Failure to perform the agreement

We speak of a breach of contract when a party fails to comply with an agreement or does not properly fulfil established agreements. This is also referred to as a breach of contract. In the event of a breach of contract, the party that fails to comply with contractual agreements is liable for damages. In addition, the aggrieved party may terminate the agreement.

High degree of freedom of contract

Under Dutch law, there is a high degree of freedom of contract. This means that anyone actively engaged in commercial transactions with other parties is free to determine the content of the agreement. This is in contrast to employment law or tenancy law, which are subject to mandatory provisions. In such cases, the law specifies when certain agreements are in breach of the law.

Most disputes between parties arise during the performance, termination and dissolution of a contract or when a contract is enforced. Disputes may arise about the content of an article or a provision. Another possibility is that circumstances have changed to such an extent that maintaining the contract is unreasonable. In some cases, this constitutes force majeure. The most common disputes arise when one of the parties fails to comply with the agreement, either in whole or in part. In that case, one party is guilty of a breach of contract.

Verbal agreement

In the Netherlands, a verbal agreement is just as valid as a written contract. Agreements are “form-free”. This means that the law does not impose any requirements on such agreements. There are no provisions stipulating that agreements must be recorded on paper. One problem with verbal agreements is that they are often difficult to prove afterwards. It is therefore preferable to record business agreements in writing, so that a failure to perform can be demonstrated. If there are doubts, or if the parties disagree, they can refer back to the agreement to see what rights and obligations have been entered into.

Negotiations are not always non-binding

Before an agreement is concluded, the terms of that agreement are often negotiated. During the negotiations, the parties do not yet fully agree with each other. So there is no agreement yet. However, case law has determined that conduct during the negotiations does indeed influence the actions of the other party.

If the negotiations involve significant interests for the negotiator or his company, it is advisable to seek (legal) advice. There are, of course, many different types of negotiations and agreements. When parties enter into negotiations with each other, it is important to take the following elements into account:

• Is the party with whom negotiations are being conducted authorised and/or entitled to negotiate on behalf of that party and ultimately to conclude an agreement? General powers of representation can be verified in the trade register of the Chamber of Commerce. Another option is to request written authorisation showing that the person is authorised to negotiate on behalf of the other party.

• Have the negotiations progressed to such an extent that the other party could infer that an agreement would be concluded? It is important to ask this question regularly. In such a case, it may be that the negotiations can no longer be broken off without the consequences of a breach of contract. The consequences, even if no agreement is reached, could then be significant.

Letter of intent or Memorandum of Understanding

During negotiations (e.g. in the case of a company takeover), the letter of intent (LOI) or Memorandum of Understanding (MoU) deserves special attention. In these documents, the parties want to record a certain intention without committing themselves definitively. The choice of words and structure of such an LOI is of the utmost importance in order to prevent, sometimes unintentionally, a meeting of minds on certain points.

In a pure LOI, only the procedural agreements are laid down. These agreements relate, for example, to:

– the various steps to be taken in the acquisition process;

– the conditions under which the potential seller provides information to the potential buyer (confidentiality);

– the manner in which the parties deal with other potential buyers (exclusivity).

The LOI or MoU determines the manner in which the parties work towards a purchase agreement. If there is agreement, this will often be laid down in a separate document.

Terminating an agreement can lead to damage

Without a contractual or legal provision, a continuing performance contract (an agreement that is not entered into for a specific period of time) can only be terminated if there are sufficiently compelling reasons for the termination and if a reasonable period of notice is given by the terminating party. Circumstances such as the duration of the agreement are of great importance in this regard.

If the contracting party of an entrepreneur does not wish to continue the cooperation agreement and terminates it, the other party will lose turnover or suffer other disadvantages. This disadvantage or termination damage constitutes a failure to perform and is, in principle, at the expense of the entrepreneur. This may be different if there are grounds for charging the damage or part of this damage to the party that terminated the agreement.

There may be various grounds for substantiating this damage. A ground may be based on the contract and/or legal provisions and/or the requirements of reasonableness and fairness, which imply that, under special circumstances, certain parts of this termination damage should be borne by the party that terminated the agreement.

Agreement: performance, fulfilment and breach of contract

More often than they would like, entrepreneurs have to deal with customers who do not fulfil their agreements, either in whole or in part. If a party does not fulfil the agreement, either in whole or in part, and this can be attributed to him or her, this constitutes a breach of contract, a failure to fulfil the agreement, or a defect in performance.

Failure to perform

Failure to perform is a breach of contract that can take various forms. The breach of contract may mean that the debtor does not comply with the agreement at all. It is also possible that performance is not timely or that performance is unsatisfactory. Delivery is made, but the delivery does not meet the specified requirements.

The party that fails to comply with the agreements is in breach of contract. This requires a notice of default. The party must be notified of the fact that agreements have not been or will not be fulfilled by means of a notice of default. A notice of default is a written reminder (by registered letter or e-mail) giving the debtor a final opportunity to properly fulfil the agreements in the contract.

The written notice must contain a clear deadline within which the debtor can still fulfil their obligations. This deadline may not be unreasonably short. If, after sending this notice of default, the agreement is still not fulfilled, the debtor is in default. From the moment the debtor is in default, the creditor can take a number of legal actions to obtain compensation for its losses or to enforce the agreement, possibly through legal proceedings.

Sometimes it is not necessary to send a notice of default because performance is no longer possible or because the debtor has indicated that it will not fulfil its obligation. Examples include flyers with a specific date on them. Once this date has passed, performance is pointless. In such cases, the other party is immediately in default and (legal) action, such as claiming damages, can be taken immediately.

In the event of non-performance of the agreement, there are four options for the creditor:

– demand performance plus compensation for (delay) damage;

– claim damages instead of performance of the agreement;

– terminate the agreement and claim damages;

– suspend (not perform) its own obligations until the other party performs its part of the agreement.

Demanding performance of the agreement

If, after sending and receiving the notice of default, the debtor still fails to fulfil its obligations, it will be in default – it will be in breach of contract. It is possible to still fulfil the obligations with which the debtor can “redeem” the default. In this case, the debtor often owes additional compensation. Examples of this are damage caused by delay and the costs incurred to collect the claim.

If the debtor is able to fulfil an agreement but does not wish to do so, a claim for fulfilment of the agreement can be brought before the court.

Claiming compensation

If the creditor no longer wishes to have the agreement performed or if performance is no longer possible, he can notify his debtor that he is claiming substitute compensation on the basis of failure to perform. From that moment on, the debtor can no longer perform his original obligation and is obliged to compensate the other party for the damage suffered.

Claiming compensation is only possible if the debtor’s failure to perform is attributable to the debtor or if it is at his risk. The compensation usually concerns compensation for financial loss. In exceptional cases, other damages may also be compensated, but these possibilities are considerably more limited.

If the debtor is unable to fulfil his obligations because, for example, a severe storm has damaged the goods to be delivered, he can invoke force majeure. In that case, the creditor must terminate the agreement so that he does not remain liable for the damage himself.

Termination and partial termination

In the event of non-performance of the agreement and the debtor being in default, the agreement may be terminated. Any failure to perform the agreement may lead to termination, unless it is a minor failure that is too minor to justify termination. Culpability is not a requirement for termination of the agreement. The agreement may also be terminated in the event of force majeure.

The consequence of terminating an agreement is that any work already performed must be reversed. Work that was still to be performed no longer needs to be performed. If work can no longer be reversed, such as (partial) painting of a house, compensation may sometimes have to be paid.

If a contract is only partially not fulfilled by one party, partial termination of the contract is also possible. This is known as partial termination. As a result, the rest of the contract (where there are no shortcomings on the part of the parties) remains in force. If the debtor does not agree to this, the creditor can ask the court to declare the contract terminated.

Suspension of the contract

In the event of non-performance of the agreement, the creditor is entitled to suspend his own obligations. This means that the creditor waits to perform his own obligations under the agreement until the other party has fulfilled its obligations. Suspension is possible from the moment that a claim is due and payable. It must be clear that the claimant has a claim that should already have been fulfilled. In some cases, it may be unreasonable to suspend performance if the other party’s failure to perform is very minor.

Unlawful act

Even if there is no agreement between the parties, one of the parties may be liable for damage caused by a failure to perform. Article 6:162 of the Civil Code (BW) stipulates that anyone who commits an unlawful act against another person is obliged to compensate the creditor for the damage suffered as a result. In order to successfully bring an action for tort, five requirements must be met: unlawfulness, imputability, damage, causality and relativity. An agreement is not required in the case of a tort.

Unlawfulness

The law distinguishes between three different types of unlawful acts: an infringement of a right, an act or omission in breach of a legal obligation, and an act or omission in breach of what is considered proper conduct in society according to unwritten law. An infringement of a right could, for example, be an infringement of the rights and/or property of the company.

Attributability

The perpetrator is considered to be attributable if they are at fault for their conduct or if the unlawful act falls within their sphere of risk. The latter means that this conduct is (by law) their responsibility. In this case, the failure to comply is attributable. In some cases, the employer may be liable for the conduct of their employees.

Damage

Some form of damage must have been suffered. The law includes a provision stating that damage that must be compensated on the basis of a legal obligation to pay compensation consists of “financial loss and other damage”. Financial loss consists of both loss suffered and loss of profit. “Other disadvantage” refers to other types of damage, such as immaterial damage.

Causality

There must be a (causal) link between the unlawful act and the damage. In principle, the injured party will have to prove this.

Relativity

The relative aspect of the wrongfulness means that the standard violated by the perpetrator must have been written to protect the interest that has been violated. An example is a dentist who practises his profession without authorisation. The law requires dentists to have a licence. Other dentists cannot hold that dentist liable on the grounds of wrongful act. The licence requirement was introduced to protect patients from incompetent dentists, not to protect the livelihoods of competing dentists.

Request legal advice without obligation

If you have any questions regarding breach of agreements or contracts, please contact one of our solicitors. You can reach us by email, telephone or the contact form. Based on the agreement and the circumstances described, our solicitors can often immediately indicate what the possibilities are, but also what the impossibilities are. Therefore, always seek advice from a corporate law solicitor before terminating or entering into an agreement.