Corona contracts: a step-by-step plan for renegotiation

In the midst of this corona crisis, we would like to share a legal message from our partner Lexsigma Advocaten below. In the article below they explain what the corona crisis means for you as an employer in commercial contracts. What are your rights as an employer? What legal actions are taking place?

Are there any questions after this article? Then you can contact Lexsigma Advocaten. They can be reached via the following number: 020-8940700 (ask for Bob van der Kamp, Ramon Pasma or Lara Smeets). It is also possible to ask a question via email: corona-commericeel@fhi.nl.

Corona contracts: a step-by-step plan for renegotiation

General: unforeseen circumstances or force majeure?

The economic corona crisis is evident. How does the crisis affect your commercial contracts contractually? Renegotiation on the basis of unforeseen circumstances, which in my opinion includes the corona crisis, and/or contract adjustment seem to be the first legal instruments to formulate an answer to this question. The code also provides the basis for this. An obvious distribution key for resulting “damage” seems to be 50/50, unless the contract itself prescribes a different distribution of risk. I parrot the same as my fellow professionals. For example, lawyer Tjittes in The Hague; a similar contribution was published by him from whom I “borrowed” a lot. My aim here is merely to provide quick and very practical tools for practice, hence my approach.

The appeal to force majeure is also frequently heard. In other words, does the corona crisis result in force majeure? Presumably, due to legal corona measures, the debtor in question is prevented from doing so performance itself to be carried out (in a timely manner). For example, I am thinking of the delivery of goods and services or the organization of events. In the event of disruption of the contract balance due to falling prices or the value of the consideration in general, there appears to be no room for invoking force majeure.

What is that? An appeal to unforeseen circumstances. What is the consequence of force majeure? The creditor is then not entitled to compensation due to a shortcoming in performance. He cannot demand fulfillment of the contract due to its (practical) impossibility. In the event of force majeure, the creditor can still terminate the agreement due to a shortcoming. In the event of force majeure, the debtor may request full or partial dissolution or amendment of the agreement if there are unforeseen circumstances.

 Furthermore, it is possible that the contract contains a force majeure or unforeseen circumstances clause (hardship clause, material adverse change clause). In that case, the interpretation of those clauses in accordance with the Haviltex standard will determine whether the corona crisis or its consequences qualify as force majeure or an unforeseen circumstance within the meaning of the contract and, if so, what the legal consequences thereof are (such as (temporary ) suspension, obligation to renegotiate, (partial) dissolution or amendment).

Reasonableness and fairness

The execution of a contract is governed by reasonableness and fairness. Reasonableness and fairness mean that parties, including commercial parties, must take each other's legitimate interests into account. Reasonableness and fairness may require an obligation to negotiate in the event of unforeseen circumstances.

Internationally, a renegotiation obligation in the event of unforeseen circumstances is not unusual. I prefer to make this renegotiation obligation a priority in the event of an unforeseen change in circumstances. However, a contracting party is not automatically obliged to accept a reasonable offer to change from the other party in the event of unforeseen circumstances. If renegotiations conducted in good faith lead to nothing, the only option left is to go to court.

Step-by-step plan for “unforeseen circumstances” due to 'corona demand drop'

Application of this provision takes place in three steps.

Step 1: are there any unforeseen circumstances?

In other words: did circumstances arise after the conclusion of the agreement that were not taken into account in the contract? The foreseeability of circumstances is not important in itself. The fact that it is known in history that a pandemic breaks out every now and then (Spanish flu, SARS) does not mean that the pandemic due to the corona virus is not an unforeseen circumstance. What matters is whether the parties have taken this risk into account in their contract.

It seems to me that parties have, as a rule, not taken into account the corona pandemic and the far-reaching consequences it is now having. So there is an unforeseen circumstance. A natural disaster has also been classified as an unforeseen circumstance in parliamentary history. But circumstances more tailored to an individual contract can also qualify as unforeseen circumstances, such as when the agreement has (partly) lost its meaning, if the value relationship between the mutual performances has been seriously disturbed (the costs of compliance for the debtor have exceptionally increased sharply or the value of the performance for the creditor has fallen exceptionally sharply) or if compliance has become extremely difficult.

Step 2: is unchanged compliance with the contact unacceptable according to standards of reasonableness and fairness?

If a contract is to be amended or terminated by the court on the basis of unforeseen circumstances, those circumstances must be of such a nature that the other party cannot expect unchanged maintenance according to standards of reasonableness and fairness. In fact, it concerns an application of the restrictive effect of reasonableness and fairness (with the high unacceptability threshold).

If the circumstances are the responsibility of the person who relies on them due to the nature of the agreement or common opinion, modification or termination is not possible. Restraint is the motto, after all: an agreement is an agreement. Entrepreneurial risk also has significance. As a rule of thumb, if a company encounters major financial and/or business economic problems as a result of the coronavirus, there is no normal entrepreneurial risk that the injured party must bear according to common opinion. The injured party is then entitled to change or terminate the contract.

Step 3: how should the contract be adjusted by the judge?

There is a lot of space. The judge is Maatman. For example, a judge has a great deal of freedom in amending or terminating the contract. The amendment or dissolution can be pronounced in whole or in part, and also temporarily. An amendment to a contract may also entail its temporary (mutual) suspension. Furthermore, amendment or dissolution can be given retroactive effect. The judge can also attach conditions to the amendment or dissolution, such as awarding compensation if it is (partially) dissolved. Ultimately, what matters is that the judge restores the contractual balance disturbed by the unforeseen circumstance, taking into account the changed situation.

The judge must make his decision as closely as possible to what the parties initially intended and to the risk allocation that was initially included in the agreement. For the benefit of practice, I will give a number of points of view that I believe are relevant:

• In the case of long-term contracts, a temporary change (including a suspension) or partial dissolution is more likely than a permanent change or complete dissolution. After all, the influence and consequences of the coronavirus on the fulfillment of contracts is temporary in nature.
• As a starting point, it can be accepted that now that both parties are not to blame for the corona crisis, the setback must be divided equally between both parties.
• However, the contractual risk allocation initially agreed between the parties must be maintained. A party may not benefit commercially from the modification of the contract. Anyone who has entered into a commercially advantageous or disadvantageous contract must retain that advantage or disadvantage proportionately in the event of amendment or termination. That is a reason to deviate from the 50/50 division of the disadvantage.
• When determining the disadvantage, any advantages resulting from any compensatory government measures must also be taken into account. This may require a readjustment (with retroactive effect) when a party has enjoyed this advantage.