Termination and compensation
Contracts that are not fulfilled can place an enormous burden on your business. Reliability is key. A supplier who fails to deliver, a customer who fails to pay, or a service provider who consistently fails to show up will also cause you problems. You wait, you send emails, and nothing changes. And it is your reputation that suffers.
In this article, I will outline the legal remedies available to you as a business owner to terminate a poorly performed or breached contract and to recover your losses.
When is the other party in breach?
A breach occurs when a party fails to fulfil its contractual obligations or fails to do so on time or properly. Think of a supplier who delivers late, a contractor who delivers shoddy work, or a customer who simply fails to pay.
To be entitled to damages, the breach must be attributable to the other party. However, even if the other party is not at fault for the breach even in cases of force majeure termination is often an option. Attributability is not a requirement for termination.
The notice of default
Before you can terminate the contract or claim damages, in most cases the other party must first be in default. You achieve this by sending a written notice of default. This is a formal notice in which you set a reasonable deadline for performance (Article 6:82 of the Dutch Civil Code).
If the other party does not respond, or makes it clear that they will not perform, then default is a fact. A well-drafted notice of default is strategically invaluable: it records what went wrong, when it happened, and what you expect, and this documentation is indispensable later.
The importance
As soon as your counterparty is in default, you are in principle entitled to terminate the contract (Article 6:265 of the Dutch Civil Code). However, this right is not absolute. The law contains an important exception: termination is not justified if the breach, given its special nature or minor significance, does not justify termination and its consequences.
A minor delay or a slight discrepancy in the number of products delivered therefore does not give you grounds to scrap the entire contract. In the case of systematic or serious breaches, it is a different matter.
This makes it more important to document the breach carefully. The key factor here is the subjective significance of the breaches. If timely delivery is essential, it is therefore advisable to communicate clearly with the other party. Those who have their documentation in order are in a strong position should the other party contest the termination.
Partial termination: a scalpel, not an axe
Termination does not have to be an all-or-nothing proposition. The law also offers you the option of partial termination (Section 6:270 of the Dutch Civil Code): you terminate the contract only to the extent that the breach justifies it.
For example, in the event that a supplier delivers 100 products, 30 of which are defective. You can then choose to terminate the contract solely in respect of those 30 defective units and allow the rest to stand. In practice, this is often a more efficient and commercially sensible approach than full termination.
Partial termination also has implications for the price obligation. The consideration is reduced proportionately. This means you are not left liable for the full invoice amount for partial performance.
Permanently impossible? Then take immediate action
In some cases, performance is not merely delayed but permanently impossible. Consider a unique work of art that is destroyed before delivery, a wedding cake that is not present at the wedding, or a concert that has been cancelled. The service or item is irretrievably lost.
In the event of permanent impossibility, a notice of default is not required: the breach takes effect immediately by operation of law (Article 6:81 in conjunction with 6:83 of the Dutch Civil Code). You do not need to give the other party an extra chance to still perform; that chance simply no longer exists.
This immediately opens the door to termination and compensation, without having to go through the usual formal notice procedure. Acting swiftly is therefore all the more essential.
Compensation and termination
Termination brings the contract to an end but does not automatically compensate you for your loss. For that, you need a claim for damages, which you can combine with the termination.
Section 6:277 of the Dutch Civil Code expressly provides for this. The party whose breach has given rise to termination is obliged to compensate the creditor for the loss suffered as a result of termination rather than performance. This places you in the position you would have been in had the contract been properly performed: lost profits, costs incurred, the price difference between the contract price and the replacement market price all fall within the scope of your claim.
If the termination has also led to a reduction in value, for example because goods returned to you are now worth less, Article 6:278 of the Dutch Civil Code provides for an additional claim for compensation. Termination and full compensation are thus two sides of the same coin.
No need for a court
The major advantage for you as an entrepreneur is that termination can usually take place out of court. You do not need to go to court for this. A written notice of termination is sufficient (Article 6:267 of the Dutch Civil Code).
You are not tied to a contract that is harming you for months on end, waiting for a ruling. You take action yourself, quickly and decisively. Should the other party contest the termination or the compensation, proceedings will follow, but you will have a well-documented case file to hand.
The longer you wait, the greater the damage will become and the harder it will be to prove it later. Acting promptly is the smart thing to do.
Take swift action
If your contractual partner fails to fulfil their obligations, you have concrete and powerful legal tools at your disposal. Notice of default, (partial) extrajudicial termination and compensation under Section 6:277 of the Dutch Civil Code are not vague concepts; they are tools that you can, and if necessary, must, use today. After all, the agreement will simply continue to exist if you take no action.
We help you analyze your position, build your case and vigorously enforce your rights. Whether it involves drafting a notice of default, issuing a notice of termination or conducting legal proceedings. You are not on your own.
Please contact us one of our lawyers by email, phone or fill out the contact form for a no-obligation initial consultation. The sooner you act, the stronger your position.
