The spread of the coronavirus has developed into a severe crisis that is also affecting the construction and rental industry in the Netherlands. Catering operators and retailers are wondering (among other difficult questions) whether they can pause their rent payments while they have no or very little turnover. In the construction industry, it seems inevitable that scenarios will occur whereby contractors cannot carry out their works within their budget or deadlines due to circumstances related to the corona crisis (limited availability of personnel or materials, disruption of supply chains, restrictions on performing work at construction sites, etc.). Additionally, employers under construction contracts may not be able to perform all of their obligations; for example, providing technical drawings on time, or reviewing documents within certain deadlines).
Below we set out certain statutory and contractual provisions that may be relevant in the event that such disruptions occur. The chances of successfully invoking these provisions depend on the specific circumstances, and are to be assessed from case to case.
1. General Dutch contract law
Under Dutch contract law (book 6 of the Dutch Civil Code (“DCC”)), one or more of the following grounds could be invoked:
- ‘force majeure’ (article 6:75 DCC): if a default of its obligations cannot be attributed to the debtor, then performance of the relevant obligations cannot be claimed and the debtor is not under the obligation to compensate damage suffered by the creditor. It is likely that, in certain cases, force majeure may be invoked in connection with the corona crisis. This depends, among other things, on the specific circumstances of the case and the contents of the relevant agreement;
- Not imposing/mitigating contractual penalties (article 6:91-6:94 DCC): construction contracts often include penalties, or deductions of the contract sum that the employer may impose, if the work is not completed before the agreed completion date. Lease contracts often also contain penalty provisions (for example, on the non-performance of the operating covenant). However, no penalties become due to the extent that the default is not attributable to the debtor (article 6:92(3) DCC). Furthermore, a debtor may request the court to mitigate the imposed penalty amount on grounds of fairness (article 6:94(1) DCC). The latter provision is mandatory Dutch law, and hence cannot be excluded in a contract (article 6:94(3) DCC);
- Unforeseen circumstances (article 6:258 DCC): a creditor may request the court to amend the consequences of a contract or to wholly or partly terminate the contract on grounds of unforeseen circumstances (i.e. circumstances or risks that are not addressed in the contract). These circumstances must be of such a nature that the counterparty to the contract cannot expect, taking into account reasonableness and fairness, unchanged continuation of the contract. During the economic crisis that started in 2008, Dutch courts were reluctant to change or terminate contracts for unforeseen circumstances. The general opinion was that this economic crisis was part of the normal economic risks, to be borne by businesses themselves. However, we find it unlikely that the corona crisis will also be deemed a part of such normal economic risks. No doubt this matter will be assessed by the Dutch courts in the near future;
- Reasonableness and fairness (article 6:248 DCC): a court may rule that a creditor cannot invoke a certain provision in a contract on grounds of reasonableness and fairness;
2. Construction contracts
2.1 Dutch contract law on construction contracts
For construction contracts, the following ground under book 7 DCC could also be invoked:
- Cost-increasing circumstances (article 7:753(1) DCC): the contractor may request the courts to adjust the contract sum for cost-increasing circumstances, which the contract did not have to take into account and that are not attributable to it (article 7:753(1) DCC).
2.2 Contracts under the UAC 2012
For contracts under the UAC 2012 (Uniforme Administratieve Voorwaarden voor de uitvoering van werken en van technische installatiewerken 2012 (UAV 2012)), which are widely applied general terms and conditions for construction contracts in the Netherlands, a contractor may (also) invoke one or more of the following provisions:
- request for additional payment (paragraph 6(1) UAC 2012). For example, additional cost due to certain unforeseeable changes in applicable laws and regulations in connection with the corona crisis that come into force after the date of conclusion of the contract (paragraph 6(12)-(14) UAC 2012). In this context, it may be relevant that mayors of municipalities will be granted the right to issue by-laws that can be enforced by imposing penalties. Furthermore, these ‘cost-increasing circumstances’ (paragraph 47 UAC 2012) also justify a claim for additional payment. This concerns circumstances that the contractor did not have to take into account and that materially increase the cost of the work;
- request for extension of deadlines (paragraph 8(5) UAC 2012). The contractor may demand extension of deadlines if the works cannot be completed in time due to force majeure (among other reasons). To the extent the construction time is agreed as a certain amount of ‘workable business days’, then the corona crisis could also lead to unworkable days (and hence to a longer construction period);
- not imposing penalties or deductions for force majeure (paragraph 42(3) UAC 2012). Finally, the employer cannot apply deductions for late completion of the works, if the delay is caused by force majeure events.
The employer may, among other things, instruct changes to the works (paragraph 36 UAC 2012), suspend the works temporarily (paragraph 14(1) UAC 2012), or terminate the works in an uncompleted state (paragraph 14(7) UAC 2012). Furthermore, we can imagine that if the employer cannot perform its own obligations (such as granting access to the construction site, or timely provision of drawings or documents) in a way that is not attributable to it, then the employer may also invoke force majeure as defence against a damages claim from the contractor (article 6:75 DCC).
2.3 Contracts under the UAC-GC 2005
For contracts under the UAC-GC 2005 (Uniforme Administratieve Voorwaarden voor Geïntegreerde Contractvormen 2005 (UAV-GC 2005)), which contains widely applied general terms and conditions for design and construction contracts in the Netherlands, a contractor may (also) invoke one or more of the following provisions:
- request for compensation of costs or extension of deadlines (paragraph 44(1) UAC-GC 2005). This request could be based on paragraph 44(1)(a) UAC-GC 2005 (events whereby the UAC-GC 2005 explicitly set out that the contractor is entitled to compensation of additional costs extension of deadlines). These may include, for example, unforeseeable changes in applicable laws and regulations in connection with the corona crisis that come into force after the date of conclusion of the contract and lead to delays or additional costs. Pursuant to paragraph 11(2)-(3) UAC-GC 2005, this may constitute a ground for compensation of costs or extension of deadlines. Again here it may be relevant that mayors of municipalities will be granted the right to issue by-laws that can be enforced by imposing penalties, for example. Furthermore, a request for compensation of costs or extension of deadlines could also be based on paragraph 44(1)(c) UAC-GC 2005 (unforeseen circumstances of such nature that the employer, taking into account reasonableness and fairness, cannot expect unchanged continuation of the agreement);
- not imposing penalties for force majeure (paragraph 36(1) UAC-GC 2005): finally, the employer cannot impose penalties for delays of agreed milestone dates, if the delay is caused by force majeure events.
The employer may, among other things, instruct changes to the works (paragraph 14 UAC-GC 2005), suspend the works temporarily (paragraph 16(1) UAC-GC 2005), or terminate the agreement for convenience (paragraph 16(8) UAC 2012). Furthermore, we can imagine that if the employer cannot perform its own obligations (such as granting access to the construction site, timely provision of drawings or documents) in a way that is not attributable to it, then the employer may also invoke force majeure as defence against a damages claim from the contractor (article 6:75 DCC).
2.4 DBFM(O) agreements
Under Dutch DBFM(O) agreements, parties enjoy certain rights if a ‘Force Majeure Event’ occurs – as defined in said agreements. The definition includes an exhaustive list of events that qualify as Force Majeure Events. The outbreak of viruses is generally not included in this list, but biological contamination is. Furthermore, regulations from authorities in connection with the corona crisis may lead to changes to laws and regulations within the meaning of a ‘Relevant Change in Law’. That said, it is generally required that the relevant law or regulation specifically concerns the contractor(s) of the works, or requires additional capital investments, before a claim for compensation is granted. The Dutch DBFM(O) agreement generally excludes the right to invoke unforeseen circumstances (article 6:258 DCC). However, this exclusion may not always be maintained in court.
Where a certain performance under an agreement is warranted, the guarantor must ensure such performance, even in case of force majeure events. Hence, to the extent that the corona crisis leads to force majeure, this does not discharge the guarantor of its obligations. That said, it is common practice that exclusions and limitations are agreed in contracts in relation to warranty obligations. For example, it follows from paragraph 22(2) UAC 2012 that the contractor is not under the obligation to perform remedial works under warranties, if the defect concerned cannot be attributed to it.
3. Lease contracts
In the rental sector, the main question is currently whether a tenant who is confronted with
a forced closure or a significant fall in turnover is still required to pay the rent. The answer
to this question obviously depends on the content of the lease contract and the specific
circumstances, and will therefore have to be assessed on a case-by-case basis. Suspension of the rent is often excluded by contract, and the tenant therefore runs the risk of being in default immediately if he does not pay the rent on time. In general, a tenant could – among other approaches – consider relying on the following legal grounds, of varying stability:
- ‘force majeure’ (article 6:75 DCC): generally, force majeure events relieve the debtor from the duty of specific performance as well as the duty to pay damages. Performance may be deemed impossible, for example, in the event the imposed governmental measures preclude performance. Economic inability to pay debts (such as rent) does not, by itself, qualify as an impossibility under Dutch contract law.
- Rent reduction (article 7:207 DCC): a tenant may claim (i.e. only before a court) a rent reduction in case of a defect impeding the quiet enjoyment under a lease. A defect is – in short – a quality or characteristic of the leased property or another circumstance not attributable to the tenant, as a result of which the leased property does not provide the tenant the enjoyment which a tenant could have expected. Case law shows that many circumstances not relating to the leased property itself are considered to be normal economic risks, to be borne by the tenant and do not qualify as a defect. For example, a disappointing number of customers or visitors comes generally for the risk of the tenant. In addition, it is possible that parties may have agreed that (a) specific circumstances should not be considered a defect, or (b) a rent reduction is excluded by contract. The latter is not uncommon for commercial leases;
- Unforeseen circumstances (article 6:258 DCC): the corona crisis is highly exceptional. It is not inconceivable that courts may decide that the extreme distorting effects of the coronavirus and the government measures on the lease relationship go beyond normal commercial risks and, as such, qualify as unforeseen circumstances. This may lead to modification or termination of the lease contract, or give rise to a duty to renegotiate.
For questions/additional information on the legal consequences of the corona crisis in the construction and rental industry, please contact:
David Orobio de Castro
All posts by David Orobio
Ingmar de Groot
All posts by Ingmar de Groot
All posts by Boris Cammelbeeck
All posts by Erik Verweij
A Dutch translation of this blog can be found here
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