The outbreak of the coronavirus and the measures taken by the government to control its spread have far-reaching consequences for organizations and companies. The need for solid written agreements with regard to liability proves its value in times of corona too.
In times like these, for example, some suppliers encounter difficulties when delivering goods and services in time – which may cause them to breach their contractual obligations. Now that a successful appeal to force majeure can limit one’s liability, the question that comes up is whether the spread of coronavirus and/or the measurements taken by the government to control the spread of the virus create a situation of force majeure.
Force majeure in general
Force majeure is defined in Article 6:75 of the Dutch Civil Code. In short, this article states that a breach of contract (non-performance) cannot be attributed to a party if and insofar as this party is not at fault and the non-performance is outside the scope of risk of this party.
The law does not require the performance of the agreement to be (permanently) impossible.
Provided that agreements should be complied with (pacta sunt servanda), a party is liable when it could have prevented non-performance. Therefore, a party is supposed to investigate alternative options for performance and to do what it can to control the damages. Even if, for example, for a higher cost.
A potential force majeure situation that we have seen often lately is the company, fully dependent on raw materials coming from a country in complete lockdown due to measurements taken by the government to control the spread of coronavirus. If that same company can get its raw materials from a different country which is not in lockdown, but for a higher price, often the situation will not qualify as force majeure.
A breach of agreement can be attributed to a party when a specific statutory provision (the law) creates liability, due to a legal act. Alternatively, a party can be held responsible on account of generally accepted principles (common opinion) – for example, in the event of foreseen circumstances at the time of reaching an agreement.
Spread of coronavirus and force majeure
One should bare in mind the essential question is usually not whether the coronavirus in itself creates force majeure, but whether (the consequences of) the measurements taken to control or combat the virus qualify as a force majeure situation.
According to the Dutch Civil Code, force majeure is proven when performance of the agreement is impossible due to the measurements taken by the government to control the virus and there are no other ways to honour the agreement.
In other words, if a party wants to prove the existence of a force majeure situation, it should prove:
- fulfillment of the agreement is impossible;
- the impossibility does not fall in its sphere of risk;
- the consequences of the impossibility could not reasonably be prevented;
- the impossibility could not be foreseen at the time of the conclusion of the agreement;
- law nor legal act states that non-performance can’t be attributed to the party.
Force majeure provision
In their agreements, contracting parties may include an express provision on force majeure, deviating from the statutory provisions mentioned above. This means that parties can spell out the terms for force majeure in the contract by expressly defining, extending or limiting the force majeure situations. Another option is to include the consequences of a force majeure situation such as suspension of performance.
As the Dutch Civil Code merely gives a general description of force majeure, a contractual force majeure provision is an opportunity to manage expectations and therefore discussions. It is advised to first check existing contracts and/or terms of conditions for existing force majeure provisions and their scope, applicability and details. If no no express force majeure provision is included, statutory force majeure provisions automatically apply.
In the event that no epidemic or pandemic is mentioned for future situations, it is advisable to amend current express force majeure provisions for future contracts. For companies that rely on suppliers, it is recommended to include that force majeure exists when their supplier faces a force majeure situation.
In the event that (contractually or statutorily) a situation cannot be qualified as force majeure, an alternative reasoning for a party could be hardship based on article 6:258 of the Dutch Civil Code. This article states that contracting parties can request the court to either modify a contract or the consequences of a contract, or to wholly or partially dissolve (ontbinden) a contract if unforeseen circumstances have arisen.
The hardship article applies only to unforeseen circumstances that are of such a nature that, according to the standards of reasonableness and fairness, the opposite party may not expect an unchanged continuation of the agreement. The court may change or dissolve the agreement with retroactive effect.
Whether or not a situation qualifies as an unforeseen circumstance depends on the (case by case) interpretation of the courts. However, generally speaking, courts have proven to be quite hesitant in applying the remedy ex Article 6:268 Dutch Civil Code.
Reasonableness and fairness
Summarizing the above, using force majeure as a solid ground for release from contractual obligations will not always succeed. Even though the changes of success depend mostly on the specific circumstances, including the contractual provisions that may apply, the standards of reasonableness and fairness have, at all times, a remedial effect on what can be or could have been expected from a party – and whether a situation can be labelled as force majeure or an unforeseen circumstance. This means that, also (or maybe: especially) in times of corona, parties should keep the lines of communication open, consider different options and try to focus on stakes and interests instead of positions and points of view. After all, every entrepreneur hopes to overcome this crisis and you will most likely need each other in the future.