Legal opportunities to mitigate financial losses from the corona outbreak
Because of the corona virus outbreak and the subsequent governmental responses, it is expected that businesses will not (fully and timely) fulfil their contractual obligations. At present this mostly affects branches that are dealing with immediate closures – like the catering sector – and companies that are strongly reliant on their stagnated suppliers. However, it is not unlikely that more businesses will face similar problems because of stricter governmental measures or because of a deteriorating economy, with a recession at worst.
It is vital for every company to quickly examine its legal risks and to communicate sensibly with their contracted parties about the current situation. This applies to debtors that are threatened with shortcomings in their own obligations, as to creditors that demand an unconditional fulfilment of the obligations of their business partners. In this article two important legal stances are discussed which a debtor can take to mitigate its financial risks. Possible responses to these stances by a creditor are also discussed for he is not left empty handed in these situations.
According to Dutch contract law a debtor is generally responsible for losses that are the result of the non-performance of his own obligations. An exception is made when the shortcomings cannot be attributed to the defaulting party. This applies when the defaulting party is not at fault and not liable on other legal grounds. In this event the debtor can successfully claim that a force majeure applies to his non-performance, which means that an obligatory compensation for the losses of the creditor does not exist. Because of the extraordinary nature of the corona pandemic, claims based on force majeure are deemed promising. However, a claim based on force majeure becomes more complicated exclusively on the ground of a deteriorating economy, because changing market conditions are commonly attributed to a company’s own sphere of risk, which is akin to the judgements of the Dutch courts during the subprime mortgage crisis.
Another consequence of a force majeure claim is that a creditor becomes unable to claim the fulfilment of the debtors obligations itself. This could also apply to a payment obligation, like the payment of rent by a catering company. Naturally a payment obligation does not permanently cease to exist. When the extraordinary circumstances that led to a force majeure are over, the contractual obligations need to be fulfilled like usual, including the postponed obligations. Nonetheless, it is important to keep in mind that a creditor can dissolve an agreement even in a situation where a force majeure applies, unless the dissolution of a contract is disproportionate towards a debtor’s shortcoming(s).
Commercial contracts and general terms and conditions regularly contain provisions in which the contracted parties have already determined what constitutes as a force majeure while also predetermining the consequences thereof on their contractual obligations. For example: the right to dissolve an agreement, the postponement of payment terms, the suspension of the fulfilment of contractual obligations and/or the expiration of liability. In this scenario the statutory provision is not a guiding principle anymore. Nevertheless, if these provisions are disadvantageous to one party, this doesn’t have to mean that all adverse consequences are in his sphere of risk. Therefore, it is of great importance for both contracted parties to thoroughly review their legal possibilities.
In Dutch contract law there is also a possibility to request a Dutch court to dissolve or alter the contents of a commercial contract based on unforeseen circumstances. These circumstances had to be unknown to the parties during the conclusion of the agreement and of such an extraordinary nature that an unaltered continuation of the agreement cannot be expected according to the standards of reasonableness and fairness. The outbreak of the corona virus and the subsequent unconventional governmental measures might very well be designated as such unforeseen circumstances. However, the chances of success are always strongly rooted in the specific circumstances related to the case, while at the same time Dutch courts are very reluctant when judging about this doctrine. Within this doctrine however, the contents of a written agreement can still be decisive for a court’s judgement in a case.
If your company requires information or advice about the legal implications of the current corona outbreak on commercial contracts (like acquisition agreements, rental contracts and sales agreements), then it’s always possible to contact one of our attorneys-at-law who are specialised in corporate law.