What are the consequences of the coronavirus (COVID-19) for entrepreneurs?

The effects of the coronavirus can currently be felt all around the globe. Great uncertainty about the duration of measures concerning the virus and ever more stringent measures cause many questions among entrepreneurs. Frequently asked questions are:

Picture Laura – Del, CC https://www.flickr.com/people/20519310@N04/.
  1. Can I invoke force majeure if I am unable to comply due to these circumstances?
  2. Can I invoke unforeseen circumstances if I am unable to comply due to these circumstances?
  3. Does an agreed penalty clause apply in the given situation?
  4. Does the insurance cover damages which result from closing a business or cancelling events due to the coronavirus?
  5. Can I still hold a shareholders’ meeting after the call for social distancing and the ban on assembly?
  6. What is the effect on me as a buyer in a business acquisition?
  7. To what extent can I, as an entrepreneur, rely on support measures from the Dutch government?

Below, we try to answer these most frequently asked questions concerning a company and the coronavirus. If you have any further questions about your specific situation, contracts or other questions about the legal consequences of the coronavirus, we will be happy to help you. Please feel free to contact Wintertaling Advocaten & Notarissen.


 

 

  1. Force Majeure

The default position under Dutch law is that agreements (recorded in contracts or orally) are to be carried out. Failure to do so may have several consequences, such as the obligation to pay compensation in s.6:74 of the Dutch Civil Code (DCC). A question that arises with many entrepreneurs is whether they can invoke force majeure if they cannot comply because of (the measures surrounding) the coronavirus.

There are three ways in which force majeure can be invoked:

  • The statutory rules;
  • A specific force majeure clause in a commercial contract; and
  • A provision in applicable general terms and conditions;

 

Statutory rules

Under Dutch law, s.6:75 DCC determines the circumstances under which the non-performing party can invoke force majeure. This provision states that force majeure can be invoked if a breach of performance cannot be attributed to a party, nor should it be for its account by virtue of its fault, the law, legal act or generally accepted practice. Simply put, if you have fallen short due to external factors and this cannot be blamed on you, this is a case of force majeure. A successful appeal to force majeure under Dutch law depends on the specific circumstances of the case and therefore has a high threshold. In all cases, in order for a successful appeal to force majeure to be valid, the defaulting party must prove that:

  • performance has become impossible;
  • impossibility of performance is not attributable to that party, nor to its fault;
  • consequences of impossibility cannot reasonably be avoided;
  • impossibility was unforeseeable at the time the contract was concluded; and
  • neither the law nor the agreement stipulate that the non-performance should be for its account.

It is important to note that the legal regulation of force majeure covers the situation in which it is impossible for the debtor to comply. However, the regulation does not cover all consequences for the contracting parties who, due to changed circumstances, are in a different position than when they entered into the contract. For example, if the coronavirus creates a scarcity with regard to imports of products from China, the Dutch electronics vendor will not be able to invoke force majeure vis-à-vis its customers because the purchase price has risen and therefore it will no longer make a profit. After all, the lack of a profit margin makes does not make it impossible to supply. An exception to this principle applies, for example, if the debtor is unaware or unfamiliar with his obligations.

 

Specific force majeure clause

Many (commercial) contracts include a force majeure clause (also called material adverse change (MAC) or act-of-god clause, although legally not always entirely the same). The parties to an agreement can use this clause to contractually extend or limit the legal concept of force majeure. Whether the current coronavirus is covered by a force majeure clause depends on the wording of these provisions in the contract and/or the general terms and conditions. Force majeure clauses may specifically identify diseases, epidemics or quarantine measures as circumstances for a successful invocation of force majeure. More often, however, a general description of the circumstances is used: `All external causes beyond the company’s control. ` In the latter case, however, it is not yet clear whether the outbreak of the coronavirus also falls under the circumstances of force majeure. In addition to this general ‘catch-all’ provision, it is therefore wise to list (branch) specific external risks, which may be the subject of negotiations – for example, American parties who contract with Dutch parties often prefer to include flooding under the force majeure clause, because these risks are difficult to insure.

 

General terms and conditions

If no force majeure clause has been agreed in the body of the agreement, in some cases general terms and conditions may be invoked. For general terms and conditions to be applicable, it is required that they form part of the agreement, and are therefore offered by one party and accepted by the other party. It is not required by law that another party has actually read the general terms and conditions before it is bound by them, whereby stricter requirements apply to trade with consumers.[1]

An example of a force majeure clause in general terms and conditions is:

“15.1. None of the parties is obliged to fulfil any obligation under an agreement if it is hindered to do so by force majeure. Force majeure is understood to mean a non-attributable shortcoming in the fulfilment of obligations, including floods, fire, overheating, dust, terrorist attacks and/or acts of war.

 15.2. If the force majeure situation has lasted longer than ninety (90) days, the parties shall be entitled to terminate the agreement in writing with immediate effect, without the parties being obliged to pay any reciprocal compensation. What has already been performed pursuant to the Agreement shall be settled by the parties on a pro rata basis.[2]

 

A viable defense?

With regard to the coronavirus, no unambiguous answer can be given to the question of whether a failure to comply as a result of the coronavirus constitutes a successful claim of force majeure. This will vary from case to case – for example, a provider of a SaaS service may not be able to invoke force majeure quickly, but a parcel delivery service that is temporarily short on deliverers may.

 

Consequences at political level

The French Minister of Economy, Finance and Justice, Bruno le Maire, has announced that fines will not have to be paid when a successful appeal to force majeure can be made. A successful appeal under French law implies that three conditions are met: unforeseeability, the circumstances must be beyond the control of the contracting parties and they must lead to an impossibility to perform the contract.[3] This makes the French system comparable to the Dutch system.

A similar measure has been invoked by the Chinese Council for the Promotion of International Trade, in which (Chinese) contracting parties can also invoke force majeure in the event of non-compliance due to the coronavirus.

To date, the Dutch government has not expressed an opinion on the invocation of force majeure.

 

 

 

  1. Unforeseen circumstances

It is more probable to invoke unforeseen circumstances. Indeed, it is more likely that the conditions under which the original contract was concluded will be unreasonable in the current situation, rather than that there is an actual impossibility to perform. These unforeseen circumstances are regulated in s.6:258 DCC and are an elaboration of the so-called restrictive effect of reasonableness and fairness of s.6:248(2) DCC. ‘Unforeseen’ does not mean that circumstances have occurred which were not foreseeable at the time of the conclusion of the contract, but that circumstances have occurred which are not ‘foreseen’ in the contract.

These circumstances must result in it being unacceptable to maintain the contract unchanged. This means that there is a high threshold: if performance of the contract is ‘merely’ undesirable, this is not sufficient to amend the contract. Recourse to unforeseen circumstances must be accepted restrictively .

Normally this means that an economic crisis cannot be invoked as an unforeseen circumstance, because price fluctuations are part of the business risk. This is different when the value ratio is disturbed to such an extent that a discounted risk can no longer be said to exist. The latter is the case if, as a result of the unforeseen circumstance, a party would run into major financial and/or business problems if the contract remained the same. In that case, unforeseen circumstances may be invoked.

The principle point of invoking unforeseen circumstances is a matter of the judge taking the changed situation into account and restoring the balance disturbed by the unforeseen circumstance. The contract will then be adjusted by the court in such a way that the risk for the party who can successfully invoke the unforeseen circumstances can be limited. A starting point is that the disadvantage will be divided 50/50%.

 

 

 

  1. Penalty clause

With some regularity, commercial contracts also include penalty clauses stipulating that a party will be fined if there is an attributable breach of contract. The wording of the penalty clause in the contract determines how and when a contracting party has to pay a penalty. In the current situation, the coronavirus can hinder the compliance of the contractual obligations and thus activate the effect of the penalty clause. In those cases where contracting parties invoke the penalty clause, the following arguments can be brought up in court to challenge the invocation:

  • the penalty clause should be declared inapplicable on grounds of reasonableness and fairness;
  • the amount of the fine should be tempered to reflect fairness.

Moreover, a successful invocation of force majeure (see under force majeure) may mean that there is no breach of contract. As indicated above, the Dutch legislator or court has not yet ruled on a specific Corona situation in which a fine is invoked.

 

 

 

  1. Insurance

Can your company claim under the business insurance for the damage caused by a significant drop in production or even closure of your company due to the coronavirus? Business indemnity insurance often provides short-term cover for the loss of business income caused by damage or loss to the business premises.

Damage resulting from a major outbreak of disease, such as the coronavirus, is often excluded. This means that – depending on the circumstances of the case – the damage, decrease in production and period of closure of the business, due to the coronavirus, are unlikely to be covered by these insurances. For example, the terms and conditions of the Rabobank/Interpolis business insurance policy state that adverse effects caused by viruses will not be compensated.[4] Nationale Nederlanden also does not insure damage caused by the Corona virus since there is no “material damage”.[5]

In addition, the Dutch catering establishments will only be allowed to open if they have their meals picked up or delivered. Also, all gatherings (also with less than a hundred people) are prohibited as a result of the current regulations.[6] If no successful appeal to force majeure can be made for these cancellations, the entrepreneur will be held liable for the damage. This raises the question whether the entrepreneur can recover his damage from an insurance policy.

In that case there are several possibilities: for example, liability insurance, cancellation insurance, event insurance or credit insurance could be invoked.

Whether these insurances will also reimburse if an event is cancelled as a result of the corona virus depends on the applicable policy provisions. Questions that the entrepreneur should check are:

  • How is the insured event described in the policy provision?
  • Is government intervention required for cancellation?
  • Is damage caused by an outbreak of epidemics or pandemics excluded?
  • What is the amount of the insured sum?
  • what is your deductible?
  • what is the damage and total costs covered in the event of an insured event?

In practice, some policy provisions will exclude damage resulting from cancellation due to an outbreak of disease and in cases of epidemics and pandemics. This means that in the current situation not all damages resulting from cancellation of the events due to the coronavirus will be covered.


 

  1. Shareholders’ meeting

The call for everyone to adhere as far as possible to social distancing and the ban on meetings may also have consequences for meetings of shareholders (GMS).

Dutch law does not stipulate a minimum number of people that must attend a shareholders’ meeting. In theory, the presence of one shareholder is sufficient. However, the articles of association may make an exception to this minimum, and in the case of companies with several shareholders this is often the case for certain decisions. You should therefore review your articles of association before convening the GMS.

Another possibility to meet the call for social distancing is to organise a digital GMS. This involves, for example, organising a GMS by means of a conference call, Skype, Facetime or Zoom. S.2:227a DCC stipulates that if a company wishes to make use of a digital General Meeting of Shareholders, the articles of association must explicitly allow this. The articles of association often suffice with the phrase `(…) that each shareholder is authorised, either in person or by a representative authorised in writing, to participate in the general meeting by means of an electronic communication device, to address the meeting and to exercise the voting right.´ In addition to an explicit provision in the articles of association, other requirements must also be met: for example, the shareholders must be able to be identified via their electronic communication devices. They also have to be able to directly take note of the meetings and to exercise their voting rights in them.

Finally, s.2:238 DCC also provides the possibility to make decisions outside the GMS, i.e. in writing. However, all shareholders must agree to this method of decision-making – the ‘ordinary’ majority requirements laid down in the articles of association apply to the approval of the resolution.

 

 

 

  1. M&A

MAC (material adverse change) clauses are regularly used in acquisition contracts. The purpose of these MAC clauses is to protect the buyer against material adverse change in the (financial) position of the target company in the period between signing (conclusion of the purchase agreement) and completion (delivery of the shares) in so far as these moments are apart, for example in order to obtain approval from the ACM (Dutch merger authority). The wording of the MAC clause is leading in determining whether a business interruption due to the corona virus is covered by the MAC clause. An example of a MAC clause is: “Seller’s obligation to Supply is subject to the following requirements prior to Completion: (…) no MAC has occurred since the date of this Agreement”. Now let’s hope that the lawyers have formulated the MAC clause in such a way that the Corona virus is covered by it.[7]

Incidentally, MAC clauses are generally formulated in such a way that causes outside the company are not covered by the exceptions. In our opinion, therefore, the generality of the Corona crisis usually does not fall under the exception. Then we have to return to the general Dutch law concepts of force majeure and unforeseen circumstances (see above).

Example of a MAC clause:

A Material Adverse Change is an adverse effect relating specifically to the Companies, which is materially adverse to the Group Business and leads to a significant deterioration of the net consolidated operational annual results of the Companies, other than an effect or change that is (i) related to information made available for the due diligence investigation, (ii) applicable to economies in general or the industry in which the Companies operate, (iii) the result of a change in applicable law, case law and/or generally accepted accounting or tax principles, (iv) the result of an instruction by or approval of Buyers, (v) political conditions (including changes arising out of acts of terrorism, sabotage, armed hostilities or war), weather conditions or other force majeure events, (vi) any loss of, or adverse change in the relationship with, employees, customers or suppliers of the Group Business directly or indirectly caused by the announcement of the Transaction or any other transactions contemplated by this Agreement, whereby in all events the adverse effect shall be balanced against any positive effects or changes which have occurred since that date.

 

 

 

  1. Government measures

It appears from the above that many questions regarding the effect of (the measures surrounding) the coronavirus are still unclear or need to be considered specifically per situation. However, the Dutch government has announced a package of measures to mitigate the economic impact of the coronavirus.[8] All measures taken by the government to maintain employment that entrepreneurs and businesses can use are listed on its website.[9] Two important emergency measures that can help companies and entrepreneurs during the coronavirus will be highlighted below.

One of the measures is the accelerated opening of the extended guarantee scheme for small and medium-sized enterprises (hereafter: BMKB)[10]. This scheme has been operational since 16 March 2020 and will apply until 30 June 2022. Companies can use the BMKB as a bridging loan or to increase their current account credit, i.e. the amount they are allowed to be overdrawn. This extension is essential for the liquidity of smaller entrepreneurs who will now lose income or production due to the coronavirus. Through the BMKB scheme, the Ministry of Economic Affairs and Climate Change guarantees the loans to entrepreneurs so that they can borrow money more easily. Entrepreneurs can turn to lenders for this purpose. In the regular scheme, the guarantee credit concerns 50% of the credit provided by the bank. The government guarantor amounts to 90% of this guarantee credit. With this extension measure, the size of the guarantee credit in the BMKB is increased from 50% to 75%. As a result, banks can extend credit more easily and quickly and companies have the opportunity to borrow earlier and more money.

A second emergency measure that is being worked on is the drafting of a new Temporary Emergency Measure to bridge the gap for job retention (Dutch abbreviation: NOW).[11] This measure will replace the current short-time working measure (Dutch abbreviation: WTV) which has been repealed with immediate effect (on 17 March 2020). Employers of companies of any size (small, medium, large) will be able to apply for a ‘substantial contribution to wage costs’ under this new measure.

The scheme means that employers who are faced with at least 20% expected loss of turnover as a result of the coronavirus can apply to the UWV (governmental Employee Insurance Agency) for an allowance for labour costs for a period of 3 months for their employees with permanent and flexible contracts. This period of 3 months can then be extended once more by 3 months, for which the employer may have to meet further conditions. The amount of the allowance for the wage costs depends on the loss of turnover and will not exceed 90% of the wage bill. For example, in the event of 100% loss of turnover, the contribution to the wage and salary bill will be 90%, and in the event of 50% loss of turnover, the contribution to the wage and salary bill will be 45%. Employers can use this allowance to continue to pay their employees even in times of loss of turnover due to the coronavirus. In addition, this new compensation arrangement will also apply to the wage costs for employees with on-call contracts and temporary employees for whom the employer has no obligation to continue to pay wages. During the period in which the employer receives compensation under this measure, it may not apply for dismissal of its employees on the grounds of business economics.

At this moment it is not yet possible to submit a NOW application. As soon as the date of commencement of the NOW scheme is known, applications can be submitted via the UWV. It is clear, however, that the scheme will apply to turnover decreases at employers as of 1 March 2020. As from 17 March 2020, it will no longer be possible to apply for the reduction of working hours. Application for reduced working hours that have already been submitted, will all be regarded as applications submitted for the new scheme; additional information may, however, be requested.

 

 

_______________________________

[1] s. 6:232 Dutch Civil Code (DCC) jo. s. 6:235 jo. s. 6:233 sub B DCC.

[2] https://www.parentix.nl/wp-content/uploads/2018/05/Algemene-voorwaarden-General-Terms-and-Conditions-v2_3-NL-EN-U….pdf.

[3] https://www.maire-info.com/coronavirus/covid-19-et-marches-publics-bruno-le-maire-encourage-la-reconnaissance-de-la-%C2%A0force-majeure–article-24010. Regarding the conditions of force majeure, Bruno le Maire speaks about imprévisibilité, extériorité en irrésistibilité.

“Concrètement, si une entreprise de BTP “a un retard dans l’exécution de son contrat parce qu’elle n’arrive pas à se fournir en matières premières ou parce qu’elle a un certain nombre de ses salariés qui sont confinés”, elle pourra avoir du retard “sans aucune pénalité“, a-t-il illustré.” https://www.francetvinfo.fr/sante/maladie/coronavirus/coronavirus-comment-le-gouvernement-entend-il-aider-les-entreprises-face-a-l-epidemie_3858871.html.

[4] https://www.rabobank.nl/images/SVZ-PV-01-201_291008245.pdf

[5] https://www.nn.nl/Coronavirus-COVID19.htm#zakelijkeschadeverzekering

[6] Valid from 23 March 2020, see website Rijksoverheid.

[7] Also read https://www.nrc.nl/nieuws/2020/03/19/het-grote-deal-breken-is-al-begonnen-a3994255.

[8] Parliamentary documents II 2020, 20077147 (Parliamentary letter of 17 March 2020 on the jobs and economy emergency package),

[9] See https://www.rijksoverheid.nl/onderwerpen/coronavirus-covid-19/veelgestelde-vragen-over-coronavirus-voor-werkgevers/financiele-maatregelen.

[10] https://www.rijksoverheid.nl/actueel/nieuws/2020/03/17/coronavirus-kabinet-neemt-pakket-nieuwe-maatregelen-voor-banen-en-economie.

[11] https://www.rijksoverheid.nl/actueel/nieuws/2020/03/17/coronavirus-kabinet-neemt-pakket-nieuwe-maatregelen-voor-banen-en-economie.

This publication was written by Esra Koopman and Onno Cusell and Marein Smits and Thom Schölvinck and Tim Carapiet

Leave a Reply

Your email address will not be published. Required fields are marked *