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Coronavirus – Unforeseen circumstances defense ruling - The Netherlands

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02-06-2020

Two recent court cases suggest that Dutch courts maintain a high bar for successfully invoking the unforeseen circumstances doctrine in the current COVID-19 crisis.

Can the COVID-19 outbreak justify a modification or termination of an agreement on the basis of the “unforeseen circumstances” doctrine (onvoorziene omstandigheden) of article 6:258 of the Dutch Civil Code? The general consensus in Dutch professional literature is that, depending on the facts of the case at hand, is that it can be.  

However, in two recent (and non-related) cases the Netherlands Commercial Court (NCC) and the District Court of Amsterdam ruled in summary proceedings that the relevant circumstances could not lead to modification or termination of the disputed agreements.

Can a letter of intent be terminated or amended due to unforeseen circumstances?

The first case dealt with the question whether a letter of intent (LoI) can be terminated or amended due to unforeseen circumstances. The claimant and defendant had signed an LoI with regard to the purchase of shares by the defendant from the claimant for an amount of approximately EUR 169 million.

After several months of negotiations, the defendant (i.e. the prospective buyer) decided not to sign the share purchase agreement and ancillary documentation and to withdraw from the transaction due to COVID-19 circumstances. The first question to be answered by the NCC was whether an agreement regarding the purchase of the shares was already reached between parties. Contrary to the claimant’s plea, the NCC ruled that this was not the case.

The LoI, however, was undisputed and contained a clause stating that if either party, for whatever reason, backed out of the share purchase transaction, a penalty fee of EUR 30 million would be owed to the other party. The claimant requested the NCC to enforce the penalty fee of EUR 30 million. In its turn, the defendant argued that the penalty fee should be annulled or mitigated by the NCC due to the COVID-19 outbreak, as it qualified as an unforeseen circumstance according to the defendant. The NCC did not follow the defendant’s line of reasoning. In its judgement, the NCC has not dismissed the unforeseen circumstances argument due to COVID-19 in general, but considered that the termination fee implicitly provided for a risk allocation between parties if a circumstance such as the COVID-19 outbreak occurs.

Material adverse change clauseand unforeseen circumstance

In another, similar case brought before the District Court of Amsterdam, the court ordered the defendant (prospective buyer) to sign a share purchase agreement on the basis of a signing protocol which was signed by both parties end of February 2020.

The claimant had requested the court to do so, because the defendant had refused to sign the share purchase agreement due to COVID-19 circumstances. By signing the signing protocol, the defendant had committed to the share purchase transaction according to the court. The conditions precedent included in the signing protocol did not form a basis to back out of the transaction.

In addition, the parties had talked about possible consequences of COVID-19, but agreed to not include a material adverse change clause or another COVID-19 clause during their negotiations. Considering this background, the court ruled that the COVID-19 outbreak did not qualify as an unforeseen circumstance between the parties.

For more information

Should you have any questions or wish to have your current or draft agreements checked in light of the implications of the current COVID-19 crisis, please do not hesitate to contact us.

For more information contact

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