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Contractual obligations must be fulfilled, whether corona or not. It is possible that an entrepreneur who is unable to fulfil his obligations due to the coronavirus crisis may invoke unforeseen circumstances. However, the court will only accept such a defence if performance of the contract is truly unacceptable due to these circumstances. This will not often be the case.
It is a question that has occupied many people during the past few weeks: May an entrepreneur who, as a result of the coronavirus is unable to fulfil his contractual obligations, invoke unforeseen circumstances? In one of its first published judgments, the Netherlands Commercial Court (NCC) – the new court for international commercial disputes in Amsterdam – decided on this question.
A New York based shareholder in a horse jumping company negotiated with the Amsterdam based investment firm Tennor the sale of 50% of his shares in a horse jumping company. In December 2019, the parties signed a so-called Letter of Intent (LOI). This included that the sales contract would become final when the parties signed the yet to be drawn up sales contract. In addition, the LOI included a “cancellation fee”: If one of both parties, for whatever reason, would still refrain from the purchase, then this party would owe the other party a penalty of EUR 30 million.
The shareholder in New York then drew up a contract for the sale of 50% of the shares in the horse jumping company at the price of EUR 169 million. Although lawyers and advisors of Tennor promised repeatedly that the contract would be signed, this did not happen in the end. The NCC proceedings focus on two questions:
The first question is answered negatively by the NCC. Although a duly signed written contract is not a formal requirement for the formation of a contract in the Netherlands, it may be a factor of substantial importance for the courts in determining whether an agreement was concluded. Both parties work in the M&A-practice and are assisted by several, specialised advisors, including lawyers and financial experts. As a consequence, in this particular case, a high threshold applies for accepting contract formation without the sales contract having been signed by the person authorised to do so. The commitments made by Tennor’s advisors are not enough to warrant the conclusion that an agreement has been formed.
The next question the NCC has to answer is whether Tennor has to pay the fee of EUR 30 million to the shareholder in New York, now that he has not signed the sales contract. Or should the fee be reduced or changed due to the coronavirus?
Tennor argues that circumstances have changed as a result of the coronavirus since December 2019 to such an extent that it cannot be expected from him to pay the entire fee. He emphasizes that he had intended to sign the sales contract and would certainly have done so if the coronavirus had not erupted. However, now that the coronavirus crisis has erupted, in view of the current economic conditions, he has no choice but to refrain from the purchase. The penalty agreed in advance is therefore, given the circumstances, too severe. In addition, Tennor points out that the horse jumping company has significantly decreased in value since the coronavirus crisis, so that also in this respect, it would be unreasonable to expect from Tennor to pay the entire fee; the fee was related to the value of the shares, which was much higher at the time the fee was established between the parties.
The NCC does not go along with this. The coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that under the given circumstances it would be unacceptable to hold Tennor to the fee obligation. The parties have agreed on the fee to spread the risk and encourage each other to conclude the transaction. This sharing of risk agreed in advance would be thwarted if the decrease in value of the horse jumping company could lead to a reduction of the fee. This would make it easier for Tennor to waive the transaction in such a case, and increase the risk for the shareholder in New York. In a nutshell, by maintaining the fee obligation, the NCC maintains the contractual balance previously agreed by the parties.
When can you, as an entrepreneur, successfully invoke unforeseen circumstances? This question cannot be answered unequivocally. The starting point is and remains, as can also be seen from the judgment by the NCC, that contractual obligations must be fulfilled, whether corona or not. It is possible that an entrepreneur, who is unable to fulfil his obligations due to the coronavirus crisis, may invoke unforeseen circumstances. However, the court will only accept such a defence if performance of the contract is made truly unacceptable due to these circumstances. This will not often be the case. Anyone invoking unforeseen circumstances will therefore have to give good reasons why, in his specific situation, these circumstances make performance unacceptable.
Are you wondering whether you can invoke unforeseen circumstances in this coronavirus crisis? We will be happy to help you assess your chances and, if necessary, explain to the court why performance of a contract is unacceptable to you. Please contact our coronavirus crisis team:
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