Legal consequences of the supply-chain issues due to COVID-19

The outbreak of the COVID-19 virus (Corona virus) comes with many economic and practical challenges for many countries. Companies struggle to transport, obtain and produce products and may even be required to suspend their production entirely for a certain period of time. As a consequence of this, it may be challenging or impossible for companies to fulfill their contractual (supply-) obligations. This article provides a brief overview of the possible legal consequences of supply-chain difficulties and potential remedies.

Contractual obligations

The contracting parties are required to fulfill their contractual obligations of existing agreements. According to Dutch law, every failure to fulfill contractual obligations requires compensation of the damages that the other party suffers as a result of the non-performance and to cure the non-performance to the extent possible. There are, however, several exceptions to the requirement to compensate the damages.

Force Majeure

The party that is responsible for the non-performance could be relieved from the requirement to compensate the damages if the non-performance is the result of an event of force majeure. For a successful force majeure defense under Dutch law, it is required that the non-performance is: (i) not attributable to the fault of the nonperforming party and (ii) not at the risk of the non-performing party pursuant to the law, a juridical act or generally accepted principles.

Whether the anti-Corona virus measures such as quarantines or lock-downs can be considered as force majeure events greatly depends on the specific circumstances of the case. In general it is required that the force majeure events directly impact the obligations of a contracting party as a result of which it is entirely impossible or practically too onerous to fulfill the contractual obligations.

It is important to note that the force majeure provision in the Dutch Civil Code is a regulatory provision, which means that the contracting parties can limit or extend its scope, or even exclude the possibility to invoke force majeure entirely. It is therefore necessary to review the written agreement and the applicable terms and conditions in order to determine whether a certain event or measure can be characterized as force majeure.

In respect of agreements that concern international sale of goods it is important to review the choice of law provision in order to determine whether the Vienna Convention on Contracts for the International Sale of Goods (CISG) is excluded. If that is not the case and both parties are established in a contracting state, the force majeure provisions of the CISG will apply. These provisions set forth that a party is not liable for a failure to perform, if that party proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it, nor its consequences. In short, if the risk was beyond the control of the party that did not perform, that party may invoke force majeure to escape contractual liability.

Unforeseen circumstances

As an alternative to invoking force majeure, a contracting party can request the court to either modify the effects of the contract or terminate it in whole or in part on the basis of unforeseen circumstances. The unforeseen consequence have to be of such a nature that the other party, based on the standards of reasonableness and fairness, cannot expect the contract to continue and be enforceable. The modification or termination can be given retroactive effect

The Dutch government announced a number of economic measures in light of the Corona virus. Read more about these measures.