Defaulting debtor or not (anymore) after all?

05 August 2024

Blogs Marc Janssen Procedural & Litigation

Introduction

On April 12, 2024, the highest civil court, the Supreme Court, adjudicated on an issue of importance to B2B practice. At issue in that case was the extent of damages suffered by the buyer as a result of the sellers' failure to perform the obligation to deliver a plot of land. The question is when the sellers' default occurred. The court ruled that although the buyer could infer from a communication from the sellers, which was clear in itself, that the sellers would default on the obligation, the sellers were still not in default. The court referred to (among other things) a letter from the buyer's lawyer in which he had then given the sellers another deadline to let them know that they were still willing to comply.

Legal system

During the time that proper performance remains outstanding after it has become due, the debtor is in default. Sometimes default does not occur until after the creditor has sent a notice of default to the debtor. A notice of default is a written summons, in which the debtor is given a reasonable time for performance and is held liable for all damages if performance is not forthcoming within this time. In this case, "in writing" also means by e-mail or bailiff's writ. In a notice of default, the creditor must clearly state which specific obligation he still requires performance of. Whether a period for performance is reasonable depends on all the circumstances of the case (such as the length of the period, the nature of the performance and the preparatory actions required). In two cases, the creditor can suffice with a written notice containing a liability notice, namely when the debtor is temporarily unable to perform (for example, in the case of an import or export ban) or it appears from his attitude that a notice would be useless (for example, due to statements made to third parties). If the debtor lets the creditor know that he will not perform, as in this case decided by the Supreme Court, (or the creditor can infer this from a communication from the debtor), then the debtor is in default by operation of law (i.e. without notice of default) from that moment on. The debtor is likewise in default by operation of law if a term fixed for satisfaction expires without the obligation being fulfilled.

Fatal deadline

The main rule is that all deadlines set in a contract for performance are fatal deadlines. This also applies to expressly agreed payment terms. However, it may follow from the nature of the contract, the nature of the obligation in question or the other circumstances of the case that the term is not fatal. Therefore, it is wise to expressly state that a term is fatal.

Importance of default

Why is it important that the debtor is in default? From that moment, the creditor can claim rescission of the contract if the debtor defaults. Also, from that moment, the creditor is entitled to (additional) damages based on breach of contract.

High Court

In the judgment discussed here, the Supreme Court holds that default without notice of default commences when the creditor must infer from a communication from the debtor that the latter will fail in the performance of the obligation. If the obligation in question is due and payable, the default then commences by operation of law. According to the Supreme Court, the fact that a creditor gives the debtor the opportunity to still perform after the default has occurred does not mean that the creditor waives or processes his right to invoke the default that occurred earlier. The court found that the sellers' January 19, 2017 letter contained a clear notice from which the buyer could infer that the sellers would default. Thereby, the default occurred by operation of law. In the January 20, 2017 letter, the buyer extended the offer he had previously made to the sellers, and with the February 1, 2017 letter he gave the sellers the opportunity to still comply. This does not mean that the buyer could no longer rely on the default entered on January 19, 2017, since the sellers did not accept this offer and did not take this opportunity.

Practice Tip

It is clear from the above that careful drafting of B2B contracts is also important for answering the question of when default, default and/or a notice of default is required and, if so, what it should contain (e.g., what term). Apart from that, it is important to seek -in good time- advice on the question of what to do when the other party defaults: Is it necessary to declare the other party (again) in default by sending a notice of default? What exactly should this contain? This will determine your further legal position as a creditor (e.g. damages and/or rescission). If you have questions as a result of this blog or if you have other corporate law questions, please feel free to contact Marc Janssen or any of the other members of the Proceedings & Dispute Resolution section.