Part 2 of ‘four points of attention when concluding (commercial) agreements’: liability

You are negotiating an agreement with your counterparty - for example, a supplier, manufacturer or service provider. What if the delivered product is not what you envisioned? Or vice versa: you have produced something or provided a service, but your counterparty claims that it does not meet the requirements and believes that he or she has suffered damages as a result? In this blog, we provide practical tips & tricks.

Contractual liability

When two parties enter into an agreement, they agree to perform certain obligations. If one party subsequently fails to honor this obligations, fails to do so correctly and/or fails to do so on time, the other party may suffer damages. The damaging party may then wish to hold the damaging party liable. What legal points should you - as the party causing damage or as the party suffering damage - at least pay attention to?

             1. What exactly has been agreed upon about (the limitation of) damages?

Whether a defaulting party can be successfully held liable, largely depends on what the parties have contractually agreed upon. Therefore, first pay close attention to the agreement and/or general terms and conditions. For example: the parties may have agreed that liability is limited to a certain amount of money. The value of this cap may differ, but often the value of the to be delivered in one contract year is taken as the starting point. In other cases, the amount reimbursed by the insurance company is used as cap. In addition, it is common practice to exclude so-called "indirect" damages completely. Note that Dutch civil law does not define the term "indirect" damages. Therefore, parties often include in an agreement what they see as "indirect" damages. For instance: loss of goodwill, lost profits, lost savings, etc. In short, the important take away is to first review the agreement (and/or general terms and conditions) and check whether the type of damage is (fully or partially) eligible for compensation.

             2. Is notice of default required?

In some cases, damages can only be claimed after the defective performing party has been given the opportunity to still perform within a reasonable time. This is called a notice of default (ingebrekestelling). Only if the defective party fails to fulfill its obligations after a reasonable period of time as set out in the notice of default, it is in default and the injured party can (for example) terminate the contract and claim damages. It is therefore very important that if a notice of default is required, it is sent in a timely manner.

3. Is the damage attributable?

A party who is in default is not liable for damages if those damages cannot be attributed to him. This is called force majeure. The Dutch civil law gives a definition of this in article 6:75 DCC, but parties themselves can deviate from this definition in their agreement or general terms and conditions. Therefore: check if the event is attributable to the non-performing party (by reading the agreement, terms and conditions and/or the Dutch law).

This blog is part of a blog series on points of attention when entering into agreements. Don't want to miss a blog? Or would you like to know more now about liability or an agreement you are planning to conclude? Please reach out to s.poutsma@ploum.nl or b.schoenmaker@ploum.nl.

Also appeared in this blog series:

1. Term and termination
2. Force majeure
3. Choice of law and choice of forum