The Netherlands Commercial Court (NCC) rejects the Defendant’s appeal to unforeseen circumstances arising from the Covid-19 and orders the Defendant to pay an agreed break fee.
The first case dealing with an appeal to unforeseen circumstances arising from the Covid-19 pandemic was decided by the Netherlands Commercial Court on 29 April 2020. The dispute arose after parties entered into an LOI which included a break fee in late December 2019. The LOI specified a deadline for signature of the final Transaction Agreement of 2 March 2020. The Transaction Agreement was in final form and on 2 March 2020 the Buyer’s advisers reassured the Seller that the signature pages would be sent shortly. However the agreement was never executed and the Seller asked the Netherlands Commercial Court in summary proceedings to rule that the Transaction Agreement had come into force and that the purchase price should be paid and as an alternative claim that the full agreed break fee of Eur 30 million be paid to the Seller.
The dispute between the parties arises against the background of the value of the business (an equestrian show jumping business) having plummeted dramatically since the signature of the LOI, as all show-jumping events are cancelled as a result of the Covid 19 pandemic. These are the unforeseen circumstances that the Buyer sought to rely on in summary proceedings before the Netherlands Commercial Court. The Buyer argued that the principles of reasonableness and fairness under Article 6:94, 6:248 and 6:258 of the Dutch Civil Code demanded that the break fee not be enforced or that it should be reduced.
The Netherlands Commercial Court (NCC) opened its doors in January 2019 and is already becoming a favoured forum for quick and relatively less expensive dispute resolution for international contract disputes. The 3 judge panels of the NCC are selected for their commercial expertise and are seen as impartial and independent. Parties must explicitly agree to submit their dispute to the NCC and that proceedings will be conducted in English.
Firstly the Court denied the Seller’s claim that an enforceable contract had arisen even though the Buyer had not signed the Transaction Agreement. The court pointed to the binary wording of the LOI – either execute the Transaction Agreement by the deadline or pay the break fee. This wording indicated that the parties intended that execution of the agreement was the bar that would need to be met for formation of the agreement. Although under Dutch law this formal step is not an absolute requirement, execution has significant evidentiary weight. The court recognized that requiring the signature of the Buyer for a binding contract created a significant burden for the Seller given the impact of the Covid 19 pandemic but the court felt that there was not sufficient “solid ground” to support a solution whereby the Buyer would be forced in summary proceedings to pay the purchase price and thus face the same uncertainty arising from the pandemic that the Seller now faced.
When it came to the break fee in the LOI however, the court felt that the fee was intended as a risk allocation mechanism that would allow the parties to walk away from the deal in extraordinary circumstances – “so significant that they outweigh an immediate Eur 30 million cash payment, in the other party’s discretion”. A post LOI change in the value of the business was, according to the court, part of the bargain when the parties agreed on the fee and the price. The court pointed out that the parties were experienced in M&A practice and were advised by an array of experts. Contracts must as the court pointed out generally be enforced as agreed and that interference is only allowed to avoid an unacceptable impact based on principles of reasonableness and fairness.
The parties never contemplated the Covid 19 crisis which could point to this being an unforeseen circumstance under Article 6:258 of the Dutch Civil Code. The Buyer argued that the break fee imposed a harsh punishment for a situation that the Buyer could not have foreseen and that the fee was related to the price and value of the business at the time of signing the LOI which had changed fundamentally. The court ultimately does not rule on whether the Covid 19 is an unforeseen circumstance or not. The relevant question, according to the judges is whether if in all of the circumstances “it is unacceptable, under standards of reasonableness and fairness, to demand strict performance of the fee obligation”. The purpose of the fee to provide comfort and engender confidence would be undermined if a downturn would allow a party to back out.
The Court argues that the right approach at this early stage is to “share the pain” and that in this case this means that the Buyer should pay the Eur 30 million break fee. The Court also rejected the Buyer’s argument that the fee should be seen as a penalty subject to mitigation under Article 6:94 of the DCC.
The Buyer indicated that they would appeal any adverse ruling and has already instituted proceedings in a Dutch court.