Contracts: Dissolving a (purchase) agreement

Publication date: 28 July 2016
After concluding a contract, what are your options if your counterparty won’t deliver a product, delivers the product too late, delivers a wrong or defective product or does not fulfil the agreement in any other way?

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If two parties conclude an agreement, they both assume that the agreement will be fulfilled and no problems will arise. However, often, one of the parties won’t deliver a product, delivers the product too late, delivers a wrong or defective product or does not fulfil the agreement in any other way. Then what?

Dissolution

If an agreement is not fulfilled as previously intended, under certain conditions, the agreement can be dissolved. What are these conditions?

  1. One of the two parties must have failed to fulfil the agreement. This must concern an essential failure. For instance, if a baker has ordered 10 kilograms of flour and it turns out that only 9955 grams were delivered, this will not be sufficient to dissolve the purchase agreement.
  2. Fulfilment is no longer possible, for instance, the product cannot be replaced or a hard deadline has lapsed (think of a wedding cake that should have been delivered before 15:00 h but collapsed when on the way). If the fulfilment is not permanently or temporarily impossible, for instance, because the correct product can still be delivered, it will not be possible to directly dissolve the agreement and the supplier must be given a chance to still fulfil his obligations within a set period of time.

How to dissolve a purchase agreement

This can be done by notifying the counterparty in writing that the agreement will be dissolved. If the dissolution is accepted, the agreement will be dissolved from then on. If the counterparty does not accept the dissolution, the court can be requested to render a decision on the dissolution.

Consequences of the dissolution

After the dissolution, the parties have to re-establish the situation before they entered into the contract in the best possible way. All deliveries and payments have to be undone. If the buyer returns the purchase, the seller has to return the money. But what has to be returned exactly if the product cannot be returned or only be returned in deteriorated condition? Does the seller have to refund to the buyer the total purchase price?

Return not possible

In some cases the product cannot be returned by the buyer and an alternative compensation will have to be paid to the seller. Recently, a buyer of a motor boat intended to dissolve the agreement because the boat was defective. The court dissolved the agreement and ordered that the money had to be refunded to the buyer, but the court forgot to mention that the buyer had to return the boat. The seller requested a supplement to the decision but in the meantime the buyer had sold the boat. Returning the boat was therefore no longer possible. Ultimately, the Supreme Court decided that the buyer should have taken into account that he had to return the boat and therefore must pay alternative compensation. If this compensation is based on the value of the boat, the seller will receive less money than the amount he has to refund.

Product has become less valuable

It may also be the case that returning a product is still possible but the product has been used by the buyer and was damaged or has otherwise become less valuable. This is what happened in online sale of mobile phones. Some providers offered all-inclusive mobile phone plans, without indicating the actual price of the cell phone. As this concerned an instalment purchase, the Supreme Court ordered that it was not permitted and the clients were allowed to dissolve the part of agreement that concerned the purchase of the phone. They were allowed to return the cell phone as it was at the time and got all their money back. The provider was not allowed to ask compensation for the use of the device.

Would you like to learn more about the conditions for dissolving an agreement or do you have any other questions about fulfilling contracts, please contact Russell Advocaten:

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