Contract Cancellation
Written by:
Hein Kernkamp
Cancellation of a contract due to default
Agreements make parties into law ('Pacta sunt servanda'). In concrete terms, this means that a validly concluded agreement commits the parties involved to fulfill the reciprocal obligations. If a party to an agreement does not fulfill its obligations, the other party can make use of several legal remedies under Dutch law. The other party can suspend its own performance or dissolve the agreement.
Suspension and dissolution
Suspension is a means to force the other party to comply. A more far-reaching remedy is the total or partial dissolution or cancellation of the agreement. Dissolution frees both parties from their mutual obligations and the party that was in breach becomes liable to pay damages to the other party. The party that is in material breach will therefore be presented with the bill. The legislation, introduced with the New Netherlands Civil Code in 1992, is unfortunately technically complicated, as will become clear below.
The dissolution of an agreement
Under Article 6: 265 paragraph 1 of the Dutch Civil Codeany shortcoming by a party in the fulfillment of one of its obligations gives to the other party the power to dissolve the agreement in whole or in part, unless, in view of its special nature or minor significance, this cancellation and the consequences thereof are not justified. In addition, Article 6: 265 paragraph 2 of the Dutch Civil Code provides that, insofar as compliance is not permanently or temporarily impossible, the power to dissolve arises only when the debtor is in default.
Shortcoming of minor significance?
Books have been written about how on the one hand every shortcoming justifies dissolution and on the other hand a shortcoming of minor significance does not. This article is not about that, but it does illustrate that the law is complicated to interpret for both lawyers and non-lawyers. Unfortunately, the law contains pitfalls and parties really fall into these pitfalls. If the agreement is dissolved incorrectly, the consequences of dissolution will not occur and there may even be a situation of own default. Back to the law and the requirement of absenteeism.
Default
A wedding dress must be ready on time. So if the wedding dress is not finished on time, then there is a situation of default. But it is often not that clear. If no clear term has been set for the fulfillment, the default commences in accordance with Section 6:82 (1) of the Dutch Civil Code if the debtor is given notice of default by a letter of formal notice whereby he is given a reasonable term for the fulfillment, and compliance within this deadline.
Function of the notice of default
The function of a notice of default is to give the other party a final term for compliance. This way, this party knows that the other party is serious and he will understand that there is a final deadline for compliance without a shortcoming. However, if he does not meet this period, this party will be in default from that time on and the other party may proceed to dissolve the agreement. Sending a notice of default is therefore an important step towards cancellation of the agreement.
Length of term for notice of default
A notice of default must give a reasonable term for performance. The length of the term for fulfillment that must be given to the other party depends on the circumstances of the matter. A relevant circumstance is the time the counterparty had before the reminder was sent. So if the other party has been idle for weeks, he cannot complain that he finds the term too short, because he has yet to start.
Immediate default
The legislator has also foreseen that sending a notice of default is useless in some cases. Pursuant to Section 6:82 (2) of the Dutch Civil Code, if the other party is temporarily unable to comply or if its attitude shows that a reminder would be useless, notice of default can be given by means of a written notification that the other party is held liable for the failure to perform.
Default without notice
Default can also occur without notice of default. Article 6:83 of the Civil Code lists three cases in which the default occurs without notice of default. The default occurs without notice of default:
- when a time limit for performance has expired without the commitment having been fulfilled, unless it appears that the time period has a different purpose;
- when the obligation arises from tort or serves as compensation for damages as referred to in Article 74 paragraph 1 of the Dutch Civil Code and the obligation is not immediately fulfilled;
- when the creditor must deduce from a statement of the debtor that the debtor will be in default in fulfilling the obligation.
In a judgment of 11 October 2019, the Netherlands Supreme Court indicated that this is not a limitative enumeration. Partly because of the practicality of the legal system in practice, an appeal to the absence of a notice of default may be unacceptable in accordance with the standards of reasonableness and fairness or it can be assumed that a notice of default can be omitted on the grounds of reasonableness and fairness. and then the debtor is in default without notice, "said the Supreme Court.
More important is the following passage in the judgment: 'It follows from the legal history that with regard to the Articles 6:82 and 6:83 of the Dutch Civil Code, the main rules and exceptions regarding notice of default are not so much strict rules that the creditor, after consultation of the law, will be able to apply these rules. Rather, these provisions are intended to give the judge the opportunity to reach a reasonable solution in the cases where the parties - as usually - acted without detailed knowledge of the law, according to what could reasonably be expected of them in the circumstances. '
In practice, these rules on default and contract cancellation were applied quite strictly by judges. Those parties who had not strictly adhered to the legal rules when dissolving the contract would then come home from a cold fair. The Netherlands Supreme Court therefore opts for a more pragmatic approach, which will be very welcome for a lot of people who deal with contracts but who have not thoroughly studied Netherlands law.
How is an agreement dissolved?
The agreement can be dissolved by a judge, but this can also be done by means of an extrajudicial statement. A written notification of the dissolution is sufficient. Dissolution has no retroactive effect. The agreement ends at the time of termination. Performances previously made or services rendered are not unduly made (without legal basis). However, there is an obligation to reverse these obligations (Article 6: 271 DCC). In general, not everything can be undone. Then there the values of the performances will be taken into account and set off. In addition, the party that was in default is obliged to compensate the other party's damage.
Further information
Do you want to terminate an agreement? Or have you received a notice of default? In that case, despite the favourable Netherlands Supreme Court's judgment discussed above, it would be wise to present the case to a lawyer with knowledge of Dutch commercial and contract law. You can of course contact us without any obligation by email or telephone to discuss the matter when you want to seek advice. We like to help you. It is not without reason that our motto is: Your problem, our concern.
More information?
Hein Kernkamp will gladly help you further.
