Dissolution and termination

Dissolution and termination

Some contracts specify a notice period (for example, an employment contract). The notice period must be adhered to. There is no notice period associated with the termination of a contract. If one of the parties fails to fulfill their agreements and/or obligations, the contract may be terminated.

Within the legal framework, there are two requirements for dissolving a contract. The requirements are:

1. There is a failure to perform by one of the parties
2. The breach must be sufficiently serious to justify dissolution.

If it turns out that the failure to perform was not serious enough, it does not constitute a valid reason to terminate the contract on the grounds of breach of contract. The other party with whom the contract has been dissolved may then claim damages, since the contract was not dissolved for good reasons.

We assist a wide range of clients in drafting, reviewing, and interpreting contracts. In practice, conflicts arising from contractual relationships occur regularly. These conflicts concern, for example, the interpretation of contract provisions, breach of contract (non-performance), and claims for damages. We have extensive experience in contractual dispute resolution, whether through negotiations or judicial proceedings. We have an experienced team of lawyers and legal experts in the field of contract law. Please contact us to discuss the possibilities.

Termination, dissolution, or annulment: what is the difference?

Anyone wishing to terminate a contract must first know which route is legally correct. The three main forms differ fundamentally:

• Termination ends a (often ongoing) agreement for the future. Termination is not regulated as a general concept in the law; whether and how you can terminate usually follows from the contract itself, from the general terms and conditions, or from the nature of the agreement. A breach by the other party is not required for this.
• Dissolution is the remedy for breach of contract: the other party fails to fulfill its obligations (properly). The legal basis is found in Article 6:265 of the Dutch Civil Code.
• Annulment does not relate to a subsequent failure, but to a defect at the time of concluding the contract (a defect of will such as error, fraud, coercion, or abuse of circumstances). Annulment has retroactive effect to the moment of conclusion: the contract is deemed never to have existed.

Unlike annulment, dissolution has no retroactive effect. For those just starting to explore the broader context, our page on Contract Law a good starting point.

When may you dissolve the law? Article 6:265 of the Dutch Civil Code

Article 6:265 paragraph 1 of the Dutch Civil Code stipulates that any failure to perform entitles the other party to dissolve the agreement in whole or in part, unless the failure, given its particular nature or minor significance, does not justify such dissolution and its consequences. The starting point is therefore broad: in principle, any failure justifies dissolution, and it is up to the defaulting party to demonstrate that the failure is too minor. Whether a failure is “sufficiently serious” is assessed by the court based on all the circumstances of the case. Pursuant to Article 6:265 paragraph 2 of the Dutch Civil Code, the power to dissolve arises only when performance is permanently or temporarily impossible, or when the debtor is in default .

Default and notice of default: the pitfall that causes business to fail

Most dissolutions fail not on the substance, but on the form. As long as performance is still possible, you may only dissolve the contract if the other party is in default (Article 6:81 of the Dutch Civil Code). According to the general rule of Article 6:82 of the Dutch Civil Code, default occurs after a notice of default: a written demand with a reasonable period to still perform. If the other party fails to meet that deadline, they are in default and the path to dissolution (and compensation) is open.

In a number of cases, a notice of default is not required and default occurs automatically (Article 6:83 of the Dutch Civil Code), including when a fixed deadline expires, in the case of an obligation to pay damages arising from a tort, or when the creditor must infer from a communication by the debtor that the latter will default. Misjudging these rules—for example, dissolving the contract too quickly without a valid notice of default—is a classic mistake that can cost you your case. We assess in advance whether you have taken the correct steps.

Extrajudicial or judicial dissolution

Dissolution does not require a court ruling. Pursuant to Article 6:267 of the Dutch Civil Code, dissolution takes place by means of a written declaration of dissolution to the other party, or by a court ruling. In practice, dissolution is often first effected out of court by means of a well-substantiated letter. If this results in a dispute, the dissolution (and its consequences) can subsequently be submitted to the court. A carefully drafted declaration – with the correct legal basis, the right timing, and the right party – prevents the dissolution from being overturned later.

What happens after dissolution? Restitution and compensation

Dissolution releases parties from their future obligations, but does not simply cause performances already rendered to vanish. Article 6:271 of the Dutch Civil Code creates obligations of restitution: what has already been performed (for example, a payment or a delivered item) must, in principle, be reversed or – if reversal is not possible – compensated for in value. In addition, the party suffering damage due to the breach of contract may damages in addition to dissolution. Conversely, if you dissolve incorrectly, it is the other party who may hold you liable for damages. We calculate the financial consequences for you before you decide.

Termination of long-term agreements

In the case of long-term agreements for an indefinite period – such as with a fixed supplier, a distribution relationship, or a partnership – the question often arises as to whether termination is permitted, and with what notice period. If nothing is stated in the contract, such an agreement is in principle terminable according to settled case law of the Supreme Court; however, the requirements of reasonableness and fairness may entail that a notice period be observed, that a compelling reason is required, or that compensation be paid. Terminating too abruptly can therefore be unlawful. We assess what notice period is reasonable and how you can terminate the relationship properly – and without unnecessary claims.

Lawyers and legal experts who think along with you

Dissolution and termination revolve around timing, wording, and evidence. Our mixed teams of lawyers and in-house counsel guide both international corporations and the baker around the corner: from assessing whether you are entitled to dissolve, drafting a watertight notice of default and dissolution declaration, to conducting negotiations or – where necessary – legal proceedings. We think commercially: sometimes continuing the litigation is the best route, but often a well-timed letter suffices. Do you want to know where you stand? Contact us and also view our broader expertise in Contract Law.