Under Dutch law, a debtor can remedy a default by offering to perform its obligations at a later date. Such an offer, however, has to include an offer to pay for damages and costs incurred as a result of the default (art. 6:86 DCC). If the creditor refuses to accept an offer that meets such criteria, the creditor will be in default.
In its judgment of 7 December 2018, the Supreme Court provided guidelines for a debtor's offer to remedy a default. The Supreme Court also ruled that if a creditor is in default because it has rejected a debtor's valid offer to remedy its default, this creditor can still terminate the agreement if the debtor turns out to be unable to perform its obligations under the agreement after all.
Introduction to the case
A certain clothing company (the clothing company), ordered 2,500 t-shirts from clothing manufacturer JED. JED failed to deliver the t-shirts on time. Instead, it offered to deliver the t-shirts three to four weeks later with a 10% to 15% discount.
After four weeks had passed, JED notified the clothing company that the delivery of the t-shirts was again delayed. No further discounts were offered. JED asked the clothing company whether it wanted to cancel its order. The clothing company instead confirmed its order. It also claimed damages for the delay of the order at an estimated amount of EUR 53,000. JED then cancelled the order, stating that the amount claimed was unreasonably high, considering that the total value of the original order was EUR 23,000. After several unsuccessful attempts by the clothing company to convince JED to deliver the t-shirts, the clothing company subsequently terminated the agreement.
The question before the court was whether JED made a valid offer to remedy its default by offering discounts between 10% and 15%. And if so, was the clothing company allowed to terminate the agreement?
Court of Appeal ruled that JED's offer was insufficient
The Court of Appeal ruled that JED had not made a valid offer to remedy its default. In short, it ruled that JED's offer was insufficient to cover damages and costs, in light of the continuing delay. The clothing company could therefore refuse to accept JED's offer without being in default itself.
Supreme Court provided guidelines for default situations
The Supreme Court took the opportunity to provide guidelines for a debtor's offer to remedy a default, as well as some general guidelines for debtors and creditors in situations of default.
In short, the Supreme Court held the following:
- The debtor's offer to pay for damages and costs should also include future claims for damages as well as expected future costs.
- If an offer does not include damages and costs, the debtor can still choose to accept the offer without waiving its right to such damages and costs. If the creditor refuses such an offer, it is not in default itself.
- If parties continue to disagree on the extent of the damages and costs, the debtor cannot limit its offer to an amount that is reasonable according to its own opinion. The debtor has to state beyond doubt that it will pay for damages and costs in full. If necessary, the extent of the damages and costs will have to be established afterwards, by a judge or otherwise.
- A creditor that refuses an offer that meets such criteria, is itself in default. The debtor's default is thereby remedied. However, the debtor remains required to perform its obligations as well as pay for damages and costs.
- In such case as referred to in 4. above, the debtor can initiate proceedings asking a judge to be released from the obligation to perform (art. 6:60 DCC). The debtor cannot terminate the agreement on the ground that a creditor refused a valid offer to remedy its default.
- As long as the agreement is in place, the debtor remains required to exercise reasonable care so that it can perform its obligations under the agreement as soon as the creditor remedies its default (e.g. by accepting the debtor's earlier offer to remedy its default).
- If the debtor is unable to perform its obligations under the agreement because it did not take reasonable care, the creditor can terminate the agreement even if the creditor itself is in default.
Supreme Court ruled that JED had no right to terminate the agreement
In this case, the Supreme Court held that JED, being the debtor, had no right to terminate the agreement. JED was required to deliver the t-shirts in any case and should have taken reasonable care to be able to do so. This would also be the case if the clothing company, being the creditor, was in default by refusing to accept JED's offer to provide a discount.
The Supreme Court took into account that JED had cancelled the order and refused to change its position, even after the clothing company specifically confirmed the order and repeatedly tried to convince JED to deliver the t-shirts. The clothing company could therefore legally terminate the agreement.