Taking advantage of another party’s breach of contract

Suppose: Party A wishes to enter into an agreement with Party B, whilst A knows that this will result in B being in breach of contract with regard to Party C, with whom B has previously concluded an agreement. Is Party A permitted to do this, or does this constitute unlawful conduct?

The basic principle: taking advantage is permitted

In principle, a contract is binding only on the parties who have entered into it. A third party is not a party to the contract and is therefore, in principle, free to pursue its own commercial interests, even if this is at the expense of your contract. After all, freedom of contract is a key principle in Dutch contract law. Anyone who benefits from the fact that another party fails to fulfil its obligations does not, in itself, act unlawfully.

According to established case law, therefore, it is not readily considered that a third party is unlawfully profiting from a breach of contract.

When is it unlawful?

The situation is different if there is more to it than mere profiteering. Case law holds that profiting from another party’s breach of contract becomes unlawful when the following two elements are present.

Knowledge

The first element is, logically, knowledge. The third party (Party A in the previous example) must know, or ought to know, that their actions are linked to another party’s breach of contract (Party B in the previous example). Such knowledge may actually exist, but it may also be presumed on the basis of what the third party, in their position, ought to have known.

Knowledge is a necessary condition, but is not in itself sufficient to establish unlawful profiteering from another party’s breach of contract. There must also be additional circumstances.

Additional circumstances

The second element concerns the additional circumstances. It is not possible to capture exactly what these circumstances are in a strictly defined list. The court assesses this on the basis of the circumstances of the case. Nevertheless, in practice, a number of recurring situations emerge in which the balance tips towards unlawfulness.

The clearest situation is the instigation or active encouragement of the breach of contract. Anyone who persuades the other party to breach its existing obligations is doing more than merely ‘free-riding’: they are a (contributory) cause of the breach.

The common thread in each case is that the third party does not merely benefit from the situation, but contributes to it in a culpable manner or abuses it. The more active and deliberate the involvement, the more likely the court is to find unlawfulness.

What can you do as the aggrieved party?

This legal principle comes to the fore particularly when the party in breach of contract offers no recourse itself. Normally, you would take action against the party that has failed to fulfil the contract. However, if that party is, for example, bankrupt or has disappeared, this option may provide a solution. If there is unlawfully profiting from the breach in question, you, as the aggrieved party, can hold the profiting third party liable for the damage.

Questions?

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