On 11 October 2019, the Supreme Court in the Netherlands issued a judgement setting out the rules on default (verzuim) and notice of default (ingebrekestelling). The judgement clarified the remedy period that must be given to the debtor in the notice of default in order for the default to have effect and the contract to be capable of termination (ontbinding).
What was the case about?
The main issue in dispute was whether, after a period of discussion and correspondence between the main contractor and the sub-contractor about the time frame and quality of the work of the sub-contractor, a main contractor had the right to terminate the agreement with the sub-contractor. The sub-contractor argued that the main contractor did not have this right because the sub-contractor was not yet in default. The discussion focused on whether the main contractor should have given the sub-contractor a longer remedy period when issuing the notice of default.
What are the rules on default and notice of default?
The Supreme Court used this case to summarise the rules on default and notice of default:
- If no time limit has been set for performance, the default will occur if the debtor is given notice of default in writing and is given a reasonable remedy period, and the debtor fails to perform within this period (article 6:82 paragraph 1 Dutch Civil Code).
- The function of a notice of default is to give the debtor a final term for performance and to determine the deadline until which performance is still possible without being in default. If the debtor fails to perform in time, the debtor is in default as of the deadline set by the creditor.
- The length of the remedy period that must be given to the debtor depends on the circumstances:
- A One relevant factor is the time that the debtor had before the reminder for remedy.
- In most cases, the debtor cannot wait until they receive a notice of default to take measures to remedy a default.
- If the debtor is temporarily unable to fulfil their obligations or if their attitude shows that a demand or warning would be useless, the notice of default can be given by means of a written notice from which it appears that the debtor is held liable for failure to perform (article 6:82 paragraph 2 Dutch Civil Code).
- Default can also occur without notice of default (this follows from article 6:83 Dutch Civil Code and other sources), where:
- an agreed final deadline expires;
- there is an unlawful act or an obligation to pay compensation;
- it is clear from a statement from the debtor that the debtor will not comply;
- very briefly, a notice of default is not required by the standards of reasonableness and fairness.
The Supreme Court emphasised that the rules on notice of default and default are not strict rules, but that the aim of the rules is to allow a judge to reach a reasonable resolution in a dispute between parties that do not have detailed knowledge of the law.
What does the contract say?
It is important to keep in mind that an agreement can deviate from the statutory rules on default and notice of default, such as the term that must be given in a notice of default. For example, a contractual term can be a month or a week, but it can also be contractually agreed that default occurs without the need for a notice of default.
As a general rule, a creditor and a debtor can invoke a contractual arrangement regarding default and notice of default. However, there are situations in which this cannot be done or cannot be done in full because invoking a contractual provision on default and notice of default may be unacceptable by standards of reasonableness and fairness (article 6:248 paragraph 2 Dutch Civil Code).