Remedies for breach of contract: what, when and how?
Enforceable obligations are an important aspect of commercial interaction. Contracts provide for this need by proving the terms and conditions to which parties agreed. However, in reality a promise made is not necessarily a promise kept. There may be different causes for breach of contract, but the resulting question remains the same: what remedies does an injured party have in the event of a breached contract? This blog post addresses the different remedies for breach of contract under Dutch contract law.
To what remedies is the injured party entitled?
Freedom of contract allows parties to stipulate remedies in accordance with their specific interests within the limits of the principles of reasonableness and fairness (redelijkheid en billijkheid). Therefore, parties are first and foremost entitled to the remedies on which they themselves agreed in the breached contract, such as a termination clause (ontbindingsclausule). If parties do not include their own remedies in the contract, or if they do so only partially, the Dutch Civil Code (DCC) provides relief through supplementary general remedies.
If a party breaches one of its contractual obligations when it is not allowed to do so, the injured party may claim
(i) specific performance of the contractual obligation (Article 3:296 DCC);
(ii) damages as an alternative to performance (Articles 6:74 and 6:87 DCC); or
(iii) termination of the contract (Article 6:265 DCC) and reversal of obligations already performed, such as payment (Article 6:271 DCC).
Please note that freedom of contract also allows parties to exclude some of the general remedies in their contract.
What remedy should the injured party choose?
The general remedies are three separate alternatives: the injured party may choose only one. In principle, the choice between the general remedies is at the injured party's sole discretion. This freedom of choice is somewhat limited by the principles reasonableness and fairness, including the debtor’s reasonable interest (ECLI:NL:HR:2001:AA93311; Multi Vastgoed/Nethou) and the principles of subsidiarity and proportionality. Additionally, the injured party may combine one of the general remedies with a claim for supplementary damages, such as compensation for losses due to delays or consequential loss.
The suitability of each remedy depends on the nature of the breach and the desired legal effect.
Specific performance
Specific performance may be appropriate if a third party cannot easily perform the contracted obligation (e.g. the delivery of a unique form of software) or if the continuation of a long-term contractual relationship is preferred. In those situations, the injured party may still want the debtor to perform the agreed obligation.
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Damages as an alternative to performance
On the other hand, a claim for damages as an alternative to performance might be more useful if performance is permanently impossible or if a strict deadline has passed (e.g. delivery of a wedding cake after the wedding).
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Termination of the contract
A benefit of termination of the contract is that it allows the injured party to end the contractual relationship in whole or in part and to reverse obligations already performed. This remedy could be suitable, for instance, if the injured party wishes to reclaim an item sold to the debtor.
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When and how does the injured party invoke these remedies?
The invocation of the general remedies is subject to some uncertainty. The interpretation of the general remedies depends on both the remedy chosen and the circumstances of the breached contract. This uncertainty is unfavourable in commercial practice and, as a result, commercial parties tend to include their own remedies in their contracts.
The general remedies each have their own criteria. Some of the criteria may be the same, while others apply only to a specific remedy.
The process of invoking a general remedy can be divided into the following three steps:
Step 1: Assess the nature of the breach and notify the debtor.
Like contracts, breaches vary greatly. Provisions in the contract may prescribe what constitutes “breach”. After discovering the fault in the performance, the debtor should be notified within a reasonable period to avoid forfeiture of the right to invoke a remedy.
Step 2: Determine whether notice of default is necessary.
Depending on the circumstances, the injured party may need to give the debtor final notice before being able to claim damages or termination. Depending on the circumstances of the breach, the final notice may also have to set an additional (reasonable) period for performance, after which the remedy becomes enforceable.
Step 3: Invoke the remedy.
The general remedies are invoked by notifying the debtor. Depending on the specific remedy, additional requirements for notification may apply, such as notification in writing (e.g. by letter, e‑mail or text message).
If the debtor does not perform in accordance with the remedy after notification, the injured party may claim enforcement through a court order, possibly subject to a periodic penalty payment (dwangsom).
Abstract flow chart
As the general remedies may be difficult to navigate, the three flow charts below indicate the possible actions and criteria per remedy.
Please note, these flow charts are intended to provide an abstract, non-exhaustive overview of the general remedies, as the criteria and their interpretation depend on all the relevant circumstances, which differ on a case-by-case basis. Furthermore, special areas of law, such as consumer law, may provide certain additional criteria.
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Conclusion
General Dutch contract law provides for three alternative remedies: specific performance, damages as an alternative to performance, and termination of the contract. When confronted with a breached contract, the injured party should be aware of the different criteria and the differences in legal effect in order to choose the remedy most suited to its needs. Although the general remedies provide relief, a downside is that the various criteria are subject to interpretation, which could lead to uncertainty.
Such uncertainty may be avoided by taking preventive measures, such as careful drafting of the definition of the obligations, breach (i.e. a strict deadline for performance), and the remedies. Drafting could also entail – but is not limited to – including your own remedies or excluding the additional remedies under the Dutch Civil Code. If parties have not provided for their own remedies, or have done so only partially, our abstract flow charts of the general remedies set out the process of invoking such a remedy.
