Default

Non-performance has to do with violating conditions from an agreement. The Dutch Civil Code provides that parties to an agreement must comply with the conditions laid down therein. Failure to fulfil an obligation may result in legal consequences. The main consequence of non-compliance with an agreement is the creation of an obligation to pay compensation. To qualify for this, a number of conditions must be met. Other possible actions are sentencing to fulfilment, suspension and dissolution.

Article 6:74 of the Dutch Civil Code provides that the party who fails to fulfil his obligation is obliged to compensate for the damage that has arisen as a result. It is however also required that the shortcoming is attributable to that party. This is called default.

Shortcomings are concepts that have a broad and neutral meaning. The term refers to all cases where the party lags behind in its performance compared to what has been agreed. A shortcoming can concern the full or partial failure to perform. Late fulfilment or insufficient fulfilment also concern shortcomings.

Whether there is a shortcoming depends on the explanation of the agreement. Reasonableness and fairness can also play a role in this.

Result commitment or best effort commitment?

A distinction must be made between result obligations and effort obligations: If a certain result has been agreed (a result obligation) (Product X is delivered on day Y), there is a shortcoming as soon as the agreed result is not achieved (on day Y product X has not been delivered). If it has only been agreed that the party undertakes to achieve a certain result (an effort commitment) (Supplier Z makes an effort that Service WQ is online% of the time), then there will only be a shortcoming if that party has failed in the effort that could be required of him under the circumstances.

Professionals and professional service providers, such as ICT experts, may generally be required to exercise the care of a reasonably competent and reasonably acting professional. Some parties may even have a special duty of care.

There can be no shortcoming if the performance is not (yet) due and payable, although in some cases the consequences of non-compliance may occur earlier.

Even if there is no fulfilment on the grounds of applying a power of suspension, there is no shortcoming.

The creditor has the burden of proof of the existence of the obligation and of the existence of the shortcoming.

Besides the fact that there must be a shortcoming, there must also be attributability of that shortcoming to the failing party. In principle this applies: any shortcoming is attributable. This is not the case when the failing party (the debtor) can demonstrate that the shortcoming cannot be attributed to him. This may be the case of force majeure. Force majeure exists if the shortcoming is not due to the debtor’s fault, nor does it have to be borne by law, legal act or prevailing opinions. The debtor, therefore, has the burden of proof of the existence of force majeure.

If there is an attributable shortcoming, then in legal terms this is referred to as default.

If a breach has created a risk for the damage to occur, and that risk subsequently arises, then the causal relationship between damage and failure is in principle a given. The debtor will then have to prove that the damage would have occurred without his conduct. There are exceptions to this ‘reversal rule’.

If a shortcoming is attributable, the debtor is obliged to compensate for the damage that the creditor suffers as a result. The only requirement is therefore that any form of damage has been or will be suffered and that the damage has been suffered as a result of the shortcoming. So there must be a causal link between the mistake and the damage. Lawyers also call this “condicio sine qua non”: if the damage had arisen even if the shortcoming had not existed, there was no causal link. The burden of proof of the damage and the causal link rests with the creditor.

Furthermore, there must be “default” or “permanent impossibility in compliance”.

Lasting impossibility in compliance

Fulfilment is permanently impossible if the shortcoming cannot be remedied by further fulfilment. There must, therefore, be a definition of non-compliance, or irreparable faulty fulfilment. If fulfilment is permanently impossible, then the default arises immediately after the shortcoming becomes due. No further requirements need to be met. If there is a permanent shortcoming of a (partial or defective) performance, compliance is permanently impossible if the creditor definitively rejects the performance provided.

If it is still possible to fulfil, for example (often) in the event of late fulfilment (but not always *) or in the case of repairable defective fulfilment, then there must first be a case of default.

* If compliance has been agreed upon without delay, it can also be stated after a certain period that compliance has now become permanently impossible (and therefore no additional absence is required).

Default occurs in the period that correct compliance is not forthcoming. This is regulated by law in art. 6:81 BW. Moreover, default occurs in the main rule through a notice of default, according to art. 6:82 paragraph 1 BW. In some cases, however, default occurs by operation of law, on the basis of art. 6:83 BW or on grounds of reasonableness and fairness.

The main rule is therefore that the default occurs when the debtor is given notice of default and there is no compliance after a reasonable period of time. The notice of default must be admonished to fulfil a specified commitment within a reasonable period of time. The stipulated period may not expire before the performance is due and payable. Furthermore, for example, the type of performance and the necessary preparatory actions are important to determine whether the length of the period is reasonable. Finally, the notice of default must contain a reminder: the creditor must hold the debtor liable for the delay in the absence of performance within the prescribed period. If compliance is temporarily impossible or if the debtor’s attitude shows that a reminder is useless, express liability is sufficient.

The default occurs without notice of default if a strict deadline has been violated, if an obligation to pay damages has not been met and if the debtor informs himself that he will fail to perform. For reasons of reasonableness and fairness, a default can also occur without notice.

If there is a breach of contract and default or a permanent impossibility to perform, the debtor is obliged to compensate the damage suffered as a result.

During the default of a party, the other party cannot be in default. An important situation here is credit default:

If a creditor does not cooperate with the performance he or she has requested, or if he or she blocks someone else from giving it, he may become in default with creditors if he has not made a valid appeal for suspension. It is then required that the debtor’s foreclosure is solely caused by an impediment on the part of the creditor. The cause must be attributable to the creditor. If that is the case, then there is a credit default. The debtor cannot perform, but will not be in default, because the creditor is already in default.