The global outbreak of the Corona virus (Covid-19) is having a disruptive effect on businesses, individuals and the society at large. The outbreak also affects the ability of many businesses to (continue to) perform their obligations under commercial contracts. In this publication, we discuss the legal implications of the Corona virus outbreak on performance under commercial contracts which are governed by Dutch law. Specifically, we distinguish between commercial contracts that contain specific provisions on which parties may be able to rely, and between contracts that do not contain such provisions and where the parties fall back on Dutch statutory law.
The concept of contractual freedom is well enshrined into Dutch contract law. Therefore, the primary course of action for parties whose performance under a contract may be affected by the Corona virus outbreak, is to carefully review the provisions of the contracts to assess their position. Many commercial contracts contain provisions that touch on the effects of external circumstances which give rise to defaults. A number of default scenarios which are typically included in contracts are:
- force majeure: typically defined as a situation in which the performance of a contractual obligation is impossible due to events beyond the control of the performing party (such as natural disasters, wars etc.). Force majeure-clauses typically state that if a force majeure-event occurs, the obligation of a specific party to perform its obligations under the contract, are suspended. Generally, a party that intends to rely on a force majeure-clause, must observe a notification mechanism and provide written notice of the force majeure-event to the other party. Contracts also typically provide that the contract may be terminated in the event of force majeure. Parties usually include a list of events which are regarded as force majeure-events;
- change of law: although the outbreak of the Corona virus is itself not a change of law, many governments have responded to the outbreak with emergency legislation (for example ordering lockdowns). Such emergency legislation could potentially qualify as a change in law, which could prevent a party from performing its obligations under the agreement. Many contracts contain clauses on the consequences of a default in performance in the event of a change of law. Furthermore, such a change in law may also give rise to a termination of the contract.
- Material Adverse Change/Effect (MAC): MAC-clauses typically cover three types of events. MAC-clauses generally pertain to events that have an adverse effect on (i) the business of a specific party, (ii) the ability of a specific party to comply with payment obligations, and (iii) markets in which the parties operate. MAC-clauses are typically relevant in the context of representations and warranties given by a specific party, as well as closing conditions. Whether the Corona virus outbreak constitutes a MAC depends on the provisions of the contract. Many contracts stipulate that the question of whether an event constitutes a MAC is determined by a specific party (usually not the non-performing party), at its sole discretion.
Whether reliance on these provisions is possible will always depend on all the relevant facts and circumstances of a particular case. Please note that the outbreak of the Corona virus itself will not in all circumstances qualify as a force majeure-event. As such, an analysis that takes into account all the relevant facts and circumstances, should also take into account the consequences of the Corona virus outbreak (and/or changes in the law in reaction to the Corona virus outbreak) on the performance of party under a contract. A party is not simply "off the hook" by appealing to the Corina virus outbreak to justify non-performance if the Corona virus outbreak does not have consequences that actually impede performance in that particular case.
Parties that can no longer perform their obligations under a contract, directly or indirectly, as a result of the Corona virus outbreak, should carefully review the contract to establish whether it contains provisions on force majeure, change of law, and MAC. The next step is to determine whether the non-performance falls with the scope of these provisions and what the effect of these provisions is under the contract. In certain contracts, the application of force majeure, change of law, or MAC-clauses to events such as the Corona virus outbreak, may not impact the obligations of the parties. Rather, the contract allocates the risk that this event occurs to specific party. This is generally the party whose performance if affected by the events.
As such, when assessing whether reliance on force majeure, change of law, or MAC-clauses in Dutch law governed contracts is possible, parties should take the following into account (which can also be taken into account when drafting new contracts):
- consider whether the Corona virus outbreak makes that party's performance impossible or just burdensome, and depending on the outcome, assess what position to take with respect to the contract;
- review existing commercial contracts to establish whether it contains provisions on force majeure, change of law and MAC, or any other provisions which may provide remedies against non-performance, assess whether the Corona virus outbreak falls within the scope of these provisions, and assess the consequences for relying on these provisions;
- if the Corona virus outbreak impacts the performance of a party and reliance on these clauses is not possible, the party whose performance is affected should confer as quickly as possible with the other party to the contract to discuss what arrangements can be made to mitigate the risks arising from the non-performance;
- applicable notice obligations to the other party when provisions for force majeure, change of law, or MAC are relied upon;
- whether the impacted party is required to take mitigating circumstances to ensure that the effects of the default are minimized;
- properly document the impact of the Corona virus outbreak on the business, and keep a holistic view: determine whether a specific default under a particular contract as a result of the Corona virus outbreak may trickle down to defaults in other contracts (notably financing arrangements);
- whether these the contract contains requirements on arbitrating the qualification of events like the Corona virus outbreak; and
- assess whether the negative effects of the Corona virus outbreak are covered by insurance policies.
For completeness' sake, we note that for contracts which are governed by English law, the analysis may be substantially similar. For industry standard contracts, which are typically governed by English law, such as facility agreements which are drafted on the basis of the Loan Market Association's standards, or derivative contracts which follow the 1992 or 2002 ISDA Master Agreement, check whether industry guidance is available.
Dutch statutory law
If parties did not include specific provisions on force majeure, change of law, or MAC in their contract, Dutch statutory law applies. Furthermore, general principles of reasonableness and fairness (redelijkheid en billijkheid) apply to all Dutch law governed contracts and may impact reliance on contractual provisions.
Under Dutch law, the concept of statutory force majeure (in Dutch: overmacht) is treated as a defence from the performing party to not perform its obligations under a contract. It is worth noting that, contrary to the laws in certain other jurisdictions, force majeure is a defence against non-performance and only applies if the non-performance has already been established.
In order to successfully rely on force majeure, the non-performing party must demonstrate (i) an inability to perform its contractual obligations, and (ii) that such inability is not attributable, whether on the basis of facts, law or common sense, to the non-performing party. Dutch law does not require that performance of the contractual obligation has become impossible. Again, whether a non-performing party can successfully rely on force majeure, will in the end always depend on all the relevant facts and circumstances of a particular case, noting that the Corina virus outbreak itself (and/or changes in the law in reaction to the Corona virus outbreak) may not in all cases constitute a force majeure-event. In order to argue successfully that force majeure can be relied upon, the analysis should take into account the consequences of the Corona virus outbreak on the performance of party under a contract.
If a non-performing party can successfully rely on force majeure, claims for specific performance and damages will generally be rejected by Dutch courts. Note that the counterparty to the party relying on force majeure, can also suspend its obligations under the contract or to set aside the contract. Furthermore, under Dutch force majeure law, the principle applies that the non-performing party that successfully relies on force majeure, should not be in a better position than when the contract would have been ordinarily performed. Should a non-performing party rely on force majeure and, nevertheless, attain a better position than when the contract would have been ordinarily performed, the counterparty generally has a claim on the non-performing party on the basis of unjust enrichment.
Another option under Dutch statutory law is reliance on the provisions pertaining to unforeseen circumstances (in Dutch: onvoorziene omstandigheden). Under Dutch law, a contract may be amended or terminated due to unforeseen circumstances. This provision can only be relied upon if the unforeseen circumstances are of such a nature that the other party cannot demand that the contract is maintained in an unmodified form. The threshold for relying on the unforeseen circumstances exception is high.
Finally, general principles of reasonableness and fairness may be relied upon. These principles must be applied irrespective of whether a contract contains specific provisions on force majeure, change of law, or MAC. For contracts which do not contain such provisions, and where parties fall back on Dutch statutory law, these principles must also be applied. Even if the outbreak of the Corona virus does not qualify as a force majeure-event or as an unforeseen circumstance under Dutch statutory law, a party may still not permitted to demand performance from the non-performing party if such a demand would be unacceptable on the basis of reasonableness and fairness.
Contracts that do not provide for relief in the event of force majeure, change of law or MAC, may still provide that relief under Dutch statutory law is excluded. For example: contracts typically provide that the right to terminate the contract is excluded, even if Dutch law provides grounds for termination. Under Dutch case law, such provisions are not watertight, and reliance on these provisions can still be unacceptable under standards of reasonableness and fairness.
The outbreak of the Corona virus has an unprecedented impact on the economy. This will also affect businesses and their ability to continue to perform their contractual obligations. Parties whose performance under a commercial contract is affected by the outbreak of the Corona virus, should carefully review whether the contract contains sufficient safeguards to account for this type of event, whether these provisions can be relied upon, and what the effects of such reliance is. Even if a contract does not contain (sufficient) safeguards, Dutch statutory law may provide options for relief.
Note that the outbreak of the Corona virus not only impacts commercial contracts but also, among others, employment relationships, tax and insolvency. These effects should be also carefully considered.
Feel free to reach out to your regular Baker McKenzie contact, or email Frank Kroes or Richte van Ginneken for assistance.