Distribution agreements: the doctrines of force majeure and unforeseen circumstances
The world has been shaken by multiple calamities over the past years. It is expected that such events will only increase in regularity over the coming years due to growing populations, political instability and climate change. Businesses worldwide are being forced to navigate the challenges brought on by these events, including disruptions to supply chains and the inability to meet obligations under distribution agreements.
Under Dutch law, distribution agreements that have been concluded for a specific period can, in principle, not be terminated before the end of the term (unless parties agreed otherwise). Depending on what has been agreed in a distribution agreement, or in the applicable general terms and conditions, companies may also have the option to invoke force majeure or unforeseen circumstances as an alternative escape when a calamity arises. We will discuss the two doctrines below.
Force majeure (“overmacht”)
Force majeure is a situation where a party is unable to perform its contractual obligations due to circumstances outside of its control. In the event of a force majeure, a party can invoke a contractual force majeure clause or in the absence of such a clause, invoke the relevant provision under Dutch law.
According to Dutch law, force majeure occurs when a shortcoming cannot be attributed to a party if it is not due to his fault, nor is he accountable for it by law, legal act or generally accepted practice (article 6:75 of the Dutch Civil Code (“DCC”)). When assessing an appeal of a party on force majeure, all circumstances of the case are relevant.
If force majeure is invoked, the failure will generally consist of an inability to perform the obligation. In exceptional cases, however, this may be different. The parliamentary history mentions cases in which the debtor was unaware of the existence of an obligation due to a cause beyond his control. For example, the case in which an heir fails to pay the debt transferred to him, because he is unaware of the passing of the deceased.
In principle parties are free to include a force majeure clause in their distribution agreement. Parties can then, for example, agree on a list of force majeure events. The purpose of such a clause is to protect the parties from events that are agreed to be outside normal business risk. This clause may excuse the performance of contractual obligations when specific events outside the parties’ control, e.g. natural disasters, war or pandemics, have prevented such performance.
Under Dutch law, the interpretation of a force majeure clause will depend on the meaning that parties may have reasonably attached to this clause within the given circumstances, and what the parties may have reasonably expected. For a contract entered into by professional parties, the grammatical interpretation of the provision will weigh strongly in deciding how the provision must be interpreted, and whether the parties intended it to apply to an extreme event such as e.g. the Russian invasion of Ukraine or the Covid-19 pandemic.
If the clause is successfully invoked, it will avoid a breach of contract as it excuses a party’s performance of its contractual obligations. When a distribution agreement does not specify what qualifies as force majeure, article 6:75 DCC applies.
Unforeseen circumstances (“onvoorziene omstandigheden”)
The unforeseen circumstances doctrine creates the possibility to amend or (partially) terminate a contract (article 6:258 DCC). A partial termination may include a reduction of an obligation to deliver goods or a price reduction.
Article 6:258 DCC is mandatory under Dutch law and cannot be excluded contractually. Parties may, however, choose to change the scope of the definition of unforeseen circumstances by eliminating particular events as an unforeseen circumstance in the agreement.
What is necessary to invoke article 6:258 DCC? Firstly, the relevant circumstance was not foreseen in the contract (also not implicitly). Secondly, the unforeseen circumstance must be of such a nature that the other party, according to generally held standards of reasonableness and fairness, cannot expect the contract to be maintained in an unchanged form.
Claiming unforeseen circumstances is far from easy. A relatively high threshold applies. For example, the economic recession such as in 2008 would not qualify as an unforeseen circumstance, as recessions take place now and then. An unforeseen circumstance can only be a future event. The situation with the COVID-19 pandemic was different, since such a global event seldom occurs. Therefore, the Dutch courts agreed that a distributor which had suffered severe economic losses due to the COVID-19 pandemic could appeal to unforeseen circumstances. However, this changed as the pandemic continued and the parties involved could foresee a new outbreak.
In the case of the Russian invasion of Ukraine, few could have predicted that Russia would invade Ukraine in 2022. How unexpected was the war though, considering the Russian annexation of Crimea in 2014? Against that background, can one assume that parties in, or when entering into, their distribution contract, did not take into account, not even tacitly, the possibility of a war in the region? It’s difficult to give a general answer to that question, the answer will depend on the circumstances at hand.
It is difficult to invoke force majeure or unforeseen circumstances. If you have any questions or would like any advice, please contact the team of Michelle Krekels. We are happy to assist in the matter. The attorneys at bureau Brandeis have extensive experience in settling disputes in relation to distribution agreements.