the wording of the clause under consideration and the specific facts of the case.
To determine whether the outbreak of Covid-19 falls within the scope of the force majeure clause, Dutch courts will interpret the clause in light of the parties’ intentions and expectations. In that respect, the terms of a contract must be interpreted in accordance with the meaning that each of the parties, considering the circumstances of the case, could reasonably attribute to the provisions of said contract and what the parties could reasonably expect from each other in that respect (the so-called Haviltex method). However, in an international commercial context, the grammatical interpretation (i.e. the literal text) of contracts which have been entered into by professional parties, whilst assisted by legal advisors, will weigh strongly. Therefore, the literal wording of the force majeure clause at stake can be crucial for the court when deciding whether the parties intended to include an outbreak of a disease like Covid-19 within the scope of force majeure.
If the contract does not include a definition of force majeure, Dutch courts will turn to the statutory concept provided under Article 6:75 DCC, unless parties have excluded the possibility to invoke this statutory provision.
As in case of the application of Article 6:75 DCC, the burden of proof lies with the party invoking force majeure. Unless otherwise agreed, the successful reliance on such a clause will have the same consequences as under the statutory provision.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
Even if the parties have excluded reliance on force majeure in their contract, in exceptional cases it may still be possible for the debtor to request the court to modify or set aside certain clauses on the basis of the Dutch law concept of hardship laid down in Article 6:258 DCC (for further details see our cross-border guide on hardship, which also includes a Dutch chapter). This provision constitutes mandatory law, i.e. it applies to the parties’ contractual relationship regardless of whether it is expressly included in the contract. A modification or setting-aside occurs expressly by the court and the court may provide that this is subject to certain conditions pursuant to Article 6:260 DCC.
A Dutch court may modify the effects of a contract, or set these aside, in the event of unforeseen circumstances, provided that these unforeseen circumstances are of such a nature that the other party, according to standards of reasonableness and fairness, may not expect the contract to be maintained in unmodified form. However, this is not possible if the unforeseen circumstances should be for the account of the person relying on them, which can follow from the nature of the contract or generally accepted (market) practices.
There is no statutory definition of “unforeseen circumstances”. According to Dutch legislative history and case law, however, unforeseen circumstances are circumstances which have not been factored into the contract. These may be circumstances specific to the parties, but also occurring on a regional or global scale (e.g. hyperinflations, natural disasters or regional droughts). Roughly categorised, Article 6:258 DCC is applied in cases of a (very) serious distortion of the balance of the respective obligations’ value, where the contract has become moot due to the fact that the parties’ underlying goal has fallen away and is bordering force majeure.
Whether a particular circumstance has been factored into the contract will depend on the interpretation of the contract. In practice, it can be difficult to make a distinction between unforeseen circumstances and those which constitute ordinary commercial risks and have been implicitly factored into the contract. Generally, the more elements of uncertainty or chance are included in a contract, the less likely a circumstance will be considered unforeseen.
Only in exceptional cases, unforeseen circumstances are of such a nature that a party may not be expected to perform the contract in its unmodified form. This must be determined in accordance with standards of reasonableness and fairness. The Supreme Court has ruled that this requirement is subject to a high threshold, since standards of reasonableness require first and foremost that parties abide by the terms of the contract in the form originally agreed (pacta sunt servanda) (20 February 1998, ECLI:NL:HR:1998:ZC2587 (Briljant Schreuders/ABP)). Recently, the NCC District Court (“NCC”) rendered a judgment on the question whether the Covid-19 outbreak affected a contractual break-up fee in a collapsed M&A transaction. The issue was whether an alternative contractual obligation should be modified, mitigated or reduced in light of the current Covid-19 circumstances. The NCC rejected the change-of-circumstances defence (including force majeure) and noted that contracts must generally be enforced as agreed upon. According to the NCC, the “share the pain” approach should be adopted, inter alia preserving the parties’ contractual equilibrium in the current circumstances. The NCC considered that there was no evidence in this case that the parties contemplated or discussed the full and exceptional impact of the crisis. But even if this type of crisis would not have been factored in the agreement, the NCC decided that there would be no support in the present proceedings for the proposition that the crisis would make it unacceptable for the claimant to demand strict performance by the defendant. If the fee were to be reduced, the fee’s purpose would not be accomplished (e.g. comfort and confidence to complete the M&A deal). Hence, the NCC allowed the alternative claim and rejected a modification or mitigation thereof pursuant to inter alia the unforeseen circumstances in light of Covid-19 (Amsterdam District Court, Netherlands Commercial Court, 29 April 2020, ECLI:NL:RBAMS:2020:2406).
In some sectors there has been a sector-driven response to Covid-19. In particular, we refer to the gentlemen’s agreement between landlords, tenants and banks in the retail sector described in more detail in Chapter 7 of our publication Covid-19 A Dutch guide to significant commercial and legal issues. Even though this agreement is not immediately binding on the contracts of parties that come within scope thereof, if a landlord or bank refused to grant the sector-wide relief, the Dutch courts may take the sector view into account when considering whether Covid-19 constitutes unforeseen circumstances under these contracts and how these should affect them.
Finally, when contracting under Dutch law, the parties are free to contractually agree that the terms must be renegotiated in the event that certain circumstances occur. However, this usually excludes reliance by a party on the Dutch law concept of hardship with regard to those circumstances, since they are factored into the contract.
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
There are a few general considerations that should be kept in mind in the current situation:
- Communication: Parties should communicate with business partners where the contractual relationship might be affected by Covid-19 and look for joint solutions. In addition, contracts may include notification duties which oblige a party to communicate its intention to invoke force majeure within a reasonable time.
- Existing contracts: In general, parties should carefully review contracts in contractual relationships which might be affected by Covid-19. In particular, they should look for notification and mitigation duties as well as possibilities to modify, suspend or avoid their obligations where they might run into performance issues, and possibilities to enforce their rights against parties in breach.
- Future contracts: When negotiating future contracts, parties should review whether a worldwide or local pandemic could be a reason for them or their counterparties to rely on force majeure in case of non-performance, and what this would mean to their business.
- Insurance: Parties should review their insurance coverage to identify potential claims against insurers.
- Duty to mitigate losses: The parties should prevent and mitigate damages resulting from their own and the other parties’ breaches.
- Insolvency petitions: Creditors that are left unpaid retain the option to file for their debtor’s insolvency as a tool to force their debtor into paying. The Netherlands has not imposed any moratorium on (adversarial) insolvency filings. However, the Dutch courts have indicated that they will consider all relevant circumstances to determine whether an insolvency filing constitutes an abuse of the current situation. This expressly includes consideration of the impact of Covid-19.