Netherlands Commercial Court: COVID-19 does not justify amendment of multimillion contract

The (fairly) new Netherlands Commercial Court (NCC) recently rendered an interesting judgement in summary proceedings. In this court order, the question was raised whether a party to the contract could avoid the obligation to pay a fee of € 30 million to the other party if unforeseen circumstances were invoked. Thomas van Vugt, attorney in contract law, discusses the case.

Letter of Intent; sale of shares

This case was related to the following situation: by the end of 2019, the seller and the buyer concluded a Letter of Intent (LOI) regarding the purchase of share The portion of registered capital of a private or public limited company
» Meer over share shares. In this letter, they established their intention to transfer 50% of the seller’s shares in a company in the equestrian sector to the buyer for an amount of € 169 million. The LOI also explicitly stipulated that each of the parties was free to walk away from the deal before 2 March 2020 at the latest. In that case, the party walking away would owe a fee of € 30 million to the other party.

Appeal to unforeseen circumstances

In the end, the buyer did not sign the final contracts. The seller claimed payment of the fee in summary proceedings before the NCC (which Court had been designated as the competent body in the LOI). However, the buyer claimed that the LOI could not be maintained with regard to the compensation. This situation was allegedly due to unforeseen circumstances, i.e. the current COVID-19 crisis.

Court reluctant in unilateral change of contract

Pursuant to Section 258 of Book 6 of the Dutch Civil Code, a Court may amend an agreement or dissolve it in whole or in part pursuant to unforeseen circumstances. However, the circumstances must be such that the other party, according to standards of reasonableness and fairness, cannot expect the agreement to be maintained unchanged. The NCC stipulated first and foremost that a Court must exercise restraint in the case of unilateral changes to a contract by virtue of Section 258 of Book 6 of the Dutch Civil Code. Basically, a contract must simply be fulfilled, party autonomy is paramount.

Exceptional situations

Court intervention can only be invoked in highly exceptional situations. The NCC mentions a number of examples of such situations:

• in case of a serious disruption of the balance between the parties’ contractual obligations;
• in case the usefulness of the contract has been lost because the purpose of the parties has become unattainable;
• in case compliance has become extremely prejudicial to any of the parties.

Proportionality in the obligation to pay the fee

The NCC first examined the proportionality of the agreed fee. This is not a penalty but a strong incentive for the parties to express their commitment to each other. The amount of the fee was such that the parties would only want to walk away in highly exceptional situations. The situation would have to weigh more heavily on the walking-away party than the payment of the fee. For example, if the value of the company should plummet substantially, as a result of which the buyer wanted to get rid of the deal, or if the seller found a party willing to pay much more for the shares. In those cases, the walking-away party will rather pay the fee than fulfil the deal.

Depreciation due to the coronavirus

In this case, the corona crisis reduced the value of the company (whether or not substantially). As a result, the buyer wanted to get rid of the deal after all. The escape clause (with a fee) is pre-eminently intended for such an exceptional situation. The NCC stated that if the financial position of the company is really as poor as claimed by the buyer, the fee is a quick and easy way to get out of the payment of the purchase price of € 169 million (against potentially worthless shares).

Rejection of appeal to unforeseen circumstances

Concisely: the corona crisis could be regarded as an unforeseen circumstance, yet, it is not such that the claimant, according to standards of reasonableness and fairness, cannot expect the fee obligation to remain unchanged. The purpose of the fee was to encourage the parties to perform the sale and to share The portion of registered capital of a private or public limited company
» Meer over share share the risks between them. As a result, the NCC ruled in favour of the seller in this case.