The impact of COVID-19 (coronavirus) on commercial contracts: force majeure?
Recent measures taken by the Dutch government to contain the outbreak and spread of COVID-19 (a novel Coronavirus) have led to an increase in questions regarding the consequences for commercial contracts. These measures influence society as whole, and have a serious impact on a wide range of specific sectors and industries. These measures have put the performance of commercial contracts, spanning activities ranging from delivering supplies to operating flights, under pressure. The following may provide some helpful general guidance.
Under Dutch contract law, parties to a contract can generally claim specific performance. However, both the COVID-19 pandemic, as well as the measures taken by various governments, may constitute force majeure (overmacht) under the Dutch Civil Code, meaning that specific performance of a contract can no longer necessarily be expected. Whether this is the case ultimately depends on the interpretation of the contract and the circumstances of the particular case. Notably, parties can deviate from the Dutch Civil Code and contractually define for themselves in their contractual relationship what qualifies as a situation where performance is impossible because of uncontrollable events. Many contracts contain specific clauses to that effect, such as force majeure clauses or material adverse change clauses shaping the right to invoke specific remedies.
Generally, force majeure events relieve the debtor from the duty of specific performance as well as the duty to pay damages. The creditor may, however, still terminate or alter the contract.
Under Dutch contract law and absent any specific contractual arrangement, the parties to a contract can generally claim specific performance to the extent that performance is not definitively or temporarily impossible. Performance may be deemed impossible in the event the imposed governmental measures preclude performance. Economic inability to pay debts does not, by itself, qualify as impossibility under Dutch contract law.
Performance will not generally be considered impossible if the obligor has other options available to fulfil his obligations. To some extent, this is a risk the obligor is simply expected to bear, provided that the obligor’s efforts must not become disproportionate. Ultimately, it depends on the specific facts and circumstances of a case.
The measures taken by the Dutch and other governments to address the outbreak and further spread of the Coronavirus could constitute a legal impossibility to perform under commercial contracts. Unfortunately, not much can be said about this in any general sense. For each specific contract, it will have to be established whether these measures do, in fact, affect the ability to perform the obligations arising out of the contract. It is up to the obligor to explain in sufficient detail and, if sufficiently disputed, to prove that this is indeed the case. It is worth noting that the China Council for the Promotion of International Trade has issued force majeure certificates to Chinese businesses, providing them with evidence to assist them in claims of exemption of liability for breach of contract. Other governments or authorities have already followed this example, or may do so in the future.
As a general rule of Dutch contract law, any failure of a party in the performance of one of its obligations under the contract automatically grants to the other party the power to terminate the contract in question.
The power to terminate a contract does not require the failure in the performance to be attributable to the obligor, and thus in principle also exists in case of force majeure. Whether a party can terminate a contract depends on the circumstances of the case and interpretation of the contract at issue.
Under Dutch law, a party to a contract can also request a civil court to modify a contract (or its consequences) or to wholly or partially terminate a contract on the basis of unforeseen circumstances. For the purposes of this remedy, a particular event is an unforeseen circumstance provided that the parties have not, either explicitly or implicitly, incorporated the occurrence of said event in the contract. Moreover, such circumstances have to be of such a nature that the counterparty cannot expect the contract to remain valid and enforceable in its unaltered form. Courts have generally been reluctant to apply this remedy in the context of the 2008 economic crisis on the grounds that such 'normal' economic risks are to be borne by businesses themselves. Nevertheless, courts may decide that the extreme distorting effects of the pandemic on contractual relationships indeed go beyond normal commercial risks and, as such, qualify as unforeseen circumstances. This may lead to suspension, modification or termination of the contract, or give rise to a duty to renegotiate, thereby finding a new balance in the contractual relationship between the parties to share the burden that results from the COVID-19 situation.
A party to a contract can also invoke the remedy of damages, in addition to or as an alternative to termination of the contract. In contrast to the remedy of termination, the non-performance must be attributable to the obligor for him to be liable to compensate for resulting damage. As such, force majeure can relieve the obligor from his obligation to pay damages.
To conclude, some practical advice to take into account:
- Assess your obligations and rights under existing contracts.
- Monitor and keep track of what action is required to protect your interests (now and in the future) by, for example, giving written notice of default in good time, granting the counterparty additional time for performance.
- Document whether (and, if so, how) the Coronavirus and the measures taken by various governments or authorities have adversely affected your or your counterparty’s ability to perform.
- Consider the future of the contractual relationship with your counterparty when choosing what available remedy to invoke.
- In many long-term relationships, it may be more beneficial to approach your counterparty in anticipation of (expected) problems, in an effort to proactively address them.
Finally, but importantly, there are many industries and areas of law for which more specific guidelines can be given, ranging from securities offerings to employment law and IT contracts. This information can now be found on our Stibbe website, but please do not hesitate to reach out to any of our contacts persons below if you have any questions on your specific situation.