How is your commercial contract affected during COVID-19?

How is your commercial contract affected during COVID-19?

COVID-19 is disrupting both domestic and international trade and commerce. It is therefore important to assess which clauses in commercial contracts are affected.

Here is some guidance on specific provisions to look out for:

Force Majeure clauses

Force Majeure simply refers to an unforeseeable circumstance that prevents a party from fulfilling a contract. This clause generally provides a defence to a party seeking performance of a contractual obligation.

A Force Majeure clause may be expressly included in the commercial contract or in the case of Dutch law, is already imputed by the Dutch Civil Code. Parties to a contract may also chose to define on their own accord exactly what constitutes an unforeseeable circumstance.

Whether performance of a contractual obligation is deemed impossible is not a straightforward question however and a pure financial inability to pay a company’s debts does not automatically preclude one from performance.

In order to prove impossibility of performance due to COVID-19 and the related government measures imposed on companies and individuals, this must be determined on a case by case basis, requiring review of the facts and circumstances surrounding the obligation in question.

Notification Obligations and Mitigation of Loss

Commercial contracts may include notification duties which oblige a party to communicate its intention to invoke certain remedies, for example Force Majeure, within a reasonable or specified timeframe.

Observance of these time frames are important as failure may give rise to claims for compensation or termination of the contract altogether. These considerations are particularly important in supply chains where deadlines for delivery and logistical requirements are paramount.

Notification duties may also attach additional requirements for mitigation of loss. For example, if the Force Majeure clause renders delivery of goods impossible, there may be an additional obligation to notify the innocent party thereof within a specific time period and to take reasonable steps to mitigate the damage or loss incurred.

Thus, even if the responsible party is protected by the impossibility of performance, there may be a duty to source alternative means of performance.

Termination and Damages

Where failure to perform an obligation under the contract has occurred, this may give rise to a right of termination. This right is dependent on the formulation of the clause in question and the circumstances as a whole.

It is important to note however that non-performance of an obligation does not have to be attributable to the defaulting party for a right of termination to be afforded. As a result, Force Majeure may not be a valid defence to a claim for termination.

A party may also seek to claim damages for non-performance, as well as termination of the commercial contract. Generally, damages are provided for to place the innocent party in the same situation as if the contract had been performed. Unlike termination however, the non-performance must be attributable to the defaulting party for such a claim to succeed.

Conclusion

During these unprecedented times it is essential for contracting parties to assess whether they could find themselves in breach of contract. Conversely, if one has been aggrieved by non-performance, they should determine whether and to what extent they have any rights of recourse.

If you have any questions relating to your commercial contract, please don’t hesitate to contact Blenheim Advocaten.

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