The coronavirus (COVID-19) has impacted commercial relationships and trade in many ways and gives rise to a number of pressing commercial and practical issues. In particular the travel and hospitality sector face mass cancellations and have already taken measures such as flight stops, cancellations and lay-offs. We have seen the first bankruptcies as a result. Other industries are or will be deeply affected as well. This includes manufacturing, retail and fashion, finance and insurance, hospitality, leisure and other services industries. The COVID-19 outbreak already lead to a complete disruption of public life. Only vital services are performed, in health care, hospitals, food supply, police, etc. Factories, offices, stores, museums, restaurants, music halls, fitness centres and cinemas are closed in countries around the world. The effects are not just short term. COVID-19 may cause also in the mid and longer term delays in transactions, manufacturing and late deliveries to end customers. It affects stock markets and financial security. It threatens the continuity of supply chains and the ability to continue to trade international. The implications may not just be temporary.
Business partners, especially when located in different countries (high risk or lower risk, at the epicentre or already post outbreak) may choose or prioritize measures differently. This could lead to disagreement and commercial disputes. Companies may be impacted to the point where they are at risk of bankruptcy .
How do you translate the impact of the COVID-19 outbreak to what it means for your commercial contracts and your decisions in the short and medium term? Here are some things to consider in business relationships that are subject to Dutch law.
Understanding the contractual implications
Companies are deeply concerned, many are already fully affected and have begun reviewing their contracts to better understand the implications and their options. The question now arises: what are the legal consequences of not being able to meet your contractual obligations? You organize events but have to cancel due to government restrictions. Or you cannot supply your customers because the factories in China closed for a period of time and product has not been timely shipped. Or you are at the epicentre of the outbreak and you cannot deliver because public life has ceased and all travel has been halted. Such non performances are a breach of the contract. And if you or the other contracting party suffers damages as a consequence of the CODID-19 outbreak, who is liable for those damages? What are you expected to (or not to) do from a contractual perspective and what can you do to limit your exposure?
Understanding the possible contractual implications requires a full review of the contracts and an assessment under the applicable law in light of all facts and circumstances.
Step 1. Identify the applicable law and forum
Different laws may apply to different ‘phases or elements’ of a commercial contract. This is especially true in the context of a supply chain, where certain ‘parts’ of the contract are often executed in a different country or by subcontractors. The subcontracting situation could be subject to a different contract and (chosen) law. Local overriding mandatory laws may apply to the local activities possibly leading to an unexpected outcome. When assessing the exposure in order to make the best possible decision, it is a starting point to assess which court (or arbitration forum) has jurisdiction. This may affect the outcome of the proceedings because courts apply their own procedural laws (including applicable treaties) to establish whether they are competent to hear the case.
Step 2. Contractual opportunities to amend or terminate the contract
Most contracts include clauses that determine if and how the parties can amend or terminate a contract. The contract may, for example, provide that a supplier or customer may unilaterally amend the contract, postpone its obligations, or even terminate it. A contract may also address if and under what circumstances a party is entitled to suspend certain contractual obligations. In continental Europe national laws, sometimes of overriding mandatory nature, may demand that a longer notice period or compensation for damages or goodwill applies. Where there is no written contract, the applicable law determines the answers to these questions. In any case, review of your contracts is crucial even under time pressure to make and execute a decision. In addition, the applicable laws should be identified and analysed in order to make a well founded and justifiable decision.
Step 3: Is it possible to invoke force majeure?
The guiding principle under Dutch law is that you are liable for all damages resulting from a breach of contract unless the breach cannot be attributed to you. A breach cannot be attributed to you if you are not to blame for the breach according to the law, a legal act or generally accepted principles. In this case we say it is force majeure. A principle embedded in the Dutch Civil Code.
When relying on force majeure, you may not be at fault and the breach should not fall within your sphere of risk. Such risk can be created by law (e.g. a statute), by contract or common opinion. Examples that typically are not comprised under common opinion are financial difficulties, incompetency, etcetera. But to be clear, force majeure cannot be invoked when performance of a contractual obligation simply has become more difficult. Generally, if non-compliance with your contractual obligations was foreseeable, damages would be attributable to you by virtue or common opinion. A Dutch court has ruled that epidemics, such as the bird flu, and sudden and unforeseeable legislative measures as a result thereof, could lead to the situation where damages as a consequence of breach of contract are not attributable. Dutch courts have a relatively high discretion to decide whether or not a certain damage should come for the risk of one party under common opinion. Seeing that in the Netherlands the government instructed among other things, employees to work from home and to avoid gatherings of people, because of the COVID-19 outbreak, we believe that in some cases neither party will be to blame for damages resulting from the COVID-19 outbreak. This includes damages resulting from taking precautions ordered by the government to prevent the spread of the virus (this can of course be different if the damages result from a failure to take adequate precautions or to follow government instructions). A party cannot be blamed if he could not have reasonably prevented the event that led to non-performance and hereby avoided its consequences.
In case of force majeure, the other party cannot successfully sue you for damages or specific performance (unless the debtor would profit from the non-performance beyond the situation of a normal performance of the contract). Force majeure does not prevent the other party from using the defense that he suspended his performance, for example to pay you. He may also annul the contract. Many contracts include a force majeure provision. Normally the contractual provision prevails over the law, unless the outcome is unacceptable according to the general principle of reasonableness and fairness that is laid down in the Dutch Civil Code. If the clause is incomplete, unclear or ambiguous, the above rules also play a role. A full review of your contract may clarify when and how you can invoke force majeure. For example, a force majeure clause will likely include a list of situations to which it applies. It will improve your evidentiary position if this list is non-exhaustive and/or if it explicitly includes ‘pandemic’ or ‘virus outbreak’. The clause may also state how a contract party should be notified in case of a force majeure or what further steps should be taken, for what period of time or a division of risk or costs related to a force majeure event. Not only the force majeure provision itself should be carefully reviewed, the same applies for example to guarantees, and limitations of liability because these also may include specific obligations or an allocation of risk that prevails over the rules of the Dutch Civil Code. Be aware that force majeure may possibly apply to breaches of both contract partners.
Fear of liability should never prevent taking adequate steps to protect the health and safety of people. Compliance with governmental instructions, such as travel bans and lock down, could fall under force majeure, unless the contract, common opinion or particular circumstances allocate the risk in another way.
Excusable breach / unforeseen circumstances
The Dutch Civil Code provides that under certain circumstances contracts may be amended by the court (this cannot be invoked out of court) if, in the light of unforeseen circumstances, it may not be reasonable and fair to preserve all contractual terms. Case law provides precise facts and circumstances that normally do and do not qualify as unforeseen circumstances. The requirements are quite strict. Clearly, if the contract includes references to ‘pandemic’ or ‘virus outbreak’ (for example in the force majeure clause), this situation was foreseen and negotiated. I suspect that many contracts will have no such references and that this is an avenue to explore or if you are a creditor, to prepare for this line of argument. Parties may, on the basis of unforeseen circumstances renegotiate their contract.
Changing legal environment - Invalid terms
At the moment, on an almost daily basis governments in Europe, also lower governments, publish new instructions, guidelines, and laws as a response to the COVID-19 outbreak. As a consequence, terms included in a contract could become invalid or unenforceable as a result. Also, the precise guidelines, instructions and laws may be relevant to determine whether an action or omission at a particular point in time was an appropriate and justifiable response or measure in light of all facts and circumstances of the case. For evidentiary purposes, it is helpful to keep a log (download, save print screens or print) of the websites and documents posted by governments and (semi-)governmental institutions.
Negotiating and reaching a settlement
If the COVID-19 developments affect your business or people in your company, address the identified risks and discuss these with your contract partners. The way in which you handle and communicate, is relevant. It simply helps under Dutch law to show that you have liaised with the other party and have taken their legitimate interests into account. Certain commercial terms may need to be renegotiated. Existing contracts may require careful negotiations. Reaching (settlement) agreements on damage control and allocation of costs and liability between the parties often has to be made under extreme time pressure. This entails an increased risk of escalation into disputes. Provisions as described above (force majeure, excusable breach or other principles of law) might also be used as leverage to negotiate towards finding a commercially suitable solution for both parties.
For existing contracts, waivers may need to be drafted and signed. If an entire contract needs to be re-drafted or newly drafted, it might be worth to think about rewriting the force majeure provisions, and/or to consider adding carve-outs, guarantees or limitations on liability, depending on the type of contract and your position (manufacturer, distributor, buyer, seller, etcetera).
Our team of experts is available to help you to protect and grow your business in these challenging times. Please contact Martine de Koning, Head of Team Commercial and International Trade.
