Setting aside for breach: contract termination under Dutch law
Under Dutch law the remedies for non-performance of a contractual obligation are (in principle):
- contract performance
- contract performance and compensation for late performance
- damages instead of performance
- contract termination for cause - setting aside of the contract (ontbinding)
- setting aside of the contract and damages.
The remedy to set aside a contract under Dutch law is provided in article 6:265 (up to and including 6:277) of the Dutch Civil Code (Burgerlijk Wetboek). Article 6:265 of the Dutch Civil Code provides that every failure of a party in the performance of one of its obligations gives the other party the right to set the contract aside in whole or in part, unless the failure does not justify this setting aside and the consequences thereof, given its special nature or minor importance.
It is the debtor who has the onus of proof that the failure to perform its obligations does not justify the setting aside of the contract. It is important to note that under Dutch contract law setting aside of a contract does not require a fundamental breach and that a creditor is not burdened with proving that the breach is so fundamental that it justifies setting aside of the contract. The remedy of setting aside a contract is available when the non-performance is attributable and when the non-performance is due to force majeure (overmacht). The right to claim damages only exists when there is an attributable breach of contract.
Article 6:277 of the Dutch Civil Code provides:
1. Where a mutual agreement has been set aside in full or in part, the party whose failure to perform has caused the ground of termination must compensate the damage which the opposite party suffers as a result of the fact that both parties have not complied with the agreement.
2. If the failure to perform is not attributable to the debtor, then the previous paragraph shall only apply within the limits of in article 6:78.
When both parties are unable to perform, both parties have the right to set aside the contract.
Setting aside a contract under Dutch law requires that the debtor is in default (in verzuim). It can be done by a written declaration to the other party (article 6:267, paragraph 1, of the Dutch Civil Code):
1. The setting aside of a mutual agreement is effectuated by means of a written notification of the party who is entitled to set aside the agreement, addressed to the other party to that agreement. If the mutual agreement has been concluded solely by electronic means, it may also be set aside by means of a notification addressed to the other party by electronic means. Article 6:227a, paragraph 1, applies accordingly.
The setting aside of a contract under Dutch law may also be pronounced by a court upon the demand of the creditor (article 6:267, paragraph 2, of the Dutch Civil Code):
2. A mutual agreement may also be set aside by a judgment of the court, upon demand by the party who is entitled to set aside the agreement.
Partial setting aside of contractual obligation under Dutch law: the actio quanti minoris
Under Dutch law a contract may be set aside in whole or in part. Article 6:270 of the Dutch Civil Code provides for partial setting aside of a contract:
A partial rescission of a mutual agreement implies a proportional reduction of the mutual performances, in quantity or quality, that parties have to perform according to that agreement.
In this way a party may obtain a reduction of his obligations (such as the obligation to pay the contractual price), in case the other party delivers only part of the goods bought, or when the goods delivered are lacking in quality.
What are the effects of setting aside a contract under Dutch law?
Setting aside (or termination for cause) of a contract under Dutch law does not have retroactive effect. The setting aside of a contract under Dutch law releases parties from the contractual obligations.
To the extent that these obligations have already been performed, the legal ground for this performance remains intact even after setting aside of the contract, but an obligation arises for the parties to reverse the performance of the obligations already performed. This is regulated in article 6:271 of the Dutch Civil Code:
Setting aside a contract releases parties of the obligations affected by it. As far as these obligations have been performed already, the legal basis for performance remains effective, but the law imposes an obligation on parties to undo the performances they already have received by virtue of the rescinded agreement.
In case the performances by their nature cannot be reversed, compensation of their value at the time of performance is required. Article 6:272 of the Dutch Civil Code provides:
1. Where the nature of the performance received makes it impossible to return it, it is replaced by a compensation of its value, calculated at the moment on which it has been received.
2. Where the performance received was not in conformity with the contractual obligation, the compensation meant in paragraph 1 is limited to the value of the benefit that the recipient, in the circumstances, has gained from the performance, calculated at the moment on which he received it.
When performance cannot be undone after the contract has been set aside, the recipient shall be considered to have failed in his performance of the statutory obligation to reverse the performances, and is obliged to pay compensation for the losses caused by this. A party who has rightfully set aside a contract, may also claim supplementary damages, provided that the non-performance is attributable to the other party.
