Agreements or contracts and liability
A verbal agreement is just as valid in the Netherlands as a written one. Agreements have no prescribed form. This means the law does not stipulate any requirements for this agreement. There are no provisions stating that agreements must be recorded on paper. A problem with verbal agreements is that they are often difficult to prove afterwards. It is therefore wise to record business agreements in writing. If there are doubts, or if the parties disagree, the agreement will tell them which rights and obligations were assumed. Under Dutch law, a large degree of contractual freedom applies. This means that everyone trading with other parties may decide for themselves what will be included in the agreement. This is in contrast to labour law or tenancy law. Mandatory legal provisions apply to these. In those cases, the law indicates when certain agreements are in conflict with the law. Most disputes between parties arise during implementation, termination and dissolution or when an agreement is enforced. Disputes may arise about the content of an article or a provision. Another possibility is that the circumstances have changed in such a way that maintaining the agreement is unreasonable. In some cases, this may constitute force majeure. The most common disputes arise when one of the parties does not comply with the agreement, or does not do so fully. In that case, one party is failing to comply with the agreement. If one of these situations arises, it is wise to obtain legal advice from our lawyers. Based on the agreement and the circumstances mentioned, they can often immediately indicate what the possible options are and also what options are not possible.
Negotiations not always without obligation
Before an agreement is concluded, the terms of that agreement are often negotiated. During the negotiations, the parties are not yet in full agreement. In other words, there is no agreement yet. However, case law stipulates that conduct during the negotiations does indeed influence the actions of the other party. If negotiations involve major interests for the negotiator or his business, it is wise to seek advice. There are, of course, many different types of negotiations and agreements. When parties enter into negotiations with each other, it is in any case important to take the following elements into account:
- Is the negotiating party authorized and/or entitled to negotiate and ultimately conclude an agreement on behalf of this party? The general representative authority can be checked in the trade register of the Chamber of Commerce. Another option is to ask for a written authorization showing that the person is authorized to act or negotiate on behalf of the other party.
- Have the negotiations already 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 consequences. The consequences, even if no agreement is reached, could in that case be significant.
Letter of intent or Memorandum of Understanding
The letter of intent (LoI) or Memorandum of Understanding (MoU) deserves special attention during negotiations (e.g. in the case of a business acquisition). The parties wish to record a specific intention in these documents, without wanting to commit themselves definitively. The choice of words and the structure of such an LoI is of the utmost importance to prevent, sometimes unintentionally, a consensus being reached on certain aspects. A pure LoI contains only the procedural arrangements. These arrangements relate, for example, to:
- the various steps to be taken in the acquisition process;
- the conditions under which information is provided by the potential seller to the potential buyer (confidentiality);
- how the parties deal with other potential buyers (exclusivity).
The LoI or MoU determines how the parties work towards a purchase agreement. If there is a consensus, this will often be recorded in a separate document.
Terminating the agreement can lead to damage
Without a contractual or legal provision, a continuing performance agreement (an agreement that has not been entered into for a specific period of time) can only be terminated if sufficiently compelling interests exist for the termination or if a reasonable notice period is observed by the terminating party. The circumstances are of great importance in this case, such as the term of the agreement. If the contracting party of an entrepreneur does not wish to continue the cooperation agreement and cancels it, the other party will suffer a loss of sales or a disadvantage in some other way. In principle, this disadvantage or termination damage is at the expense of the entrepreneur. This may be different if there is a reason to charge the damage or part of this damage to the party that has terminated the agreement. There may be various grounds on which to substantiate this damage. It can be based on the contract and/or legal provisions and/or the requirements of reasonableness and fairness, which mean that under special circumstances, certain parts of this termination damage should be at the expense of the party that has terminated the agreement.
Agreement: compliance, performance and default
More often than they would like, entrepreneurs have to deal with customers who do not (fully) comply with their agreements. If a party does not (fully) comply with the agreement and this can be attributed to him or her, it constitutes a breach of contract (a shortcoming in the compliance with the agreement) or a defect in performance.
Breach of contract
Breach of contract can come in various guises. Breach of contract may mean that the debtor does not comply with the agreement at all. It is also possible that performance is not made in time or the performance may be of poor quality. Delivery is made, but does not meet the requirements. The party that does not comply with the agreements, commits a breach of contract. He must be notified of this fact by means of a notice of default. This is a reminder by letter (or e-mail) in which the debtor is given a last chance to properly comply with the arrangements in the agreement. The reminder must contain a clear deadline within which the debtor can still fulfil his obligations. This should not be an unreasonably short term. If, after sending this notice of default, the agreement is still not complied with, the debtor is in default. From the moment the debtor is in default, the creditor can institute a number of legal actions to obtain compensation for the damage or to still enforce the agreement, possibly through the courts. Sometimes, there is no need to send a notice of default, because compliance is no longer possible. Examples include flyers with a specific date. Once this date has passed, compliance is pointless. In such cases, the other party is immediately in default and (legal) action can also be taken immediately, such as compensation. In the event of non-compliance with the agreement, creditors have four options:
- to demand compliance, as well as compensation for damage caused by delays;
- to claim damages instead of compliance with the agreement;
- to dissolve the agreement and claim damages;
- to suspend its own obligations (non-compliance) until the other party has fulfilled its part of the agreement.
These four options will be explained in more detail below Demand compliance with the agreement If the debtor, after sending and receiving the notice of default, still fails to fulfil his obligations, he will be in default. It is still possible to meet the obligations, which means the debtor can ‘remedy’ the default. In this case, the debtor often owes additional compensation. One example of this is damage caused by delays and the costs incurred to collect the claim. If the debtor is able to comply but does not wish to comply, a claim for compliance with the agreement can be filed with the court. Claim compensation If the creditor no longer wishes compliance or compliance is not possible, he can inform his debtor that he will be claiming alternative compensation. From that moment on, the debtor can no longer fulfil his original performance and he is obliged to compensate for the damage suffered by his counterparty. It is only possible to claim compensation if the debtor’s non-compliance is attributable to the debtor, or if it is at his risk. If the debtor is unable to meet his obligations, for example, because a severe storm has caused damage to the goods to be delivered, he can invoke force majeure. In that case, the creditor will have to dissolve the agreement, so as not to be left with the damage himself. Dissolution/partial dissolution In the event of non-compliance with the agreement and if the debtor is in default, the agreement may be dissolved. Virtually every shortcoming in compliance with the agreement can lead to dissolution, unless it concerns a shortcoming that is too minor to justify dissolution. Culpability is not a requirement for dissolution. The agreement can also be dissolved in the event of force majeure. The consequence of dissolution is that the performances already made must be reversed. Performances that should still be made no longer need to be made. If performances can no longer be undone, such as when a house has been partially painted, a fee must sometimes be paid. If a party fails to comply with only part of an agreement, partial dissolution is also possible. As a result, the rest of the agreement (with which the parties do comply) will continue to exist. If the debtor does not agree to this, the creditor can ask the court to order the dissolution. Suspension of the agreement In the event of non-compliance with the agreement, the creditor is authorized to suspend his own obligations. This means the creditor waits to fulfil his own performance from an agreement until the other party fulfils its obligations. Suspension is possible from the moment the claim has become due and payable. It must be clear that the claimant has a claim that should have already been fulfilled. In some cases, it may be unreasonable to suspend if it concerns very minor non-compliance on the part of the other party.
Unlawful act, outside contractual liability
Even if there is no agreement between the parties, one of the parties can be liable for damage caused. Article 6:162 of the Dutch Civil Code stipulates that he who commits an unlawful act against another is obliged to compensate the damage suffered by the other as a result. To successfully bring an action in connection with an unlawful act, five requirements must be met: unlawfulness, culpability, damage, causality and relativity. Unlawfulness The law makes a distinction between three different unlawful acts: an infringement of a right, an act or omission in violation of a legal obligation and an act or omission in violation of what is customary in society according to unwritten law. An infringement of a right can, for example, be an infringement of rights and/or property of the company. Culpability The offender is culpable if he is to blame for his conduct or if the unlawful act lies within his control. The latter means that this conduct (under the law) is at his expense. In some cases, the employer may be liable for the conduct of the employees. Damage Some form of damage must have been suffered. The law contains a provision that damage, which has to be compensated on the basis of a legal obligation to pay, consists of ‘financial loss and other loss’. Financial loss consists of both loss and lost profits. ‘Other loss’ refers to other types of damage, such as intangible 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 unlawfulness means the standard violated by the offender must be written to protect the interest that has been violated. One example is a dentist who practises his profession without authorization. The law requires dentists to be licensed. Other dentists cannot hold that dentist liable on the basis of an unlawful act. The licensing requirement was in fact introduced to protect the patient against incompetent dentists and not to protect the livelihood of competing dentists. If you have any questions about agreements or contracts and compliance or non-compliance with them, please contact one of our lawyers.