COVID-19 - amending Dutch law contracts in unforeseen circumstances

In every commercial contract negotiation risk allocation is a key issue. Both parties wish to maximise their upside of the deal, while minimising the potential downside thereof. Contractual provisions that play an important role in risk allocation include warranties and indemnities (guarantees), limitations of liability (exoneration or exculpation provisions), payment terms, force majeure clauses or material adverse change (MAC) clauses, suspension and termination rights and insurance coverage provisions. What risks are allocated and to what extent may be a matter of interpretation of the contract.

But what options do parties have if the negotiators did not take into account certain risks, such as the COVID-19 pandemic and the government measures to contain it and one of the parties cannot or does not want to perform because the contract lost its cause or performance will become extremely burdensome. Dutch Courts have the power to either modify the effects of a contract or set a contract aside in whole or in part on the basis of unforeseen circumstances.

What are unforeseen circumstances?

Unforeseen circumstances (or unforeseeable changes in circumstances) are circumstances that parties did not consider in their contract. In other words, circumstances of which the occurrence or non-occurrence was not in any way already accounted for in the contract (also not implicitly). So, when talking about the COVID-19 pandemic or the government measures to contain it, it is not the issue whether the parties did not or did foresee these events, which, in general, they most likely did not. The question is whether they made a provision for it, which, in general, most likely they also did not do.

When may a Dutch law contract be amended?

When, absent a relevant risk allocation provision, should a contract be altered or set aside in whole or in part because of the COVID-19 pandemic or the government measures? This will have to happen if a party can successfully argue that the COVID-19 pandemic or the government measures that followed, are circumstances that are of such nature that the other party, in accordance with the standards of reasonableness and fairness, could not have expected the unaltered enforceability of the contract.

In general, a Dutch court will exercise restraint to grant a party’s request to set aside a contract in whole or in part because of unforeseen circumstances. For example, in Dutch case law a general economic down-turn (such as the 2009 financial crisis) is considered to be part of the normal entrepreneurial risk. Natural disasters, however, are not. The COVID-19 pandemic and the specific economic consequences of the public health measures taken by the Dutch government affecting specific companies or sectors are likely to be considered beyond the normal entrepreneurial risk.

COVID-19 is an unforeseen circumstance – how to proceed?

Assuming that the COVID-19 pandemic and the government actions to contain it are unforeseen circumstances, then what? Renegotiations may often be the best way forward from a commercial perspective and are preferable over court proceedings. Furthermore, Dutch scholars have argued that in the event unforeseen circumstances come to light, parties may even be obliged to renegotiate a mutually acceptable solution. From Dutch case law it may then be derived that parties should take into account each other’s legitimate interests during such renegotiation. If such negotiations fail, parties may seek refuge in court proceedings.

In what way then should a contract be changed or when can it be set aside in whole or in part. This may in any event depend upon (i) the type of contract, (ii) the remainder of the term of the contract (if it is a continuing performance contract a temporary postponement may be an option), (iii) what risk allocation parties agreed upon in the first place and (iv) what recovery options parties have available (e.g. either through insurance and/or through the economic measures that are now being taken by the Dutch government to soften the blow of the economic impact of the COVID-19 pandemic).

Finally, for a Dutch court that has to strike a new balance or that has to decide upon the termination of a contract, it may be that, at the end of the day, it is all about what risk allocation is economically acceptable and what the best solution is also in the long term, which may also be the question of which party is best in place to carry the burden of the consequences of the COVID-19 pandemic that nobody foresaw and for which none of the parties is to blame.

Learn more about the COVID-19 outbreak and its consequences for commercial contracts.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.