Since 1 January 2023, we have seen the entry into force of a new Book 5 of the Civil Code, relating to ‘Obligations’. As you would gain little from a comprehensive discussion, we would instead like to emphasise a number of prominent features. What we are aiming for are significant principles you can also actually start applying in your contracts.
Doctrine of frustration
We see the doctrine of frustration as legally enshrined for the time being, a principle we referred to various times last year, and clearly not diminishing in importance.
The principle entails a contracting party being able to ask the other party for a renegotiation – for the purpose of adjusting or even terminating the contract – if circumstances have changed, other than what was foreseeable when concluding the contract. If that change was not on account of that party itself, although making observing its obligations unreasonably onerous, it may be decided that the other party can no longer demand implementation.
What to remember
- You should therefore be aware that a principle such as this is involved, even if this was not discussed contractually.
- Rather than this doctrine of frustration obstructing what you believe to be a well-negotiated deal, this in fact makes it possible to resume negotiations even after hoping for the best. If you nevertheless want the application to be avoided, this can be ruled out contractually, in contrast to in other countries such as the Netherlands.
- Redress is rarely black and white, which also holds true in this case; and the option is not necessarily between whether or not to apply. Also among the options is a middle way – application subject to clear rules: renegotiation from as soon as unforeseen and non-imputable circumstances have an impact above a certain amount; renegotiation is only possible within a certain period following the initial signing of the contract or the other way around, following a certain period at the earliest, for instance.
- Continue respecting the initial arrangements provided you were unable to reach any agreement otherwise with the counterparty. The doctrine of frustration does not offer freedom for imposing different conditions unilaterally from one day to the next.
Should the renegotiations break down and a solution cannot be reached within a reasonable period – including the possibility to contractually agree on the duration of such a ‘reasonable period’ – at the one of the party’s request, the judge may decide to adjust or even wholly or partially terminate the contract. Moreover, this legal action is taken and handled as in summary proceedings.
- As a rule, respecting the principle of balance is straightforward: you wish to have an obligation imposed on the counterparty, or a specific right for yourself, such as a reflection of this agreement and how you yourself can also include an equivalent obligation or can agree the same right for your counterparty;
- Be sparing with ‘non-negotiable’ conditions: do not employ this position too liberally, and instead keep this in reserve as appropriate for these are actually useful for, while bearing in mind the judicial implications of the balance to be maintained.
Extrajudicial dissolution
You will undoubtedly have noticed the principle of extrajudicial dissolution
appearing in contracts for many years now. The new law of obligations has now regulated this legally, or at least laid down possibility of it. Nevertheless, it is by all means still useful to continue making contractual arrangement in this regard.
- The contractual arrangement enables you to establish the trigger: while it is good to know dissolution can be ordered by the counterparty without the court’s intervention, which breaches does the contracting parties themselves view as serious enough for this? Which obligations are genuinely essential?
- These might include supplementary arrangements: within what term an infringement must be responded to/are there any arrangements that must nevertheless survive the contract’s dissolution/what about restitution or any obligation to repair/is damage recovery in principle arranged in cash or in kind, etc.
- Care should once again be taken with arrangements, given the unlawful conditions cited above. If a party’s rights concerning default or poor implementation by the other party are illegally restricted or precluded, it is highly likely you will be called to order.
Dissolution is of course a far-reaching and one of the most radical principles. Should this approach prove too drastic for the situation at hand, the price reduction
might well offer a solution. In that case, the question of course concerns what the value difference is between the agreed performance and what is ultimately delivered. Potentially see to it contractually that an approach such as this can be taken, although only provided an expert is engaged to estimate that difference.
Do not necessary wait until there is actually a major breach, either. If already proves to be clear beforehand – a suspicion is insufficient – that a breach such as this is inevitable, since for instance previous deadlines were not met by the counterparty and a prompt final delivery is thus impossible, the agreement can be terminated in advance. What is known as an anticipatory breach is indeed only possible if the consequences of non-compliance by your counterparty are serious enough for you, and this involves exceptional circumstances. Moreover, you must in fact have reminded your counterparty to offer any suitable guarantees within a reasonable period that the arrangements will indeed be properly respected.
If you have any questions about this new law of obligations, please contact one of our experts.
