Category: English

Signing electronically in the Netherlands

Amsterdam/Enschede, 27.06.2022

Electronic signatures are playing an increasingly important role in signing contracts and other documents. The European Directive has also been implemented in the Netherlands. This article explains the role it plays and the recommendations surrounding electronic signatures in the Netherlands.

Also examined here is the question of whether electronic signatures in the Netherlands fulfil the “written form requirement” and the extent to which it is possible to sign electronically in the Netherlands.

At the European level, the rules on electronic signatures are set out in the eIDAS Regulation. Article 3 of the Regulation distinguishes between three types of signatures:

– Electronic signature: data in electronic form attached to or logically linked with other data in electronic form and used by the signatory to provide the signature (Part 10); e.g.,

• a scan of a paper signature
• the (typed) signature at the end of an email

– Advanced electronic signature: fulfils the following requirements (Article 13 Part 11 and Article 26 of the eIDAS Regulation):

a. It is clearly linked to the signatory;

b. It allows the signatory to be identified;

c. It has been created using electronic signature creation data which the signatory may use under their sole control with a high degree of confidence; and

d. It is linked to the data signed with it in such a way that any subsequent modification of the data can be detected.

– Qualified electronic signature: an advanced electronic signature which

e. is created by a qualified signature creation unit and

f. is based on a qualified signature certificate;

The qualified certificate must also be issued by a qualified trust service provider that fulfils the requirements of Annex I of the eIDAS Regulation (Article 3, Part 15 of the eIDAS Regulation).

The eIDAS Regulation only prescribes legal effect for qualified electronic signatures. The following shall apply to the other electronic signatures: “An electronic signature shall not be denied legal effect and admissibility as evidence in legal proceedings solely on the grounds that it is in an electronic form or that it does not meet the requirements for qualified electronic signatures.”

This means that qualified electronic signatures have the same effect in each Member State: they have the same legal effect as a handwritten signature. With regard to the other electronic signatures, the legislation varies from one Member State to another.

Dutch Regulations

Article 3:15a BW (the Netherlands Civil Code) regulates the legal effects of simple and advanced electronic signatures.

“An advanced electronic signature (Part 11) and another electronic signature (Part 10) have the same legal effects as a handwritten signature if the signature method used for those two electronic signatures is sufficiently reliable, taking into account the purpose for which the electronic signature is used and all other circumstances of the case.”

This Article does not specify what constitutes a sufficiently reliable electronic signature. There is an open standard which renders giving a general indication of when the requirements in Article 3:15a BW have been fulfilled difficult. It is assumed that a simple electronic signature generally suffices for simple transactions, whereas an advanced electronic signature is required for more complex transactions which demand greater reliability and security.

When determining whether a transaction is simple or complex, the economic value and the nature of the transaction play a role. As the importance of the legal act increases, the electronic signature must be supplemented with additional safeguards.

The parties may decide for themselves which type of electronic signature they consider to be desirable for which legal act. In most cases, the parties will record their choice in their contractual relationship for evidentiary purposes. Should the parties refrain from making such a choice, in the event of a dispute, the court will examine whether the signature actually used is sufficiently reliable, taking into account the nature of the transaction and all other circumstances of the case.

Evidence

If a qualified electronic signature is used, it will have the same legal effect as a handwritten signature (Article 25 (2) of the eIDAS Regulation). This means that it has a binding evidentiary effect (Article 156 in conjunction with Articles 156a and 157 (2) Rv).

The parties may conclude agreements regarding the reliability of advanced and other electronic signatures. This is not possible in the case of qualified electronic signatures, as this is stipulated in the Regulation.

This party agreement is a circumstance which is taken into account when assessing the reliability of the method used for the signature. In the event of a dispute, the judge will examine the cases based on the criteria set out in Article 3:15a BW.

Should the judge find that the simple or advanced electronic signature is sufficiently reliable, this document will have a binding evidentiary effect in accordance with Article 3:15a BW in conjunction with Article 156a BW in conjunction with Article 157 (2) BW. Should the judge decide that an electronic signature is not sufficiently reliable, the electronic document will only have free evidentiary value (Article 152 Rv).

There remains little case law on these issues.

Use of electronic signatures in the Netherlands

Qualified electronic signature: This action is accompanied by a qualified certificate. This certificate is part of the digital code which the sender adds to their message There are special organisations which issue certificates, the certification service. Public Key Infrastructure (PKI) The government issues the certificates used by the Dutch government. Radiocommunications Agency Netherlands monitors the provision of certification services.

Various providers from whom this service can be purchased can be found online (DocuSign, Adobe).

Advanced electronic signature (AES): This option is not mentioned on the government website. The eIDAS Regulation mentions this but does not provide any further explanation.

Other electronic signatures: This is generally not recommended for business transactions of significant value.

Conclusion

A qualified electronic signature has the same legal effects as a “normal” signature. This means that the signed document has a binding evidentiary effect.

A document signed using an advanced or other electronic signature will only have binding evidentiary effect if the court considers the signature method to be sufficiently reliable in relation to the nature and value of the transaction. If a judge does not consider the type of signature to be sufficiently reliable, Article 3:15a BW will not apply and the document will have free evidentiary effect. It should be noted that, if the court does not consider the signature method to be reliable, it is highly unlikely that it will confer any significant evidentiary value.

Author: Advocaat Irith Hofmann, Damste Advocaten, Netherlands

The provisions relating to the actuarial deposit are not applicable to British plaintiffs

Vienna, 09.06.2022

The United Kingdom’s withdrawal from the European Union has raised numerous uncertainties regarding bilateral law enforcement. For example, the Austrian Supreme Court recently had to deal with the issue of the actuarial deposit. The purpose of the actuarial deposit (§ 57 of the Austrian Code of Civil Procedure (öZPO)) is to protect a domestic defendant from not being able to recover legal costs from a foreign plaintiff who has unsuccessfully filed a claim against the defendant; as a security for legal costs, the actuarial deposit is thus intended to protect against abusive or costly legal action by foreign plaintiffs.

The Austrian Supreme Court ruled on 23/03/2022 that a British plaintiff did not have to provide an Austrian defendant with an actuarial deposit. The Supreme Court based the decision on the enforcement obligation between the European Union and the United Kingdom agreed by the United Kingdom’s ratification of the Hague Convention on Choice of Court Agreements in Civil and Commercial Matters on 28/09/2021. Due to this contractual agreement, the defendant’s argument that the lack of enforcement of Austrian legally established procedures in the United Kingdom would create significant uncertainties for Austrian contracting parties was not valid.

This decision is part of a growing body of post-Brexit case law in the European Union. After a hard Brexit was avoided at the last moment via a trade agreement with the EU, Prime Minister Boris Johnson declared his intention to adjust the remaining EU influences on the hierarchy of standards in favour of British companies. It can therefore be assumed that EU companies will be increasingly confronted with legal uncertainties in the future.

Author: Mag. Kristina Steflitsch / Mag. Johannes Zink, hba Rechtsanwälte Vienna, Austria

EARN extends its reach

Berlin/Brussels, 17.11.2021

The EARN European Accounts Receivables network has gained another experienced partner in Central Europe with DEWISPELAERE ADVOCATEN, Belgium.

DEWISPELAERE ADVOCATEN is an independent law firm based in Brussels (Strombeek-Bever).  Founded as early as 1975, DEWISPELAERE today specialises in particular in corporate, contract and financial law also with cross-border aspects. In addition, they have special expertise in credit management and thus perfectly complement the EARN portfolio with a highly experienced legal partner in Belgium.

You can view our current EARN members here.

ECJ: avoidance of transactions in insolvency proceedings in cross-border business

Berlin, 28.07.2021

In insolvency proceedings conducted in Germany, it is particularly easy for insolvency administrators to successfully assert claims against creditors by means of insolvency avoidance. This practice is based on the administrator-friendly insolvency case law by the German Federal Court of Justice, which has facilitated the enforcement of avoidance claims for the insolvency administrator by lowering the standard of proof.

A judgement by the European Court of Justice (ECJ) of 22 April 2021 (Case C-73/20 – Oeltrans Befrachtungsgesellschaft) now provides a lifeline to foreign creditors domiciled in an EU Member State. In its judgment the court decided on insolvency avoidance claims asserted against a Dutch inland waterway shipping company which had received a payment for transports from a client who declared insolvency shortly after. This payment was demanded back by the insolvency administrator of the former client.

Art. 13 of Council Regulation (EC) No. 1346/2000 of 29 May 2000 (now identical in wording to Article 16 of the (EU) Regulation 2015/848 on insolvency proceedings) allows foreign defendants to invoke the insolvency avoidance law of their home country, as long as its requirements for avoidance are lower than the requirements in the country of the contesting insolvency administrator. The Dutch inland waterway shipping company used this regulation as defence against the insolvency administrator’s avoidance claim by arguing that under Dutch law the contested payment would not be voidable and thus the Dutch law would have to be applied.

Against the insolvency administrator’s objection, the ECJ ruled that the payments in question have to be assessed under the Dutch insolvency law. Hence, the German Federal Court of Justice, which requested the ECJ’s decision in the first place, now has to decide whether the contested payments are voidable under Dutch law. Chances are high that the court will decide in favour of the Dutch company and dismiss the insolvency administrator’s claim.

In case of a business partner displaying an ambiguous payment behaviour, the ECJ ruling provides a new possibility for corporations with foreign group companies to prevent future insolvency avoidance claims. It is advisable to these corporations to have the supply or provision of services to such a business partner carried out by group companies that have their registered office in countries with insolvency laws that are preferable for creditors in case of avoidance claims. To do so, contracts should be drafted in a way that effectively determines the jurisdiction of the foreign group company that provides the services and receives the potentially contestable payments as governing. Prior to contracting, it is also necessary to examine whether the law on avoidance of transactions in insolvency proceedings in the country concerned is actually preferable for the creditor. However, as stated at the outset, this will be the case for almost all EU member states. Presumably, this legal concept is, in accordance with section 339 of the Insolvency Statute, also applicable to foreign companies domiciled outside the EU.

Author: Michael Schmidt, attorney at law

PASCHEN Rechtsanwälte

VAT: New EU e-commerce rules harmonise VAT rules for greater consumer convenience and fairer competition

Brussels, 9 July 2021

The new VAT e-commerce rules bring a simple and uniform set of VAT rules for all businesses engaged in cross-border e-commerce (especially online sellers,  marketplaces/platforms as well as operators, couriers, customs, tax administrations and consumers) either from inside or outside the EU.

The main changes as of 1 July 2021 are:

• End to VAT exemption on importation: With the implementation of the new VAT rules, all goods imported to the EU and services are now subject to VAT.
• New EU-wide threshold: It is defined that the EU-wide threshold for distance sales of goods is EUR 10,000. The VAT must be paid in the Member State where the goods are delivered.
• Achievement of uniformity of the VAT registration: The electronic portal One-Stop Shop (OSS) simplifies up to 95% of VAT obligations for online sellers and electronic interfaces throughout the EU. With the help of the One Stop Shop the online retailer can notify and pay VAT in the One Stop Shop for all of their EU sales via a quarterly declaration. For non-EU sellers is the registration in an analogous Import One Stop Shop possible that allow to ensure the correct amount of VAT in the Member State in which it is finally due.

These new rules will:

• ensure that VAT is paid where consumption of goods and services takes place;
• create a uniform and transparent VAT system for cross-border supplies of goods and services;
• re-establish fair competition between European and foreign e-commerce market players, as well as between e-commerce and traditional shops;
• offer businesses a simple and uniform system to declare and pay their VAT in the EU via the VAT One Stop Shop/Import One Stop Shop.

Similar reforms have been put in place and are working well in other jurisdictions such as Norway, Australia and New Zealand.

Full details including explanatory notes on VAT e-commerce rules and the Council Directive (EU) 2017/2455, the Council Directive (EU) 2019/1995 and the Council Implementing Regulation (EU) 2019/2026 are available here: https://taxation-customs.ec.europa.eu/vat-e-commerce_en

French study on the efficiency of European insolvency proceedings

Paris, 2021-04-22

In January 2021, the « Conseil National des Administrateurs Judiciaires et des Mandataires Judiciaires de France » (National Council of French Judicial Officers and Judicial Representatives) has conducted a study on the efficiency of collective proceedings throughout Europe, comparing both the functioning and the role of legal systems governing insolvency proceedings in Germany, Spain, Italy, Netherlands, the UK and France.

As far as France is concerned the study reveals that:

1. France is the sole country in which two entities are involved. One to represent the interests of the debtor – the administrators – the other the interests of the creditors – the agents. These professions are regulated just like in Italy.
2. France has 2,6 times more bankruptcy proceedings than Germany and the UK. In 2019, insolvency proceedings opened in France where handled as liquidation proceedings in 65% of the case, 25 % of the cases where considered reorganisation proceedings and the remaining 10 % referred to the just introduced new preventive proceedings.
3. French insolvency proceedings focus very much on safeguarding employment and on the preservation of activity of companies. Consequently, 39% of companies under liquidation proceedings adopt a business continuity plan avoiding finaly liquidation. This 39% figure must be compared with the 8% figure in the Netherlands, 5% in Spain and 4.5% in Germany.
4. In France, the order of privileges differs from other jurisdictions since employee claims are given a very high priority. While employee protection is different in France from other EU- member states, all countries scrutinised in the study provide a guaranteed fund dedicated to the protection of the employees’ interests.

In 2020, subsidies aimed to cushion the economic consequences of the Covid crisis have considerably reduced the number of insolvencies in France.

Author: Marc Olivier-Martin, ROOM AVOCATS

Recent Case-Law Of Luxembourg Courts – Covid19-Rental Exeption For Commercial Tenants During Governement-Ordered Plant Closures

Luxembourg, 2021-03-17

The Justice of Peace Court of Luxembourg handed down interesting rulings in January 2021 on the question of whether commercial tenants are obliged to pay rent arrears during the plant closures which where incurred on the orders of the state to combat the Corona pandemic.

Commercial lessors were claiming payment of rent arrears against café owners and textile retailers who were forced to close their premises to the public during the Corona lockdown.

The defendant commercial tenants sought relief from rent or, in the alternative, a reduction in rent in court on the grounds that they were not allowed to use the rental property as a result of the government-ordered plant closures. They claimed, being obliged to stop their payments, since the claimant could not fulfil their essential contractual obligation – to guarantee the tenant undisturbed use of the rental property.

The Justice of Peace Court granted them full relief from the obligation to pay rent arrears for the period of the government-ordered plant closures based on Article 1722 of the Luxembourg Civil Code (LCC).

This article refers to the legal concept of the “theory of risk”, which provides that in synallagmatic contracts (contracts with mutual obligations of the contracting parties), if due to a case of force majeure the contractual obligation of one party ceases to exist, the corresponding obligation of the other party ceases to exist also. These circumstances entitle the renting parties to have their contracts renegotiated.

According to Article 1722 LCC, a lease is terminated by operation of law if the leased property is completely destroyed by force majeure during the term of the lease. If the rented property is only partially destroyed, the tenant may, depending on the circumstances, demand either a reduction in rent or termination of the tenancy agreement. The Justice of Peace Court ruled that Article 1722, which primarily relates to the material loss of the leased property, can also be applied in the case of a “legal loss” of the leased property.

However, the Justice of Peace Court pointed out that a commercial tenants are only released from their obligation to pay rent if the unforeseeable event prevented them from using the rental property for its intended purpose.

The risk theory of Article 1722 LCC therefore does not apply if the unforeseeable event only leads to a reduction of the commercial tenant’s sales.

It remains to be seen whether these recent rulings of the Justice of Peace Court will be overturned on appeal proceedings or whether they will obtain permanent recognition in Luxembourg case law.

Author: Anne-Marie Schmit, attorney at law

ETUDE ANNE-MARIE SCHMIT

Rent reduction for Dutch commercial tenants in corona time

Enschede, 2021-02-19

Due to government measures, amongst others hotels, shops and catering establishments closed their doors for several months during the first lockdown and now, February 2021, the Netherlands are in the midst of a second lockdown. Due to the declining or even completely disappearing turnover, it is almost impossible for tenants of industrial space to continue to pay the (full) lease installments.

In the Netherlands, various proceedings have been brought in preliminary relief proceedings about the question if the tenant can reduce its monthly lease towards the landlord. The outcome of these proceedings in the first half of 2020 were rejective resulting in the tenant baring all the risks of the corona crises not being allowed to reduce its rent. This has changed meanwhile, in the second half of 2020 and start of 2021 tenants often receive a temporarily rent reduction of 25-50%.

The legal ground of this discount varies. In the majority of the proceedings, provisional judges have ruled that the government measures that restrict the exploitation of a business premises are defective for the lease. Based on the legal defect regulation a tenant can request a rent reduction in case he cannot have the rental enjoyment that he could expect normally. The legal question is whether the government measures can be regarded as a defect in the rented property. Some judges have meanwhile ruled in favor of the tenants based on this ground.

Another legal ground is rent reduction due to unforeseen circumstances. In recent months, several tenants have taken the view that the lease must be amended due to the corona crisis. These tenants invoked article 6: 258 of the Dutch Civil Code. This article of the civil code provides that if due to an unforeseen circumstance the unaltered maintenance of a (rental) agreement cannot be expected, the agreement can be adjusted. The question is whether in the case of the corona crisis there is an “unforeseen circumstance”. Some provisional judges believe that the corona crisis and the subsequent government measures are an unforeseen circumstance. This is because the parties did not consider a pandemic with far-reaching consequences when concluding the lease.

Recently, January 2021, the first normal (not preliminary relief) proceedings concerning such a rent reduction have ended in a positive result for tenants meaning that the judge allowed a rent reduction for the tenant. This means that the trend will continue and landlords will have to deal with this more often.

Author: Irith Hoffmann, I.K.M., attorney at law

Damsté lawyers – civil law notaries

Restructuring Directive now implemented in Germany

Berlin, 2021-01-28

In 2016 the European Commission presented a proposal for a “Directive of the European Parliament and the Council on preventive restructuring frameworks, second chance and measures to improve the efficiency of restructuring, insolvency and debt relief proceedings”. This amended Directive 2012/30/EU” or “EU Restructuring Directive” for short, which was intended to help overcome the consequences of the 2008/2009 financial crisis. After intensive discussion in the European bodies, the directive entered into force in July 2019.

With its record-breaking accelerated implementation into national law, most recently against the backdrop of the Corona pandemic – there were less than 4 months between the first draft from the Ministry of Justice on 18 September 2020 and the entry into force of the law on 1 January 2021 – a pre-insolvency restructuring procedure has now also been implemented in Germany.

The detailed regulations can be found in the Act on the Stabilization and Restructuring Framework for Companies (StaRUG), which as Article 1 makes up the most extensive part of the Act on the Further Development of Restructuring and Insolvency Law (SanInsFoG).

The content of the reorganization procedure in the StaRUG is very similar to the German regulations on insolvency plan proceedings. Here also a (restructuring) plan must be drawn up, the content of which must follow Article 5 ff. of the StaRUG. However, some legal relationships are not amenable to being structured within the framework of such a plan. The most important example is employee claims (Article 4 StaRUG). The originally envisaged possibility of being able to dispose of existing contractual obligations arising from mutual contracts in the future, in particular those arising from continuing obligations, within the framework of the reorganization proceedings, has also been dropped.

As in the insolvency plan proceedings, the creditors in the restructuring plan are also divided into groups, Article 9 StaRUG, in each of which separate votes are then taken. However, unlike in the insolvency proceedings, the restructuring plan may be limited to those creditors who are important for the success of the restructure, Article 8 No. 2 StaRUG. The plan is accepted if it is approved by three-quarters of the vote of the respective groups, Article. 25 StaRUG. This is the same procedure as in the insolvency plan proceedings, however, groups rejecting the plan can also be outvoted here if the plan ultimately achieves a majority across all groups that meet the requirements of Article 26 StaRUG (so-called cramdown).

If the debtor conducts the proceedings without the assistance of a court, it may initially make the plan available to the creditors affected by it in text form (i.e. also sufficiently by e-mail) and set them a deadline for acceptance of at least 14 days. If the affected parties have not previously been allowed to jointly discuss the plan, this must include a notice that a discussion meeting will be held at the request of a creditor, Article 17 (3) StaRUG. Under Article 20 StaRUG, however, the debtor may also provide from the outset for a vote at a meeting of the parties affected by the plan.

If the debtor expects that individual parties affected by the plan will not participate, it will regularly make use of the option under Article 23 StaRUG to have the plan voted on in court proceedings, to assist with legal certainty.

Such proceedings must also be initiated if the debtor intends to make use of other “instruments of the stabilization and restructuring framework” (Art. 29 StaRUG). This will regularly be the case, in particular if it is intended to obtain enforcement and/or liquidation freeze through the issuance of a stabilization order under Art. 49 StaRUG.

For the creditors concerned, this means that they can no longer enforce existing claims and that they may even be provisionally prohibited from enforcing important security interests, which primarily concerns simple and extended retention of title. Under Article 55 StaRUG, if the debtor is dependent on its performance for the continuation of the business, the creditor is precluded in this case both from refusing performance and from terminating or amending the contract by invoking the debtor’s default. However, in these cases, the creditors who are obliged to pay in advance are at least granted protection to a certain extent by Art. 55 (3) StaRUG. They may demand collateral or insist that performance be made only concurrently. Loans and other credit commitments that have not yet been disbursed may be terminated on the grounds of deterioration in financial circumstances.

As provided for in the EU Directive, the debtor can in principle conduct the proceedings on its own. However – and this will probably be the rule in the future, if only because of the complexity of the proceedings – a restructuring representative can be appointed by the court at the debtor’s request: in a large number of constellations listed in Article 73 StaRUG, this appointment must even be made by the court ex officio. Finally, the appointment may also be made at the request of creditors if they hold more than 25% of the voting rights in a group and undertake to bear the costs.

The tasks of a mandatory restructuring representative according to Article 76 StaRUG are similar to those of the administrator in insolvency in self-administration. The optionally appointed restructuring representative, on the other hand, only has the task of supporting the parties involved in the preparation of the restructuring concept and plan, Article 79 StaRUG. The remuneration of the restructuring representative is also regulated in the StaRUG. Accordingly, he receives a fee based on the time spent, which as a rule amounts to € 350/h, and can charge up to € 200/h for the assistance of qualified employees, Article 81 StaRUG.

For proceedings of particular importance, Art. 93 StaRUG provides that the court may set up a creditors’ advisory council in line with the provisions of insolvency law.

Finally, Art. 94 et seq. StaRUG contains provisions on the so-called restructuring facilitation. This is appropriate if there is a good chance of a consensual agreement with all creditors affected by the restructuring. In this case, a restructuring moderator is appointed by the court to mediate between the parties involved. The proceedings end either with the conclusion of a restructuring settlement, which is confirmed by the restructuring court at the debtor’s request – Article 97 StaRUG – or there is a transition to the stabilization and restructuring framework according to Article 100 StaRUG and thus to restructuring proceedings under court direction.

In summary, creditors can be severely affected by pre-insolvency reorganization proceedings as in the case of insolvency of their contractual partner. Even if they want to support the reorganization efforts, they should keep in mind that insolvency proceedings may follow if the reorganization fails, and in that case, the risk of a later challenge of insolvency must also be kept in mind. Articles 89 and 90 StaRUG grant only very limited protection against the avoidance of legal acts in the course of the reorganization proceedings and the context of the fulfilment of the restructuring plan. In the case of transactions with the debtor during ongoing reorganization proceedings, it is therefore imperative to ensure compliance with the requirements of cash transactions within the meaning of Article 142 InsO. Often this will require the instruments set out in Article 55 StaRUG. The protection against avoidance concerning legal acts within the scope of plan fulfilment presupposes a plan that has been established by the court.

The pitfall in these matters often lies in the details. For example, refusal to provide further performance by invoking Article 55 (2) StaRUG may be accompanied by substantial claims for damages by the debtor if the creditor fails to prove that the requirements of the provision have been met. When dealing with debtors who are pursuing pre-insolvency reorganization proceedings, it is therefore essential not to save money at the wrong end, but to make sure that legal expertise is consulted.

Author: RA Lutz Paschen

PASCHEN Rechtsanwälte

English Law Contracts and COVID-19

Northampton, 2020-06-01

At some point companies will be required to consider whether they, or a party with whom they have contracted, can suspend or terminate a business contract as a consequence of the disruption caused by COVID-19.

Government restrictions, unsettled markets and labour issues continue to create obstacles to doing business, in some cases making adherence to contractual obligations impossible. For those agreements between international parties governed by English law, determining whether an agreement can be suspended or terminated is not necessarily straightforward because no general relief or allowance for COVID-19 exists. Each case depends on the specific terms of the contract and the exact circumstances in which the parties find themselves.

Here are some of the key issues that parties to contracts governed by English law should consider:

1. Force Majeure – does the contract include a force majeure provision that deals with the specific circumstances?
2. Mitigation – has the affected party mitigated its loss?
3. Frustration – has there been frustration of the contract?

What is Force Majeure?

A force majeure clause (if included within the contract) commonly sets out the rights and remedies of one or both the parties if an extreme event occurs which is outside their control.

A contract must specifically provide for force majeure as there is no common law principle for force majeure in England.

As each contract is drafted differently, it is important to review the specific wording on a case by case basis.  Depending on the wording of the clause, a party may be able to rely on the clause to justify delay, suspension or even termination of the contract without any liability.

Does COVID-19 Constitute a Force Majeure Event?

Whether COVID-19 constitutes a force majeure event will depend upon the definition of “force majeure” in the contract as well as the specific circumstances.

Wording that includes “pandemic” or “health crisis” may support COVID-19 being considered a force majeure event.  Any mandatory restrictions imposed by the Government may be considered a force majeure event if the definition includes wording such as “acts of government” and “regulatory measures”. On the other hand, reference to an ‘Act of God’ is unlikely to include COVID-19 as this usually refers natural disasters such as floods and earthquakes.

Unless the contract specifically states otherwise, force majeure generally won’t apply if the event was ongoing or in the contemplation of the parties when the contract was entered into.  The point at which COVID-19 was “in the contemplation of the parties” is open for interpretation.

It will be for the party seeking to enforce the force majeure clause to prove that the force majeure event has occurred to the extent that performance is significantly delayed or altered.

Mitigation

Where a force majeure event has been established, it is still necessary for the disadvantaged party to show that it has mitigated the effects of the force majeure event, regardless of whether this is specifically provided for in the contract.  The purpose of the force majeure clause is to provide relief for the inability to perform obligations under the contract, not to terminate or suspend the contract where the contract becomes more onerous for the other party.

Frustration

Separate and different to force majeure, frustration does not need to be provided for in the contract, it is a common law right.  A contract may be frustrated if an event occurs, through no fault of either party, which makes performance of the contract impossible or fundamentally different.  A contract will not be frustrated if the contract just becomes more difficult or expensive for one party to perform. In practice frustration is rarely established as it is difficult to prove that a contract was impossible to perform. However, frustration may be increasingly relied upon, given the current economic conditions, as a means of delaying or confusing matters.

Where a contract is frustrated, that contract is terminated and the parties will be discharged from their future obligations. If the contract is long-term in nature then the implications of termination should be considered before claiming that the contract is frustrated. Importantly, frustration won’t discharge the parties from previous obligations that accrued.

A potential example of frustration would be where a location is shut down as a consequence of government restrictions in connection with COVID-19 and this stops a time critical event, which is the subject of the contract, being held.  In such circumstances it might be reasonable to argue that the parties could not perform the contract.

Conclusion

Whether force majeure applies will depend on the individual contract and the circumstances in which the parties find themselves.  It is important that contracting parties seek legal advice on the specific terms of their contract.  If a party wrongly refuses to perform its contractual obligations or incorrectly terminates the contract, then the other side may take advantage of this and seek damages for breach or wrongful termination.

Rather than invoking a force majeure, businesses may wish to discuss options with the other party to reach an amicable solution.  It is possible that both parties are in a similar position e.g. if the contract is for the supply of goods, the other party may no longer require the goods. Maintaining good business relationships during the current pandemic may yield benefits when some form of normality eventually returns.

Author: Craig Harrison, Attorney at law

Tollers LLP