Termination of contracts or agreements under Dutch law
In a short period of time the economic mood has evolved drastically due to the coronavirus: in the beginning of March 2020, the focus was on collaboration, transactions and new projects. However, in that same month, the central question became what legal measures can be taken during the corona crisis. No one was prepared for this situation, which requires solidarity and a helping hand in managing the crisis as effectively as possible.
One of the themes that we are now dealing with on a daily basis concerns the termination of agreements in accordance with Dutch law. After all, in times of crisis everyone needs to save costs which often results in the termination of a contract. For the avoidance of misunderstandings: the terms ‘contract’ and ‘agreement’ will be used as synonym throughout this blog.
How to terminate an agreement under Dutch law?
This question is relevant at all times and in every context. However, in times of crisis, ‘business-as-usual’ may become uncertain and this question becomes one of the most frequently asked questions. During the past few weeks we already received the following examples:
- The buyer of a company desired to cancel the acquisition;
- The tenant of a new office building wanted to terminate the just signed Letter of Intent (LOI) because the unexpected mitigated forecast following the corona virus outbreak;
- A client had to cancel all its assignments with freelancers;
- Due to the lack of funding a proposed collaboration concerning the development of software had to be terminated; · A loan agreement became due because the collateral decreased in value too much; and
- An important investor pulled back the day before the execution of an agreed share issuance.
There will be many more examples involving the termination or cancellation of contracts the upcoming weeks and months. In view hereof, the question remains:
What are the possibilities for termination? Will such termination lead to liability for damages?
In answering this question, we will not discuss situations where a party relies upon ‘force majeure’, ‘changed circumstances’ or ‘material adverse events’. Although very relevant indeed, we will discuss these themes separately soon.
Preliminary question: is there a breach of contract?
If you desire to terminate an agreement, the first question is, whether there exists a breach of contract or default. A default situation generally exists if a party does not fulfill its contractual obligations. In such event, under Dutch law, the other party has the option to dissolve (in Dutch: ontbinden) the agreement (unless such option has been explicitly excluded in the agreement).
A prerequisite for invoking the right to dissolve the agreement, is that the defaulting party has been given written notice of the default (generally through a reminder or summons), thereby setting a reasonable term to fulfill its obligations under the agreement. If the defaulting party still fails to comply with the agreement after that notice term, the defaulting party will be in default and the agreement may be dissolved. In addition, the defaulting party can be held liable for damages resulting from the breach of contract.
In the event it is no longer possible for a party to fulfill the contractual obligation, or if that party directly indicates that he will not going to (be able to) fulfill the contractual obligation, the other party may immediately dissolve the agreement, without first having to provide written notice of the default.
Termination for convenience (“opzegging”)
Most agreements under Dutch law may also be terminated for convenience. However, some contracts cannot be terminated for convenience, for example: or a perpetual leasehold or a shareholders agreement (unless indicated otherwise in the agreement).
How do you terminate an agreement for convenience under Dutch law?
In most cases, contracts under Dutch law contain a provision that provides for the termination of the agreement for convenience. Therefore, a first step would be to verify the contract (including the general terms and conditions that may apply) and inspect the termination provisions. In many contracts, the termination notice must be provided in writing thereby taking a notice period into account. If such formalities have not been properly applied, the termination will in principle not take effect.
Important: check the law too!
For some specific types of agreements, Dutch law contains obligatory termination provisions. This for example applies to employment contracts, lease contracts and agency contracts. Consequently, in certain cases, additional rules or restrictions may prevent an easy termination.
What if the contract does not contain a termination clause?
If the agreement does not contain a termination clause, the termination of the agreement could be effected on the basis of applicable legal provisions. Under these circumstances, the following principles apply:
- if the agreement has been entered into for a definite period of time, the agreement will terminate after the expiry of that period;
- if the contract has been entered into for the performance of a specific assignment (for example, for building certain software), the agreement will terminate after that assignment has been completed;
Does this mean that there are no opportunities for early termination of such agreement? No, the following options remain available:
- a first option may be to come to a mutual termination arrangement in consultation with the other party. This requires the consultation with the other contracting party and potentially also some financial compensation as a result of the early termination;
- a second option can be to rely upon force majeure or changed circumstances (e.g. the corona virus outbreak). This may trigger the possibility to dissolve the agreement (in case of force majeure) or to terminate, or amend the consequences of the agreement (in case of changed circumstances).
The termination of continuing performance agreements under Dutch law
Continuing performance agreements are agreements that have been an ongoing or perpetual nature. Distribution agreements, license agreements, (indefinite) employment contracts, (indefinite) lease agreements and franchise contracts are examples of continuing performance contracts.
Either the law (i.e. employment or lease agreement) or the contractual terms (i.e. general terms and conditions) generally determine the termination conditions. Even in the event the ongoing performance agreement or the law do not provide for termination conditions, the starting principle is that such ongoing agreement could be terminated for convenience. Depend on the circumstances of the specific case, special attention must be paid to (i) the length of the notice period that should be taken into account and (ii) the possible duty for the terminating party to compensate the other party financially.