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COVID-19 as force majeure

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Netherlands

Dutch law recognizes the possibility to claim a legal justification for non-performance with respect to the rights and obligations under a commercial contract in article 6:75 of the Dutch Civil Code ("DCC"). This article defines circumstances beyond control of the parties as force majeure ("overmacht"). It provides that a failure in performance cannot be attributed to the obligor if it is neither due to his fault nor for his account pursuant to the law, a legal act or generally accepted principles. The right to claim force majeure is, thus, different in scope and application compared to how the term is understood in common law countries. However, in the absence of a suitable alternative term, this memo will refer to circumstances beyond the control of parties as force majeure.
 
The legal framework for force majeure under Dutch law is found in articles 6:74 to 6:80 DCC. Force majeure forms an exception to the rule that parties have to fulfil all contractual obligations. As a rule, a successful force majeure claim is challenging. The conditions for a successful claim are strict.
 
The first condition is that performance of the obligation must be impossible. This means that, due to circumstances not attributable to him, the debtor is unable at all to perform the obligation. The debtor has to prove that the shortcoming is not due to his inaction or fault. For example, if the supply of certain products is in principle possible, but requires the supplier to hire a more expensive transport company, this would not be considered force majeure. The same goes for a claim to force majeure concerning the inability to pay rent. If, for example a shop owner faces a downfall in income because of a drop of the number of customers visiting the shop due to COVID-19, and therefore cannot pay the rent of the shop, courts will most likely not honour this claim. In the absence of a governmental order to close the shop, a decrease in income and the inability to pay rent are seen as an entrepreneurial risk. The same applies to a lack of personnel. During the financial crisis, claims to force majeure as a justification for non-performance were rejected. This is different when a (national) governmental measure prohibits a specific activity. A restaurant owner, for instance, who is forced by governmental decree to close the establishment will have a better chance of successfully claiming force majeure. Second, the shortcoming must not be attributable to the non-performing party. A claim to non-attributability in times of COVID-19 will likely succeed when an entrepreneur complies with governmental measures (such as a prohibition to open) or when there is a demonstrable lack of resources caused by the pandemic or the governmental measures.
 
Mostly, the parties will have stipulated the consequences of force majeure situations in their agreement. Statutory consequences of a successful claim to force majeure are that the counter party can't claim performance and the non-performing party is not liable for damages and that the counter party may rescind the agreement. Note that the agreement between the parties has to be terminated actively; a claim to force majeure does not by itself terminate the agreement.
 
In the current circumstances, the inability to perform will be temporary since all measures taken to counter COVID-19 are likely to be lifted in the end. In this case, the inability to perform is not absolute. Review of a claim to force majeure takes place in light of the nature of the agreed performance and all other relevant circumstances. The concrete outcome of such review is based on the balance of the mutual interests, taking into account the principles of reasonableness and fairness, as stated in article 6:248 DCC. In principle, it is possible to rescind or suspend the agreement also in case the circumstances preventing performance are of a temporary nature.
 
A special sub-category of commercial contracts are those between a business and a consumer. If due to COVID-19 the price of a service increases, the consumer always is entitled to cancel the service. An example hereof is the home delivery of products by supermarkets. Due to the virus, some products may not be in stock, which delays the delivery. It might happen that a specific product is at a discount when it is ordered by the consumer, but that the discount does not apply anymore at the (delayed) time of delivery. The consumer then has the right to either pay the discounted price, or refuse delivery without charge.
 
In conclusion, with respect to commercial contracts a claim to force majeure is not easily successful under Dutch law. It is, however, not impossible either in light of the effects of COVID-19. Maybe the courts, because of these exceptional times, will review their practice of applying a strict interpretation to force majeure. Businesses should in any case be able to document as much as possible the effects of COVID-19 on their daily operations and substantiate why they should not carry the financial risk. In addition, companies should carefully review new agreements to be entered into during the pandemic. When negotiating any commercial agreement it is advisable to carefully consider different scenario's and to allow for sufficient flexibility to adapt to changing circumstances that might arise due to COVID-19 (or any similar global occurrence).
 

Please review our Covid-19 hub for updates and get in touch if you require further information.


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