Jan Kromhout December 13 2022 Abandon or argue: treating disproportionality disputes at pre-contractual stage AKD | Litigation - Netherlands Jan Kromhout Litigation IntroductionFactsDecisionCommentIntroductionThe North Holland District Court recently rendered a remarkable judgment in an equally remarkable case. Tendering for a contract, shipbuilder Damen Shipyards (Damen) initiated interlocutory proceedings challenging the contract's provisions in the pre-contractual phase.It is rare for a tenderer to initiate such an action during the pre-contractual period, which is typically focused on securing the contract by submitting the best tender. Such discussions are typically held in the post-contractual phase.Damen, however, felt compelled to challenge various contract provisions during the tender phase and, for the most part, was successful as the judge sent the contracting party home with some very specific instructions.FactsRoyal Netherlands Institute for Sea Research (NIOZ), a marine research institute, organised a tender for the construction of a new ship to replace the Netherland's largest seagoing research vessel. Damen was selected as a tenderer. During the negotiations, Damen made several requests to adjust underwater noise requirements and objected to various contract provisions, including the force majeure clause.Despite the requests, NIOZ sent Damen a final tender notice, including the contract and specifications, which were to be accepted unconditionally by the tenderer. Damen informed NIOZ that the terms of the agreement prevented the company from accepting the contract. When NIOZ proved to be unwilling to adjust the terms, Damen initiated interlocutory proceedings.DecisionDamen objected to a number of provisions, most notably those regarding underwater noise requirements, contract termination, liability and force majeure, which, it argued, were "disproportionate".Underwater noise requirements and terminationDamen claimed that the underwater noise recommendation contained in NIOZ's contract was outdated and therefore not suitable – a position supported by NIOZ's own expert. This argument was upheld by Interim Relief Judge Schotman of the North Holland District Court, which ruled the recommendation unachievable and therefore disproportionate.Regarding the termination provisions, the contract stated that, if the construction of the vessel could not be reversed, the builder would only be reimbursed for work done if the termination was not due to a default. The Court also considered this to be disproportionate and ordered the contract to be amended.Liability provisions and force majeureDamen also challenged liability provisions in the contract, which were significantly different from the usual market provisions, such as those contained in Baltic and International Maritime Council NewBuildCon, and were unusually broad in scope. Under the provisions, the contracting party had the possibility to not only claim penalties, but also damages in excess of these penalties.The Court found that the wording of the liability clause was unclear and could potentially lead to unlimited liability for all damages including consequential damages, raising the question of whether it represented a reasonable division of risk. The Court found the wording disproportionate and thus directed it to be amended.Furthermore, the force majeure clause provided that, among other things, the builder could not invoke force majeure in the event of late delivery of materials even if this was due to a failure of a third party, a provision that Damen argued was also disproportionate.Judge Schotman found that NIOZ could not place the delay risks entirely with the builder, particularly in the current environment where supply problems had been exacerbated by covid-19. The Court also highlighted the substantial fines that could potentially be imposed if the delivery time of the vessel (31 months) was exceeded.Given the relatively short delivery time, the Court said the tenderer would almost certainly encounter insurance issues under these conditions, while the fact that NIOZ had a vessel still in service meant it would not suffer immediate detrimental consequences if delay should occur.The Court found that the force majeure clause was unbalanced and disproportionate, especially under current market conditions. In an unusual move, Judge Schotman issued suggestions on the content of the new clause in line with the Court's formulation of force majeure under paragraph 5.30 of the ruling.The unprecedented far-reaching involvement of Judge Schotman in this case might be considered inappropriate and an impairment of the freedom of contract, and it could be argued that it is not the judge's place to tell a contracting party how to conduct its business.CommentPrecedent regarding tender contractsA contracting party is at liberty to determine both the request for tender and the conditions of the tendering process, as Judge Schotman noted in paragraph 5.1 of the ruling.However, there are limits to that freedom which are determined by the Procurement Act 2012, the Proportionality Guide and procurement law principles.A tenderer must act proactively if it feels that certain contract provisions are not proportionate and raise any objections at the earliest possible stage. This way, all issues standing in the way of an efficient and proper execution of the contract can be addressed early and corrected to the satisfaction of both parties, with the least possible impact on the course and timeline of the procurement procedure. This also follows from procurement case law.Abandon or argue?If the demands made by the contracting party are unacceptable to a tenderer, parties can relinquish their intention to participate in the process. In the case of Damen, the shipbuilder had already invested a substantial amount of money in the project, prompting it to initiate proceedings.Commonly, tenderers will not raise such issues until the execution phase. However, by submitting to tenders, parties commit to all conditions of the tender including the contract provisions. Any objections raised at a later stage are therefore much less likely to succeed before a judge.Despite the unusual nature of the case, the North Holland District largely ruled in favour of Damen. The ruling (implicitly) underlines that tenderers must raise objections to the tender procedure in good time (ie, before tendering). If tenderers fail to do so, clients may use this ruling as a basis to argue that they have forfeited their right to raise these objections during the execution stage. In this way, clients can benefit from this ruling too.While this ruling demonstrates that it can be advantageous for tenderers to submit complaints relating to proportionality at a pre-contractual stage, particularly in situations where terms diverge significantly from established market practices, it nevertheless represents a rare case.The extent to which the courts should intervene at a pre-contractual stage through interlocutory proceedings remains a subject for debate. In some cases, the far-reaching involvement of the judge in this case could be considered inappropriate and an impairment of freedom of contract.For further information on this topic please contact Jan Kromhaut by telephone (+31 88 253 5373) or email ([email protected]). The AKD website can be accessed at www.akd.nl.