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France
France – Abrupt termination of contractual relationships and arbitration
8 novembre 2020
- Arbitration
- Litiges
International debt recovery is perhaps one of the most challenging issues in business. Companies are usually excited when starting their new international ventures, but when payments of distributors, clients, franchisees… stop, difficulties arise, particularly when they happen abroad. Recovery is most of the times complicated, causes expenses, nightmares and sometimes undertakings simply decide to give up. We herein provide some tips to consider in the prevention phase.
The following is a summary of the ideas which were discussed in a webinar organized by Legalmondo and the Chamber of Commerce of Treviso/Belluno in Italy in November 11, 2020.
What are the best practices to manage international receivables?
The first question regards the best practices companies could put into practice to avoid or, at least, to try to minimize the impact of lack of payment when international businesses are concerned.
The following main points were mentioned as worth considering at an early status of the negotiations and business development.
Verification of the identity of the company
Who is the company we are dealing with? It is important to check its existence, legal situation and capacity to carry on business. And also, the faculties or authorization of the person signing the type of contract. Is this the right authorized person? Has this person followed the legal requirements to do it? In particular, during this period of international pandemic, when the electronic signatures are used and when agreements are frequently signed with non-original signatures but only on pdf documents.
Request of financial information
What is the credit rating of the company? Seek to obtain official accounting information, either filed with the register of companies (when possible according to the local rules), or through private investigation research: tax regularity certificate to attest that the company is in compliance with applicable rules (in places when this is possible), comfort letters from shareholders or third parties (banks)… It is important to have a reasonable certitude about the capacity of that company to carry on the concrete business. And when possible, to do it on a regular basis.
Use the right contract
What is the correct type of contract for the commercial relationship? Seek advice from a lawyer specialized in the law of the country where the debt will be collected. This will be an essential element, for example, to know when the ownership of the acquired asset is legally transferred; when the parties have agreed to pay the invoices; the validity of the general conditions (or if they have to be drafted in the local language or in the language of the negotiations or what happens when they are contradictory: the seller’s and the purchaser’s); whether this is a distribution contract or a mere supply of products and the related obligations and consequences depending on the applicable law…
Write down your agreements
Avere le condizioni per iscritto non solo sul tipo di contratto ma anche sulle modalità, condizioni e ritardi di pagamento. Ed essere consapevoli del tipo di documenti necessari per la validità dell’accordo. Uno scambio di e-mail creerebbe un obbligo? Sarebbero necessari passaggi più formali per avere un contratto / obbligo valido (notaio, registrazione, firma separata di alcune condizioni)?
Follow your contract
If there is a contract in place, it is important to follow what has been signed or agreed, to ensure that these conditions are then respected. A different and sustained commercial practice could imply a tacit change the original written agreement.
Document all transactions
From the order by the client/distributor, its acceptance by the manufacturer, the transport document, linked to the receipt of goods, and until the final invoice, all paperwork should be clear and consistent. In case of lack of payment, all these documents might be necessary to prove the correct performance of the contract.
Has the debtor risen objections?
Also check your own defaults. It is quite frequent that the non-paying party justifies its decision on a previous breaching. If there is such previous alleged infringement by a supplier, for instance (related to the shipment of goods: delays, defective products, etc.), it will be probably more complicated to ask for the payment from the distributor or, at least, it will be required an additional procedure.
Be clear on the accrual of interests for late payments
In EU countries, legislation based on the 2011/7 Directive allows to combat late payment in commercial transactions with special interest rates: make sure this is mentioned in the contract, as non-EU based companies might not be aware of this, and the difference with the general legal interest can be substantial.
Seek guarantees for your credits
This obviously can vary depending on the type of contract and the relationship between the parties. A guarantee is advisable not only at the beginning, but also when the relationship lasts for several years. Sometimes, trust in your counterparty in the past makes more difficult to ask for additional guaranties and this could imply that late payments are not correctly managed.
Consider also additional guaranties on sold goods such as, when permitted by the law, retention of title. This will imply that the ownership remains in the vendor’s hand until the complete payment. In some cases, it is also possible to have additional guarantees when the retention of title can be registered at special public registries. These special conditions should also be verified locally in order to know their extent and to respect the way they shall be agreed, accepted, and documented.
Check out our webinar on debt collection
On November 11, 2020, I had the pleasure to participate to the webinar on International Debt Collection organized by the Chamber of Commerce of Treviso and Belluno and Legalmondo: we discuss the best practices and share practical information on debt collection in Spain, Germany, France, USA, China, Vietnam and Singapore.
You can watch the recording of the webinar here.
Legalmondo’s helpdesk on international credit collection
If you would like to know more about how to collect a debt overseas, you can find the reports of our experts from 20 countries here.
Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.
Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in Charlivari v. Sté Equivalanza, n°17/03703.
It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices; the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).
Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.
Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.
Brexit had surprised nations all over the world. It is now confusing lawyers all over the world whose clients are engaged in contracts or disputes with English choice of law or jurisdiction clauses.
Should they advise their clients to continue to choose English law, jurisdiction or arbitral seats in new contracts? Should they litigate or arbitrate under choices they made in existing contracts before anyone dreamed of Brexit; or does Brexit mean the recognition and enforcement of judgments or awards may be problematic?
The United Kingdom finally left the European Union on 31 January 2020. Little in the world of enforcement and recognition has changed to date. However, the UK is due to drop out of the EU regimes with which European lawyers are familiar on 31 December 2020. From then, we will enter unchartered territory.
This first blog explores the legal framework the UK and EU politicians agreed in 2019 to carry us through to the end of 2020 and what that framework tells us about the changes to enforcement and recognition of judgments from the beginning of 2021.
What is the Withdrawal Agreement and the Withdrawal Agreement Act?
The Withdrawal Agreement is a treaty between the EU and the UK which was agreed on 17 October 2019 as a result of Brexit negotiations. The purpose of the Withdrawal Agreement is to establish the terms of the UK’s withdrawal from the EU, including what happens to jurisdiction and enforcement of judgments as between the UK and the EU.
The European (Withdrawal Agreement) Act 2020 is an Act of UK Parliament. The purpose of the Withdrawal Agreement Act is to enshrine and implement the provisions of the Withdrawal Agreement into the domestic law of the UK. Having been given Royal Assent on 23 January 2020 and ratified by the Council of the European Union on 30 January 2020, the Withdrawal Agreement Act came into force on 31 January 2020.
What is the transition period?
The Withdrawal Agreement provides for a transition period to give businesses time to adjust to the new situation and time for the UK and EU governments to negotiate new trade, travel, business and legal arrangements.
How then does the Withdrawal Agreement affect the jurisdiction and enforcement of judgments between the UK and EU during the transition period and when is the transition period to and from?
The transition period commenced on 31 January 2020 and will end on 31 December 2020, as provided for by Article 126 of the Withdrawal Agreement.
Article 132 of the Withdrawal Agreement also provides that the transition period may be extended for up to one or two years by a one-off decision made before 1 July 2020 by the joint UK-EU Committee. Although, such an extension is effectively ruled out by section 33 of the Withdrawal Agreement Act. This prohibition could be overridden by further legislation; the possibility of which is perhaps more real given the global effects of the coronavirus pandemic. However, as it stands, the default position is that the transition period will end on 31 December 2020.
What is the effect on jurisdiction and enforcement of judgments during the transition period?
There are four key provisions of the Withdrawal Agreement which affect jurisdiction and enforcement of judgments:
- Article 127 provides that EU law will apply to and in the UK during the transition period, unless otherwise provided in the Withdrawal Agreement, and any reference to Member States in EU law will be understood as including the UK.
- Article 129 provides that the UK will also continue to comply and be bound by obligations stemming from international agreements to which the EU is party during the transition period.
- Article 67(1) provides that in the UK, as well as in the Member States in situations involving the UK, the Brussels (Recast) Regulation (No. 1215/2012) (“Brussels Recast”) will apply to:
- “legal proceedings instituted before the end of the transition period”; and
- “legal proceedings or actions” which although themselves are not instituted before the end of the transition period “are related to such legal proceedings pursuant to Articles 29 to 31 of the Brussels Recast Regulation”. Articles 29 to 31 of Brussels Recast concern the rules on lis pendens and related actions.
- Article 67(2) provides that in the UK, as well as in the Member States in situations involving the UK, Brussels Recast will apply to “to the recognition and enforcement of judgments given in legal proceedings instituted before the end of the transition period.”
Practically, the effect of these provisions is as follows:
- The rules on jurisdiction and recognition and enforcement of judgments between the UK and other EU Member States will continue to be governed by Brussels Recast during the transition period.
- The courts in the UK and EU Member States in situations involving the UK will continue to apply Brussels Recast to determine jurisdiction, provided the proceedings are issued before 31 December 2020 or they are related to such proceedings.
- The courts in the UK and EU Members States in situations involving the UK will also continue to apply Brussels Recast to recognise and enforce their respective judgments, provided proceedings are issued before 31 December 2020.
- The UK will continue to comply and be bound by obligations stemming from international agreements relating to jurisdiction and enforcement of judgments to which the EU is party during the transition period. This includes the Hague Convention on Choice of Court Agreements 2005 and the Lugano Convention 2007.
- The Hague Convention 2005 applies between EU Member States, Mexico, Singapore and Montenegro. The UK is currently party to the Hague Convention by virtue of its EU membership, however, that will cease at the end of the transition period. Whether the Hague Convention will continue to apply as between the UK and other Contracting states after the end of the transition period is covered in my next Brexit blog post – ultimately, it depends on whether the UK joins the Hague Convention in its own right.
- The Lugano Convention 2007 applies between EU Member States and EFTA countries Iceland, Norway and Switzerland. Again, the UK is currently party to the Lugano Convention by virtue of its EU membership, however, that will cease at the end of the transition period. The applicability of the Lugano Convention between the UK and other Contracting States after the end of the transition period is also covered in my next Brexit blog post.
Before the end of the transition period, commercial parties should review dispute resolution clauses in their contracts to assess whether the clause’s intended utility will be affected by Brexit. If parties are engaged in current disputes, they should consider whether it is appropriate to issue proceedings before 31 December 2020 in order to benefit from the ongoing application of the existing framework of the rules governing jurisdiction and enforcement, in particular, Brussels Recast.
Summary – The company that incurs into a counterfeiting of its Community design shall not start as many disputes as are the countries where the infringement has been carried out: it will be sufficient to start a lawsuit in just one court of the Union, in its capacity as Community design court, and get a judgement against a counterfeiter enforceable in different, or even all, Countries of the European Union.
Italian companies are famous all over the world thanks to their creative abilities regarding both industrial inventions and design: in fact, they often make important economic investments in order to develop innovative solutions for the products released on the market.
Such investments, however, must be effectively protected against cases of counterfeiting that, unfortunately, are widely spread and ever more realizable thanks to the new technologies such as the e-commerce. Companies must be very careful in protecting their own products, at least in the whole territory of the European Union, since counterfeiting inevitably undermines the efforts made for the research of an original product.
In this respect the content of a recent judgement issued by the Court of Milan, section specialized in business matters, No. 2420/2020, appears very significant since it shows that it is possible and necessary, in case of counterfeiting (in this case the matter is the counterfeiting of a Community design) to promptly take a legal action, that is to start a lawsuit to the competent Court specialized in business matters.
The Court, by virtue of the EU Regulation No. 6/2002, will issue an order (an urgent and protective remedy ante causam or a judgement at the end of the case) effective in the whole European territory so preventing any extra UE counterfeiter from marketing, promoting and advertising a counterfeited product.
The Court of Milan, in this specific case, had to solve a dispute aroused between an Italian company producing a digital flowmeter, being the subject of a Community registration, and a competitor based in Hong Kong. The Italian company alleged that the latter had put on the European market some flow meters in infringement of a Community design held by the first.
First of all, the panel of judges effected a comparison between the Community design held by the Italian company (plaintiff) and the flow meter manufactured and distributed by the Hong Kong company (defendant). The judges noticed that the latter actually coincided both for dimensions and proportions with the first so that even an expert in the field (the so-called informed user) could mistake the product of the defendant company with that of the plaintiff company owner of the Community design.
The Court of Milan, in its capacity as Community designs court, after ascertaining the counterfeiting, in the whole European territory, carried out by the defendant at the expense of the plaintiff, with judgement No. 2420/2020 prohibited, by virtue of articles 82, 83 and 89 of the EU Regulation No. 6/2002, the Hong Kong company to publicize, offer for sale, import and market, by any means and methods, throughout the European Union, even through third parties, the flow meter subject to the present judgement, with any name if presenting similar characteristics.
The importance of this judgement lies in its effects spread all over the territory of the European Union. This is not a small thing since the company that incurs into a counterfeiting of its Community design shall not start as many disputes as are the countries where the infringement has been carried out: it will be sufficient for this company to start a lawsuit in just one court of the Union, in its capacity as Community design court, and get a judgement against a counterfactor who makes an illicit in different, or even all, Countries of the European Union.
Said judgement will be even more effective if we consider that, by virtue of the UE Customs Regulation No. 608/2013, the company will be able to communicate the existence of a counterfeited product to the customs of the whole European territory (through a single request filed with the customs with the territorial jurisdiction) in order to have said products blocked and, in case, destroyed.
The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.
The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to « public order« .
That « public order » is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.
As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.
The Madrid SCJ has been maintaining in recent times a very « expansive » interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.
And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.
This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to « public order », the parties no longer had the possibility to compromise and renounce the demand for annulment.
For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of « the parties’ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate ». It is what we call « justice begged for »; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.
And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators’ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.
Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties’ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the « justice » principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.
Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.
The COVID-19 pandemic’s dramatic disruption of the legal and business landscape has included a steep drop in overall M&A activity in Q1 2020. Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis’s duration.
For pending transactions, whether the buyer can walk away from the deal (or seek a purchase price reduction) by invoking a material adverse change (MAC) or material adverse effect (MAE) clause – or another clause in the purchase agreement – due to COVID-19 has become a question of increasing relevance. MAC/MAE clauses typically allow a buyer to terminate an acquisition agreement if a MAC or MAE occurs between signing and closing.
Actual litigated cases in this area have been few and far between, as under longstanding Delaware case law[1], buyer has the burden of proving MAC or MAE, irrespective of who initiates the lawsuit. And the standard of proof is high – a buyer must show that the effects of the intervening event are sufficiently large and long lasting as compared to an equivalent period of the prior year. A short-term or immaterial deviation will not suffice. In fact, Delaware courts have only once found a MAC, in the December 2018 case Akorn, Inc. v. Fresenius Kabi AG.
And yet, since the onset of the COVID-19 pandemic, numerous widely reported COVID-19 related M&A litigations have been initiated with the Delaware Court of Chancery. These include:
- Bed, Bath & Beyond suing 1-800-Flowers (Del. Ch. April 1, 2020) to complete its acquisition of Perosnalizationmall.com (purchaser sought an extension in closing, without citing specifically the contractual basis for the request);
- Level 4 Yoga, franchisee of CorePower Yoga, suing CorePower Yoga (Del. Ch. Apr 2, 2020) to compel CorePower Yoga to purchase of Level 4 Yoga studios (after CorePower Yoga took the position that studio closings resulting from COVID-19 stay-at-home orders violated the ordinary course covenant);
- Oberman, Tivoli & Pickert suing Cast & Crew (Del. Ch. Apr 6, 2020), an industry competitor, to complete its purchase of Oberman’s subsidiary (Cast & Crew maintained it was not obligated to close based on alleged insufficiencies in financial data provided in diligence);
- SP VS Buyer LP v. L Brands, Inc. (Del. Ch. Apr 22, 2020), in which buyer sought a declaratory judgment in its favor on termination); and
- L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P (Del. Ch. Apr 23), in which seller instead seeks declaratory judgment in its favor on buyer obligation to close.
Such cases, typically signed up at an early stage of the pandemic, are likely to increase. Delaware M&A-MAC-related jurisprudence suggests that buyers seeking to cite MAC in asserting their positions should expect an uphill fight, given buyer’s high burden of proof. Indeed, Delaware courts’ sole finding of a MAC in Akorn was based on rather extreme facts: target’s (Akorn’s) business deteriorated significantly (40% and 20% drops in profit and equity value, respectively), measured over a full year. And quite material to the Court’s decision was the likely devastating effect on Akorn’s business resulting from Akorn’s deceptive conduct vis-à-vis the FDA.
By contrast, cases before and after Akorn, courts have not found a MAC/MAE, including in the 2019 case Channel Medsystems, Inc. v. Bos. Sci. Corp. There, Boston Scientific Corporation (BSC) agreed to purchase Channel Medsystems, Inc., an early stage medical device company. The sale was conditioned on Channel receiving FDA approval for its sole product, Cerene. In late December 2017, Channel discovered that falsified information from reports by its Vice President of Quality (as part of a scheme to steal over $2 million from Channel) was included in Channel’s FDA submissions. BSC terminated the merger agreement in May 2018, asserting that Channel’s false representations and warranties constituted a MAC.
The court disagreed. While Channel and Akron both involved a fraud element, Chanel successfully resubmitted its FDA application, such that the fraudulent behavior – the court found – would not cause the FDA to reject the Cerene device. BSC also failed to show sufficiently large or long-lasting effects on Channel’s financial position. Channel thus reaffirmed the high bar under pre-Akron Delaware jurisprudence for courts to find a MAC/MAE (See e.g. In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027 (Del. Ch. Apr. 29, 2005); Hexion Specialty Chemicals v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)).
Applied to COVID-19, buyers may have challenges in invoking MAC/MAE clauses under their purchase agreements.
First, it may simply be premature at this juncture for a buyer to show the type of longer-term effects that have been required under Delaware jurisprudence. The long-term effects of COVID-19 itself are unclear. Of course, as weeks turn into months and longer, this may change.
A second challenge is certain carve-outs typically included in MAC/MAE clauses. Notably, it is typical for these clauses to include exceptions for general economic and financial conditions generally affecting a target’s industry, unless a buyer can demonstrate that they have disproportionately affected the target.
A buyer may be able to point to other clauses in a purchase agreement in seeking to walk away from the deal. Of note is the ordinary course covenant that applies to the period between signing and closing. By definition, most targets are unable to carry out business during the COVID-19 crisis consistent with past practice. It is unclear whether courts will allow for a literal reading of these clauses, or interpret them taking into account the broader risk allocation regime as evidenced by the MAC or MAE clause in the agreement, and in doing so reject a buyer’s position.
For unsigned deals, there may be some early lessons for practitioners as they prepare draft purchase agreements. On buyer walk-away rights, buyers will want to ensure that the MAE/MAC definition includes express reference to “pandemics” and “epidemics”, if not to “COVID-19” itself. Conversely, Sellers may wish to seek to loosen ordinary course covenant language, such as by including express exceptions for actions required by the MAC or MAE and otherwise ensure that they comply with all obligations under their control. Buyers will also want to pay close attention to how COVID-19 affects other aspects of the purchase agreement, including seeking more robust representations and warranties on the impact of COVID-19 on the target’s business.
[1] Although the discussion of this based Delaware law, caselaw in other U.S. jurisdictions often is consistent Delaware.
This week the Interim Injunction Judge of the Netherlands Commercial Court ruled in summary proceedings, following a video hearing, in a case on a EUR 169 million transaction where the plaintiff argued that the final transaction had been concluded and the defendant should proceed with the deal.
This in an – intended – transaction where the letter of intent stipulates that a EUR 30 million break fee is due when no final agreement is signed.
In addition to ruling on this question of construction of an agreement under Dutch law, the judge also had to rule on the break fee if no agreement was concluded and whether it should be amended or reduced because of the current Coronavirus / Covid-19 crisis.
English Language proceedings in a Dutch state court, the Netherlands Commercial Court (NCC)
The case is not just interesting because of the way contract formation is construed under Dutch law and application of concepts of force majeure, unforeseen circumstances and amendment of agreements under the concepts of reasonableness and fairness as well as mitigation of contractual penalties, but also interesting because it was ruled on by a judge of the English language chamber of the Netherlands Commercial Court (NCC).
This new (2019) Dutch state court offers a relatively fast and cost-effective alternative for international commercial litigation, and in particular arbitration, in a neutral jurisdiction with professional judges selected for both their experience in international disputes and their command of English.
The dispute regarding the construction of an M&A agreement under Dutch law in an international setting
The facts are straightforward. Parties (located in New York, USA and the Netherlands) dispute whether final agreement on the EUR 169 million transaction has been reached but do agree a break fee of €30 million in case of non-signature of the final agreement was agreed. However, in addition to claiming there is no final agreement, the defendant also argues that the break fee – due when there is no final agreement – should be reduced or changed due to the coronavirus crisis.
As to contract formation it must be noted that Dutch law allows broad leeway on how to communicate what may or may not be an offer or acceptance. The standard is what a reasonable person in the same circumstances would have understood their communications to mean. Here, the critical fact is that the defendant did not sign the so-called “Transaction Agreement”. The letter of intent’s binary mechanism (either execute and deliver the paperwork for the Transaction Agreement by the agreed date or pay a EUR 30 million fee) may not have been an absolute requirement for contract formation (under Dutch law) but has significant evidentiary weight. In M&A practice – also under Dutch law – with which these parties are thoroughly familiar with, this sets a very high bar for concluding a contract was agreed other than by explicit written agreement. So, parties may generally comfortably rely on what they have agreed on in writing with the assistance of their advisors.
The communications relied on by claimant in this case did not clear the very high bar to assume that despite the mechanism of the letter of intent and the lack of a signed Transaction Agreement there still was a binding agreement. In particular attributing the other party’s advisers’ statements and/or conduct to the contracting party they represent did not work for the claimant in this case as per the verdict nothing suggested that the advisers would be handling everything, including entering into the agreement.
Court order for actual performance of a – deemed – agreement on an M&A deal?
The Interim Injunction Judge finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure ordering the defendant to actually perform its obligations under the disputed Transaction Agreement (payment of EUR 169 million and take the claimant’s 50% stake in an equestrian show-jumping business).
Enforcement of the break fee despite “Coronavirus”?
Failing the conclusion of an agreement, there was still another question to answer as the letter of intent mechanism re the break fee as such was not disputed. Should the Court enforce the full EUR 30 million fee in the current COVID-19 circumstances? Or should the fee’s effects be modified, mitigated or reduced in some way, or the fee agreement should even be dissolved?
Unforeseen circumstances, reasonableness and fairness
The Interim Injunction Judge rules that the coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that, according to standards of reasonableness and fairness, the plaintiff cannot expect the break fee obligation to remain unchanged. The purpose of the break fee is to encourage parties to enter into the transaction and attribute / share risks between them. As such the fee limits the exposure of the parties. Payment of the fee is a quick way out of the obligation to pay the purchase price of EUR 169 million and the risks of keeping the target company financially afloat. If financially the coronavirus crisis turns out less disastrous than expected, the fee of EUR 30 million may seem high, but that is what the parties already considered reasonable when they waived their right to invoke the unreasonableness of the fee. The claim for payment of the EUR 30 million break fee is therefore upheld by the Interim Injunction Judge.
Applicable law and the actual practice of it by the courts
The relevant three articles are in this case articles 6:94, 6:248 and 6:258 of the Dutch Civil Code. They relate to the mitigation of contractual penalties, unforeseen circumstances and amendment of the agreement under the tenets of reasonableness and fairness. Under Dutch law the courts must with all three exercise caution. Contracts must generally be enforced as agreed. The parties’ autonomy is deemed paramount and the courts’ attitude is deferential. All three articles use language stating, essentially, that interference by the courts in the contract’s operation is allowed only to avoid an “unacceptable” impact, as assessed under standards of reasonableness and fairness.
There is at this moment of course no well- established case law on COVID-19. However, commentators have provided guidance that is very helpful to think through the issues. Recently a “share the pain” approach has been advocated by a renowned law Professor, Tjittes, who focuses on preserving the parties’ contractual equilibrium in the current circumstances. This is, in the Court’s analysis, the right way to look at the agreement here. There is no evidence in the record suggesting that the parties contemplated or discussed the full and exceptional impact of the COVID-19 crisis. The crisis may or may not be unprovided for. However, the court rules in the current case there is no need to rule on this issue. Even if the crisis is unprovided for, there is no support in the record for the proposition that the crisis makes it unacceptable for the claimant to demand strict performance by the defendant. The reasons are straightforward.
The break fee allocates risk and expresses commitment and caps exposure. The harm to the business may be substantial and structural, or it may be short-term and minimal. Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written in the letter of intent. This allocates a defined risk to one party, and actual or potential risks to the other party. Reducing the break fee in any business downturn, the fee’s express purpose – comfort and confidence to get the deal done – would not be accomplished and be derived in precisely the circumstances in which it should be robust. As a result, the Court therefore orders to pay the full EUR 30 million fee. So the break fee stipulation works under the circumstances without mitigation because of the Corona outbreak.
The Netherlands Commercial Court, continued
As already indicated above, the case is interesting because the verdict has been rendered by a Dutch state court in English and the proceedings where also in English. Not because of a special privilege granted in a specific case but based on an agreement between parties with a proper choice of forum clause for this court. In addition to the benefit to of having an English forum without mandatorily relying on either arbitration or choosing an anglophone court, it also has the benefit of it being a state court with the application of the regular Dutch civil procedure law, which is well known by it’s practitioners and reduces the risk of surprises of a procedural nature. As it is as such also a “normal” state court, there is the right to appeal and particularly effective under Dutch law access to expedited proceeding as was also the case in the example referred to above. This means a regular procedure with full application of all evidentiary rules may still follow, overturning or confirming this preliminary verdict in summary proceedings.
Novel technology in proceedings
Another first or at least a novel application is that all submissions were made in eNCC, a document upload procedure for the NCC. Where the introduction of electronic communication and litigation in the Dutch court system has failed spectacularly, the innovations are now all following in quick order and quite effective. As a consequence of the Coronavirus outbreak several steps have been quickly tried in practice and thereafter formally set up. At present this – finally – includes a secure email-correspondence system between attorneys and the courts.
And, also by special order of the Court in this present case, given the current COVID-19 restrictions the matter was dealt with at a public videoconference hearing on 22 April 2020 and the case was set for judgment on 29 April 2020 and published on 30 April 2020.
Even though it is a novel application, it is highly likely that similar arrangements will continue even after expiry of current emergency measures. In several Dutch courts videoconference hearings are applied on a voluntary basis and is expected that the arrangements will be formalized.
Eligibility of cases for the Netherlands Commercial Court
Of more general interest are the requirements for matters that may be submitted to NCC:
- the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction
- the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
- the action is a civil or commercial matter within the parties’ autonomy
- the matter concerns an international dispute.
The NCC agreement can be recorded in a clause, either before or after the dispute arises. The Court even recommends specific wording:
“All disputes arising out of or in connection with this agreement will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or “NCC District Court”), to the exclusion of the jurisdiction of any other courts. An action for interim measures, including protective measures, available under Dutch law may be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCCA”).”
The phrase “to the exclusion of the jurisdiction of any other courts” is included in light of the Hague Convention on Choice of Court Agreements. It is not mandatory to include it of course and parties may decide not to exclude the jurisdiction of other courts or make other arrangements they consider appropriate. The only requirement being that such arrangements comply with the rules of jurisdiction and contract. Please note that choice of court agreements are exclusive unless the parties have “expressly provided” or “agreed” otherwise (as per the Hague Convention and Recast Brussels I Regulation).
Parties in a pending case before another Dutch court or chamber may request that their case be referred to NCC District Court or NCC Court of Appeal. One of the requirements is to agree on a clause that takes the case to the NCC and makes English the language of the proceedings. The NCC recommends using this language:
We hereby agree that all disputes in connection with the case [name parties], which is currently pending at the *** District Court (case number ***), will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or ”NCC District Court). Any action for interim measures, including protective measures, available under Dutch law will be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCC Court of Appeal”).
To request a referral, a motion must be made before the other chamber or court where the action is pending, stating the request and contesting jurisdiction (if the case is not in Amsterdam) on the basis of a choice-of-court agreement (see before).
Additional arrangements in the proceedings before the Netherlands Commercial Court
Before or during the proceedings, parties can also agree special arrangements in a customized NCC clause or in another appropriate manner. Such arrangements may include matters such as the following:
- the law applicable to the substantive dispute
- the appointment of a court reporter for preparing records of hearings and the costs of preparing those records
- an agreement on evidence that departs from the general rules
- the disclosure of confidential documents
- the submission of a written witness statement prior to the witness examination
- the manner of taking witness testimony
- the costs of the proceedings.
Visiting lawyers and typical course of the procedure
All acts of process are in principle carried out by a member of the Dutch Bar. Member of the Bar in an EU or EEA Member State or Switzerland may work in accordance with Article 16e of the Advocates Act (in conjunction with a member of the Dutch Bar). Other visiting lawyers may be allowed to speak at any hearing.
The proceedings will typically follow the below steps:
- Submitting the initiating document by the plaintiff (summons or request as per Dutch law)
- Assigned to three judges and a senior law clerk.
- The defendant submits its defence statement.
- Case management conference or motion hearing (e.g. also in respect of preliminary issues such as competence, applicable law etc.) where parties may present their arguments.
- Judgment on motions: the court rules on the motions. Testimony, expert appointment, either at this stage or earlier or later.
- The court may allow the parties to submit further written statements.
- Hearing: the court interviews the parties and allows them to present their arguments. The court may enquire whether the dispute could be resolved amicably and, where appropriate, assist the parties in a settlement process. If appropriate, the court may discuss with the parties whether it would be advisable to submit part or all of the dispute to a mediator. At the end of the hearing, the court will discuss with the parties what the next steps should be.
- Verdict: this may be a final judgment on the claims or an interim judgment ordering one or more parties to produce evidence, allowing the parties to submit written submissions on certain aspects of the case, appointing one or more experts or taking other steps.
Continuous updates, online resources Netherlands Commercial Court
As a final note the English language website of the Netherlands Commercial Court provides ample information on procedure and practical issues and is updated with a high frequence. Under current circumstance even at a higher pace. In particular for practitioners it’s recommended to regularly consult the website. https://www.rechtspraak.nl/English/NCC/Pages/default.aspx
Summary – What can we learn in the time of Covid-19 that can be used in mediation? And what can we learn from mediation to be used in this crisis?
As you know, mediation is a way to solve conflicts in which the parties keep in their hands the possible solution. They do not need to come to a third party (judge or arbitrator) to impose the answer to them. Parties can imagine more freely what they need, and how to solve their differences.
Some of the elements and techniques mediators use in a mediation can also be used in and learnt from the current Time of Covid-19. And the current crisis also helps us to understand why they are so important in mediation.
Cooperation to get the solution is better than unilateral and imposed decisions
We usually tend to think that cooperation is a sign of weakness and that we recur to it only if we cannot impose or view or win our case. However, as in the time of Covid-19 where countries, scientists and people should fight together, when facing a conflict cooperation and going beyond your positions brings you the possibility to explore solutions that otherwise remain hidden.
« Now it is increasingly recognized that there are cooperative ways of negotiating our differences and that even if a “win-win” solution cannot be found, a wise agreement can still often be reached that is better for both sides than the alternative. […]
Three points about shared interests are worth remembering. First, shared interests lie latent in every negotiation. They may not be immediately obvious. Second, shared interests are opportunities, not godsends. Third, stressing your shared interests can make the negotiation smoother and more amicable. » [Fisher, Richard; Ury, William. “Getting to Yes: Negotiating an agreement without giving in”].
Listening is highly effective
In the time of Covid-19 we tend to accept better information that confirms our beliefs and we accept better indications that are in accordance with our preferences and beliefs. Nevertheless, also in this time, listening is of essential importance to understand the causes and solutions.
A mediator will always listen to the parties and will help them to do the same. Listening the other’s side arguments, its explanation of the facts, interests and needs, the reasons for its decisions… is also of utmost importance to find a joint solution.
«Whether you are a neutral third party (professional facilitator, friend, or manager) or one of the participants, as you listen to all the stories, you begin to sense the best solution. » [Levine, Stewart. “Getting to Resolution: Turning Conflict Into Collaboration.”]
A solution for me can also be a solution for you
In the time of Covid-19 it seems clear to all of us that a common solution is the only possible one. A vaccine will save the entire world. In mediation, the main benefit is to understand that, unlike a court judgement or arbitral award, a joint (not imposed) solution is possible and a benefit for me does not imply a damage or a lost for my opponent.
«A mediator works to understand each disputant’s perspective and to look for the value in it. In this role, you refrain from judging whose side is right or wrong. Instead, you try to see the merit in each side’s perspective. » [Shapiro, Daniel. “Building Agreement”].
We master the solution and we create the agreement in a safe environment
The solution to the current crisis does not only depend on the authorities and on the health professionals. A great part of the solution relies on everybody’s participation, washing our hands, respecting the social distance, staying safe at home avoiding contagion and the collapse of hospitals.
In court we leave the decision of the conflict in the hands of a third party –the judge, the arbitrator–. In a mediation, on the contrary, the solution remains in our hands. We know what our interests are, we create our agreement. Our imagination is our ally in finding the solution together with the counterparty and the assistance and experience of the mediator who does not impose it but helps the parties to find it. Quite often, what parties could get in mediation goes far beyond what a judge would’ve been able to grant. And this in a confidential environment.
«The Sage is self-effacing and scanty of words. When his task is accomplished and things have been completed, all the people say, “We ourselves have achieved it!” » [Lao Tzu]
Emotions do matter
Good and bad emotions are inevitable. Particularly in periods of uncertainty, crisis and loose of control, we all face strong emotions. This is true in situations like this Covid-19 and in all conflicts, and not only in personal ones. Egos, envies, fears, anxieties… are also part of our day-to-day life, work and business, but they are rarely considered in courts when solving your conflicts. A mediator helps you to take them into account in a safe environment and as a part of the conflict itself.
«Solving problems seems easier than talking about emotions. The problem is that when feelings are at the heart of what’s going on, they are the business at hand and ignoring them is nearly impossible. » [Stone, Douglas. “Difficult Conversations: How to Discuss What Matters Most”].
Belgique 
Espagne | Rémunération de la clientèle pour les agents et les distributeurs
- Agence
- Contrats
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Espagne
The importance of Mediation in Distribution Contracts
- Alternative Dispute Resolution
- Distribution
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Espagne
EU Regulation 2019/1150 | Online intermediation services and Mediation
- Alternative Dispute Resolution
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Europe
Écrire à Alexandre
Brexit – Jurisdiction and Enforcement of Judgments during the Transition Period
10 octobre 2020
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Angleterre
- Litiges
International debt recovery is perhaps one of the most challenging issues in business. Companies are usually excited when starting their new international ventures, but when payments of distributors, clients, franchisees… stop, difficulties arise, particularly when they happen abroad. Recovery is most of the times complicated, causes expenses, nightmares and sometimes undertakings simply decide to give up. We herein provide some tips to consider in the prevention phase.
The following is a summary of the ideas which were discussed in a webinar organized by Legalmondo and the Chamber of Commerce of Treviso/Belluno in Italy in November 11, 2020.
What are the best practices to manage international receivables?
The first question regards the best practices companies could put into practice to avoid or, at least, to try to minimize the impact of lack of payment when international businesses are concerned.
The following main points were mentioned as worth considering at an early status of the negotiations and business development.
Verification of the identity of the company
Who is the company we are dealing with? It is important to check its existence, legal situation and capacity to carry on business. And also, the faculties or authorization of the person signing the type of contract. Is this the right authorized person? Has this person followed the legal requirements to do it? In particular, during this period of international pandemic, when the electronic signatures are used and when agreements are frequently signed with non-original signatures but only on pdf documents.
Request of financial information
What is the credit rating of the company? Seek to obtain official accounting information, either filed with the register of companies (when possible according to the local rules), or through private investigation research: tax regularity certificate to attest that the company is in compliance with applicable rules (in places when this is possible), comfort letters from shareholders or third parties (banks)… It is important to have a reasonable certitude about the capacity of that company to carry on the concrete business. And when possible, to do it on a regular basis.
Use the right contract
What is the correct type of contract for the commercial relationship? Seek advice from a lawyer specialized in the law of the country where the debt will be collected. This will be an essential element, for example, to know when the ownership of the acquired asset is legally transferred; when the parties have agreed to pay the invoices; the validity of the general conditions (or if they have to be drafted in the local language or in the language of the negotiations or what happens when they are contradictory: the seller’s and the purchaser’s); whether this is a distribution contract or a mere supply of products and the related obligations and consequences depending on the applicable law…
Write down your agreements
Avere le condizioni per iscritto non solo sul tipo di contratto ma anche sulle modalità, condizioni e ritardi di pagamento. Ed essere consapevoli del tipo di documenti necessari per la validità dell’accordo. Uno scambio di e-mail creerebbe un obbligo? Sarebbero necessari passaggi più formali per avere un contratto / obbligo valido (notaio, registrazione, firma separata di alcune condizioni)?
Follow your contract
If there is a contract in place, it is important to follow what has been signed or agreed, to ensure that these conditions are then respected. A different and sustained commercial practice could imply a tacit change the original written agreement.
Document all transactions
From the order by the client/distributor, its acceptance by the manufacturer, the transport document, linked to the receipt of goods, and until the final invoice, all paperwork should be clear and consistent. In case of lack of payment, all these documents might be necessary to prove the correct performance of the contract.
Has the debtor risen objections?
Also check your own defaults. It is quite frequent that the non-paying party justifies its decision on a previous breaching. If there is such previous alleged infringement by a supplier, for instance (related to the shipment of goods: delays, defective products, etc.), it will be probably more complicated to ask for the payment from the distributor or, at least, it will be required an additional procedure.
Be clear on the accrual of interests for late payments
In EU countries, legislation based on the 2011/7 Directive allows to combat late payment in commercial transactions with special interest rates: make sure this is mentioned in the contract, as non-EU based companies might not be aware of this, and the difference with the general legal interest can be substantial.
Seek guarantees for your credits
This obviously can vary depending on the type of contract and the relationship between the parties. A guarantee is advisable not only at the beginning, but also when the relationship lasts for several years. Sometimes, trust in your counterparty in the past makes more difficult to ask for additional guaranties and this could imply that late payments are not correctly managed.
Consider also additional guaranties on sold goods such as, when permitted by the law, retention of title. This will imply that the ownership remains in the vendor’s hand until the complete payment. In some cases, it is also possible to have additional guarantees when the retention of title can be registered at special public registries. These special conditions should also be verified locally in order to know their extent and to respect the way they shall be agreed, accepted, and documented.
Check out our webinar on debt collection
On November 11, 2020, I had the pleasure to participate to the webinar on International Debt Collection organized by the Chamber of Commerce of Treviso and Belluno and Legalmondo: we discuss the best practices and share practical information on debt collection in Spain, Germany, France, USA, China, Vietnam and Singapore.
You can watch the recording of the webinar here.
Legalmondo’s helpdesk on international credit collection
If you would like to know more about how to collect a debt overseas, you can find the reports of our experts from 20 countries here.
Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.
Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in Charlivari v. Sté Equivalanza, n°17/03703.
It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices; the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).
Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.
Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.
Brexit had surprised nations all over the world. It is now confusing lawyers all over the world whose clients are engaged in contracts or disputes with English choice of law or jurisdiction clauses.
Should they advise their clients to continue to choose English law, jurisdiction or arbitral seats in new contracts? Should they litigate or arbitrate under choices they made in existing contracts before anyone dreamed of Brexit; or does Brexit mean the recognition and enforcement of judgments or awards may be problematic?
The United Kingdom finally left the European Union on 31 January 2020. Little in the world of enforcement and recognition has changed to date. However, the UK is due to drop out of the EU regimes with which European lawyers are familiar on 31 December 2020. From then, we will enter unchartered territory.
This first blog explores the legal framework the UK and EU politicians agreed in 2019 to carry us through to the end of 2020 and what that framework tells us about the changes to enforcement and recognition of judgments from the beginning of 2021.
What is the Withdrawal Agreement and the Withdrawal Agreement Act?
The Withdrawal Agreement is a treaty between the EU and the UK which was agreed on 17 October 2019 as a result of Brexit negotiations. The purpose of the Withdrawal Agreement is to establish the terms of the UK’s withdrawal from the EU, including what happens to jurisdiction and enforcement of judgments as between the UK and the EU.
The European (Withdrawal Agreement) Act 2020 is an Act of UK Parliament. The purpose of the Withdrawal Agreement Act is to enshrine and implement the provisions of the Withdrawal Agreement into the domestic law of the UK. Having been given Royal Assent on 23 January 2020 and ratified by the Council of the European Union on 30 January 2020, the Withdrawal Agreement Act came into force on 31 January 2020.
What is the transition period?
The Withdrawal Agreement provides for a transition period to give businesses time to adjust to the new situation and time for the UK and EU governments to negotiate new trade, travel, business and legal arrangements.
How then does the Withdrawal Agreement affect the jurisdiction and enforcement of judgments between the UK and EU during the transition period and when is the transition period to and from?
The transition period commenced on 31 January 2020 and will end on 31 December 2020, as provided for by Article 126 of the Withdrawal Agreement.
Article 132 of the Withdrawal Agreement also provides that the transition period may be extended for up to one or two years by a one-off decision made before 1 July 2020 by the joint UK-EU Committee. Although, such an extension is effectively ruled out by section 33 of the Withdrawal Agreement Act. This prohibition could be overridden by further legislation; the possibility of which is perhaps more real given the global effects of the coronavirus pandemic. However, as it stands, the default position is that the transition period will end on 31 December 2020.
What is the effect on jurisdiction and enforcement of judgments during the transition period?
There are four key provisions of the Withdrawal Agreement which affect jurisdiction and enforcement of judgments:
- Article 127 provides that EU law will apply to and in the UK during the transition period, unless otherwise provided in the Withdrawal Agreement, and any reference to Member States in EU law will be understood as including the UK.
- Article 129 provides that the UK will also continue to comply and be bound by obligations stemming from international agreements to which the EU is party during the transition period.
- Article 67(1) provides that in the UK, as well as in the Member States in situations involving the UK, the Brussels (Recast) Regulation (No. 1215/2012) (“Brussels Recast”) will apply to:
- “legal proceedings instituted before the end of the transition period”; and
- “legal proceedings or actions” which although themselves are not instituted before the end of the transition period “are related to such legal proceedings pursuant to Articles 29 to 31 of the Brussels Recast Regulation”. Articles 29 to 31 of Brussels Recast concern the rules on lis pendens and related actions.
- Article 67(2) provides that in the UK, as well as in the Member States in situations involving the UK, Brussels Recast will apply to “to the recognition and enforcement of judgments given in legal proceedings instituted before the end of the transition period.”
Practically, the effect of these provisions is as follows:
- The rules on jurisdiction and recognition and enforcement of judgments between the UK and other EU Member States will continue to be governed by Brussels Recast during the transition period.
- The courts in the UK and EU Member States in situations involving the UK will continue to apply Brussels Recast to determine jurisdiction, provided the proceedings are issued before 31 December 2020 or they are related to such proceedings.
- The courts in the UK and EU Members States in situations involving the UK will also continue to apply Brussels Recast to recognise and enforce their respective judgments, provided proceedings are issued before 31 December 2020.
- The UK will continue to comply and be bound by obligations stemming from international agreements relating to jurisdiction and enforcement of judgments to which the EU is party during the transition period. This includes the Hague Convention on Choice of Court Agreements 2005 and the Lugano Convention 2007.
- The Hague Convention 2005 applies between EU Member States, Mexico, Singapore and Montenegro. The UK is currently party to the Hague Convention by virtue of its EU membership, however, that will cease at the end of the transition period. Whether the Hague Convention will continue to apply as between the UK and other Contracting states after the end of the transition period is covered in my next Brexit blog post – ultimately, it depends on whether the UK joins the Hague Convention in its own right.
- The Lugano Convention 2007 applies between EU Member States and EFTA countries Iceland, Norway and Switzerland. Again, the UK is currently party to the Lugano Convention by virtue of its EU membership, however, that will cease at the end of the transition period. The applicability of the Lugano Convention between the UK and other Contracting States after the end of the transition period is also covered in my next Brexit blog post.
Before the end of the transition period, commercial parties should review dispute resolution clauses in their contracts to assess whether the clause’s intended utility will be affected by Brexit. If parties are engaged in current disputes, they should consider whether it is appropriate to issue proceedings before 31 December 2020 in order to benefit from the ongoing application of the existing framework of the rules governing jurisdiction and enforcement, in particular, Brussels Recast.
Summary – The company that incurs into a counterfeiting of its Community design shall not start as many disputes as are the countries where the infringement has been carried out: it will be sufficient to start a lawsuit in just one court of the Union, in its capacity as Community design court, and get a judgement against a counterfeiter enforceable in different, or even all, Countries of the European Union.
Italian companies are famous all over the world thanks to their creative abilities regarding both industrial inventions and design: in fact, they often make important economic investments in order to develop innovative solutions for the products released on the market.
Such investments, however, must be effectively protected against cases of counterfeiting that, unfortunately, are widely spread and ever more realizable thanks to the new technologies such as the e-commerce. Companies must be very careful in protecting their own products, at least in the whole territory of the European Union, since counterfeiting inevitably undermines the efforts made for the research of an original product.
In this respect the content of a recent judgement issued by the Court of Milan, section specialized in business matters, No. 2420/2020, appears very significant since it shows that it is possible and necessary, in case of counterfeiting (in this case the matter is the counterfeiting of a Community design) to promptly take a legal action, that is to start a lawsuit to the competent Court specialized in business matters.
The Court, by virtue of the EU Regulation No. 6/2002, will issue an order (an urgent and protective remedy ante causam or a judgement at the end of the case) effective in the whole European territory so preventing any extra UE counterfeiter from marketing, promoting and advertising a counterfeited product.
The Court of Milan, in this specific case, had to solve a dispute aroused between an Italian company producing a digital flowmeter, being the subject of a Community registration, and a competitor based in Hong Kong. The Italian company alleged that the latter had put on the European market some flow meters in infringement of a Community design held by the first.
First of all, the panel of judges effected a comparison between the Community design held by the Italian company (plaintiff) and the flow meter manufactured and distributed by the Hong Kong company (defendant). The judges noticed that the latter actually coincided both for dimensions and proportions with the first so that even an expert in the field (the so-called informed user) could mistake the product of the defendant company with that of the plaintiff company owner of the Community design.
The Court of Milan, in its capacity as Community designs court, after ascertaining the counterfeiting, in the whole European territory, carried out by the defendant at the expense of the plaintiff, with judgement No. 2420/2020 prohibited, by virtue of articles 82, 83 and 89 of the EU Regulation No. 6/2002, the Hong Kong company to publicize, offer for sale, import and market, by any means and methods, throughout the European Union, even through third parties, the flow meter subject to the present judgement, with any name if presenting similar characteristics.
The importance of this judgement lies in its effects spread all over the territory of the European Union. This is not a small thing since the company that incurs into a counterfeiting of its Community design shall not start as many disputes as are the countries where the infringement has been carried out: it will be sufficient for this company to start a lawsuit in just one court of the Union, in its capacity as Community design court, and get a judgement against a counterfactor who makes an illicit in different, or even all, Countries of the European Union.
Said judgement will be even more effective if we consider that, by virtue of the UE Customs Regulation No. 608/2013, the company will be able to communicate the existence of a counterfeited product to the customs of the whole European territory (through a single request filed with the customs with the territorial jurisdiction) in order to have said products blocked and, in case, destroyed.
The arbitration procedure in Spain is characterized, and constitutes one of its great advantages, by the difficulty of judicially annulling or revoking the award; the parties know that the award that is issued is in most cases firm and final and ends the conflict.
The art. 41 of the Spanish Arbitration Law only allows the annulment of the award for formal reasons (nonexistence or invalidity of the arbitration agreement, failure to notify any of the parties of the appointment of the arbitrator or of the arbitration proceedings, improper appointment of the arbitrators or that the arbitrators have ruled on matters that were not or could not be arbitrated by rule of law). And additionally the award is also voidable when it is contrary to « public order« .
That « public order » is such as to give rise, in case of violation, to the annulment of the award, is a matter that has always been controversial and debated; already in the 1958 New York Convention, “public order” is alluded to as a cause of refusal to recognize foreign awards. As the Constitutional Court (“CC”) recalls in the judgment that we commented, citing its own jurisprudence, “the material public order is the set of public and private, political, moral and economic legal principles that are absolutely obligatory for the preservation of society in a town and in a certain time and the procedural public order is configured as the set of formalities and necessary principles of our procedural legal order and only arbitration that contradicts any or some of such principles may be considered null and void for violation of public order”.
As an example, during 2018, 38 requests for annulment of awards were filed before the Superior Courts of Justice (“SCJ”), of which 31 were based on violation of public order; 8 of the lawsuits (21%) were estimated, 5 for violation of public order, and 3 for invalidity of the arbitration agreement.
The Madrid SCJ has been maintaining in recent times a very « expansive » interpretation of public order, which has generated doubts and fears in the institutions and Arbitration Courts, due to the dissuasive effect that this position could have when choosing Madrid as the seat of arbitrations, national or international.
And in the interpretative line to which we refer, the Madrid SCJ has maintained the following and surprising criterion: once an award was made and a request for annulment was filed by one of the parties, the litigants reached an out-of-court agreement and jointly requested the filing of the cancellation request; that is to say, both gave the award as good and final; the SCJ rejected the petition and continued to issue a judgment annulling the award, arguing that since the application for annulment was based on the violation of public order, then the matter was no longer available to the parties and was not, in the opinion of the Court, subject to transaction or resignation.
This was not the first time that the SCJ of Madrid had adopted this position: impeded the annulment of an award as being contrary to « public order », the parties no longer had the possibility to compromise and renounce the demand for annulment.
For the first time the matter has reached the Constitutional Court (CC): in a recent ruling on June 15, 2020, the CC has been clear and resounding; recalls in its ruling that the civil process is based on the principle of « the parties’ willingness to regulate their private interests, that is, to initiate jurisdictional activity, determine the purpose of the process and end it when they deem appropriate ». It is what we call « justice begged for »; and this principle applies not only to civil proceedings before ordinary courts but also to arbitration proceedings. The judgment also affirms that arbitration is configured by law as a heteronomous mechanism for conflict resolution, to which the minimal intervention of the judicial bodies in favor of the autonomy of the will is essential.
And it concludes by stating that the annulment action must be understood as a process of external control over the award that does not allow a decision on the merits of the arbitrators’ decision, since the causes are assessed, which justifies that “the control of the awards are limited and annulment of the award can only be obtained in exceptional cases”.
Summarizing, the CC understands and proclaims that it is contrary to the right to effective judicial protection protected by art. 24 of the Constitution, the Court’s refusal to recognize the validity of an agreement reached between the litigants based on the parties’ power to act without a prohibitive norm authorizing it, and imposing a decision that subverts the « justice » principle that inspires the civil process; reason why it grants the requested protection and orders to roll back the proceedings to the moment before the order that denied validity to the joint request for file, so that the SJC dictates another resolution accompanied by the CC’s criteria.
Therefore, the SCJ will no longer be able to prevent litigants from settling and ending a claim for annulment of the arbitration award (as it usually occurs peacefully and with appeals or cassation remedies) and it must also take into consideration the restrictive interpretation of the concept of public order that the CC has established in this important judgment. Indeed, Spanish arbitration is greatly reinforced by this judgment of the CC.
The COVID-19 pandemic’s dramatic disruption of the legal and business landscape has included a steep drop in overall M&A activity in Q1 2020. Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis’s duration.
For pending transactions, whether the buyer can walk away from the deal (or seek a purchase price reduction) by invoking a material adverse change (MAC) or material adverse effect (MAE) clause – or another clause in the purchase agreement – due to COVID-19 has become a question of increasing relevance. MAC/MAE clauses typically allow a buyer to terminate an acquisition agreement if a MAC or MAE occurs between signing and closing.
Actual litigated cases in this area have been few and far between, as under longstanding Delaware case law[1], buyer has the burden of proving MAC or MAE, irrespective of who initiates the lawsuit. And the standard of proof is high – a buyer must show that the effects of the intervening event are sufficiently large and long lasting as compared to an equivalent period of the prior year. A short-term or immaterial deviation will not suffice. In fact, Delaware courts have only once found a MAC, in the December 2018 case Akorn, Inc. v. Fresenius Kabi AG.
And yet, since the onset of the COVID-19 pandemic, numerous widely reported COVID-19 related M&A litigations have been initiated with the Delaware Court of Chancery. These include:
- Bed, Bath & Beyond suing 1-800-Flowers (Del. Ch. April 1, 2020) to complete its acquisition of Perosnalizationmall.com (purchaser sought an extension in closing, without citing specifically the contractual basis for the request);
- Level 4 Yoga, franchisee of CorePower Yoga, suing CorePower Yoga (Del. Ch. Apr 2, 2020) to compel CorePower Yoga to purchase of Level 4 Yoga studios (after CorePower Yoga took the position that studio closings resulting from COVID-19 stay-at-home orders violated the ordinary course covenant);
- Oberman, Tivoli & Pickert suing Cast & Crew (Del. Ch. Apr 6, 2020), an industry competitor, to complete its purchase of Oberman’s subsidiary (Cast & Crew maintained it was not obligated to close based on alleged insufficiencies in financial data provided in diligence);
- SP VS Buyer LP v. L Brands, Inc. (Del. Ch. Apr 22, 2020), in which buyer sought a declaratory judgment in its favor on termination); and
- L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P (Del. Ch. Apr 23), in which seller instead seeks declaratory judgment in its favor on buyer obligation to close.
Such cases, typically signed up at an early stage of the pandemic, are likely to increase. Delaware M&A-MAC-related jurisprudence suggests that buyers seeking to cite MAC in asserting their positions should expect an uphill fight, given buyer’s high burden of proof. Indeed, Delaware courts’ sole finding of a MAC in Akorn was based on rather extreme facts: target’s (Akorn’s) business deteriorated significantly (40% and 20% drops in profit and equity value, respectively), measured over a full year. And quite material to the Court’s decision was the likely devastating effect on Akorn’s business resulting from Akorn’s deceptive conduct vis-à-vis the FDA.
By contrast, cases before and after Akorn, courts have not found a MAC/MAE, including in the 2019 case Channel Medsystems, Inc. v. Bos. Sci. Corp. There, Boston Scientific Corporation (BSC) agreed to purchase Channel Medsystems, Inc., an early stage medical device company. The sale was conditioned on Channel receiving FDA approval for its sole product, Cerene. In late December 2017, Channel discovered that falsified information from reports by its Vice President of Quality (as part of a scheme to steal over $2 million from Channel) was included in Channel’s FDA submissions. BSC terminated the merger agreement in May 2018, asserting that Channel’s false representations and warranties constituted a MAC.
The court disagreed. While Channel and Akron both involved a fraud element, Chanel successfully resubmitted its FDA application, such that the fraudulent behavior – the court found – would not cause the FDA to reject the Cerene device. BSC also failed to show sufficiently large or long-lasting effects on Channel’s financial position. Channel thus reaffirmed the high bar under pre-Akron Delaware jurisprudence for courts to find a MAC/MAE (See e.g. In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027 (Del. Ch. Apr. 29, 2005); Hexion Specialty Chemicals v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)).
Applied to COVID-19, buyers may have challenges in invoking MAC/MAE clauses under their purchase agreements.
First, it may simply be premature at this juncture for a buyer to show the type of longer-term effects that have been required under Delaware jurisprudence. The long-term effects of COVID-19 itself are unclear. Of course, as weeks turn into months and longer, this may change.
A second challenge is certain carve-outs typically included in MAC/MAE clauses. Notably, it is typical for these clauses to include exceptions for general economic and financial conditions generally affecting a target’s industry, unless a buyer can demonstrate that they have disproportionately affected the target.
A buyer may be able to point to other clauses in a purchase agreement in seeking to walk away from the deal. Of note is the ordinary course covenant that applies to the period between signing and closing. By definition, most targets are unable to carry out business during the COVID-19 crisis consistent with past practice. It is unclear whether courts will allow for a literal reading of these clauses, or interpret them taking into account the broader risk allocation regime as evidenced by the MAC or MAE clause in the agreement, and in doing so reject a buyer’s position.
For unsigned deals, there may be some early lessons for practitioners as they prepare draft purchase agreements. On buyer walk-away rights, buyers will want to ensure that the MAE/MAC definition includes express reference to “pandemics” and “epidemics”, if not to “COVID-19” itself. Conversely, Sellers may wish to seek to loosen ordinary course covenant language, such as by including express exceptions for actions required by the MAC or MAE and otherwise ensure that they comply with all obligations under their control. Buyers will also want to pay close attention to how COVID-19 affects other aspects of the purchase agreement, including seeking more robust representations and warranties on the impact of COVID-19 on the target’s business.
[1] Although the discussion of this based Delaware law, caselaw in other U.S. jurisdictions often is consistent Delaware.
This week the Interim Injunction Judge of the Netherlands Commercial Court ruled in summary proceedings, following a video hearing, in a case on a EUR 169 million transaction where the plaintiff argued that the final transaction had been concluded and the defendant should proceed with the deal.
This in an – intended – transaction where the letter of intent stipulates that a EUR 30 million break fee is due when no final agreement is signed.
In addition to ruling on this question of construction of an agreement under Dutch law, the judge also had to rule on the break fee if no agreement was concluded and whether it should be amended or reduced because of the current Coronavirus / Covid-19 crisis.
English Language proceedings in a Dutch state court, the Netherlands Commercial Court (NCC)
The case is not just interesting because of the way contract formation is construed under Dutch law and application of concepts of force majeure, unforeseen circumstances and amendment of agreements under the concepts of reasonableness and fairness as well as mitigation of contractual penalties, but also interesting because it was ruled on by a judge of the English language chamber of the Netherlands Commercial Court (NCC).
This new (2019) Dutch state court offers a relatively fast and cost-effective alternative for international commercial litigation, and in particular arbitration, in a neutral jurisdiction with professional judges selected for both their experience in international disputes and their command of English.
The dispute regarding the construction of an M&A agreement under Dutch law in an international setting
The facts are straightforward. Parties (located in New York, USA and the Netherlands) dispute whether final agreement on the EUR 169 million transaction has been reached but do agree a break fee of €30 million in case of non-signature of the final agreement was agreed. However, in addition to claiming there is no final agreement, the defendant also argues that the break fee – due when there is no final agreement – should be reduced or changed due to the coronavirus crisis.
As to contract formation it must be noted that Dutch law allows broad leeway on how to communicate what may or may not be an offer or acceptance. The standard is what a reasonable person in the same circumstances would have understood their communications to mean. Here, the critical fact is that the defendant did not sign the so-called “Transaction Agreement”. The letter of intent’s binary mechanism (either execute and deliver the paperwork for the Transaction Agreement by the agreed date or pay a EUR 30 million fee) may not have been an absolute requirement for contract formation (under Dutch law) but has significant evidentiary weight. In M&A practice – also under Dutch law – with which these parties are thoroughly familiar with, this sets a very high bar for concluding a contract was agreed other than by explicit written agreement. So, parties may generally comfortably rely on what they have agreed on in writing with the assistance of their advisors.
The communications relied on by claimant in this case did not clear the very high bar to assume that despite the mechanism of the letter of intent and the lack of a signed Transaction Agreement there still was a binding agreement. In particular attributing the other party’s advisers’ statements and/or conduct to the contracting party they represent did not work for the claimant in this case as per the verdict nothing suggested that the advisers would be handling everything, including entering into the agreement.
Court order for actual performance of a – deemed – agreement on an M&A deal?
The Interim Injunction Judge finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure ordering the defendant to actually perform its obligations under the disputed Transaction Agreement (payment of EUR 169 million and take the claimant’s 50% stake in an equestrian show-jumping business).
Enforcement of the break fee despite “Coronavirus”?
Failing the conclusion of an agreement, there was still another question to answer as the letter of intent mechanism re the break fee as such was not disputed. Should the Court enforce the full EUR 30 million fee in the current COVID-19 circumstances? Or should the fee’s effects be modified, mitigated or reduced in some way, or the fee agreement should even be dissolved?
Unforeseen circumstances, reasonableness and fairness
The Interim Injunction Judge rules that the coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that, according to standards of reasonableness and fairness, the plaintiff cannot expect the break fee obligation to remain unchanged. The purpose of the break fee is to encourage parties to enter into the transaction and attribute / share risks between them. As such the fee limits the exposure of the parties. Payment of the fee is a quick way out of the obligation to pay the purchase price of EUR 169 million and the risks of keeping the target company financially afloat. If financially the coronavirus crisis turns out less disastrous than expected, the fee of EUR 30 million may seem high, but that is what the parties already considered reasonable when they waived their right to invoke the unreasonableness of the fee. The claim for payment of the EUR 30 million break fee is therefore upheld by the Interim Injunction Judge.
Applicable law and the actual practice of it by the courts
The relevant three articles are in this case articles 6:94, 6:248 and 6:258 of the Dutch Civil Code. They relate to the mitigation of contractual penalties, unforeseen circumstances and amendment of the agreement under the tenets of reasonableness and fairness. Under Dutch law the courts must with all three exercise caution. Contracts must generally be enforced as agreed. The parties’ autonomy is deemed paramount and the courts’ attitude is deferential. All three articles use language stating, essentially, that interference by the courts in the contract’s operation is allowed only to avoid an “unacceptable” impact, as assessed under standards of reasonableness and fairness.
There is at this moment of course no well- established case law on COVID-19. However, commentators have provided guidance that is very helpful to think through the issues. Recently a “share the pain” approach has been advocated by a renowned law Professor, Tjittes, who focuses on preserving the parties’ contractual equilibrium in the current circumstances. This is, in the Court’s analysis, the right way to look at the agreement here. There is no evidence in the record suggesting that the parties contemplated or discussed the full and exceptional impact of the COVID-19 crisis. The crisis may or may not be unprovided for. However, the court rules in the current case there is no need to rule on this issue. Even if the crisis is unprovided for, there is no support in the record for the proposition that the crisis makes it unacceptable for the claimant to demand strict performance by the defendant. The reasons are straightforward.
The break fee allocates risk and expresses commitment and caps exposure. The harm to the business may be substantial and structural, or it may be short-term and minimal. Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written in the letter of intent. This allocates a defined risk to one party, and actual or potential risks to the other party. Reducing the break fee in any business downturn, the fee’s express purpose – comfort and confidence to get the deal done – would not be accomplished and be derived in precisely the circumstances in which it should be robust. As a result, the Court therefore orders to pay the full EUR 30 million fee. So the break fee stipulation works under the circumstances without mitigation because of the Corona outbreak.
The Netherlands Commercial Court, continued
As already indicated above, the case is interesting because the verdict has been rendered by a Dutch state court in English and the proceedings where also in English. Not because of a special privilege granted in a specific case but based on an agreement between parties with a proper choice of forum clause for this court. In addition to the benefit to of having an English forum without mandatorily relying on either arbitration or choosing an anglophone court, it also has the benefit of it being a state court with the application of the regular Dutch civil procedure law, which is well known by it’s practitioners and reduces the risk of surprises of a procedural nature. As it is as such also a “normal” state court, there is the right to appeal and particularly effective under Dutch law access to expedited proceeding as was also the case in the example referred to above. This means a regular procedure with full application of all evidentiary rules may still follow, overturning or confirming this preliminary verdict in summary proceedings.
Novel technology in proceedings
Another first or at least a novel application is that all submissions were made in eNCC, a document upload procedure for the NCC. Where the introduction of electronic communication and litigation in the Dutch court system has failed spectacularly, the innovations are now all following in quick order and quite effective. As a consequence of the Coronavirus outbreak several steps have been quickly tried in practice and thereafter formally set up. At present this – finally – includes a secure email-correspondence system between attorneys and the courts.
And, also by special order of the Court in this present case, given the current COVID-19 restrictions the matter was dealt with at a public videoconference hearing on 22 April 2020 and the case was set for judgment on 29 April 2020 and published on 30 April 2020.
Even though it is a novel application, it is highly likely that similar arrangements will continue even after expiry of current emergency measures. In several Dutch courts videoconference hearings are applied on a voluntary basis and is expected that the arrangements will be formalized.
Eligibility of cases for the Netherlands Commercial Court
Of more general interest are the requirements for matters that may be submitted to NCC:
- the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction
- the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
- the action is a civil or commercial matter within the parties’ autonomy
- the matter concerns an international dispute.
The NCC agreement can be recorded in a clause, either before or after the dispute arises. The Court even recommends specific wording:
“All disputes arising out of or in connection with this agreement will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or “NCC District Court”), to the exclusion of the jurisdiction of any other courts. An action for interim measures, including protective measures, available under Dutch law may be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCCA”).”
The phrase “to the exclusion of the jurisdiction of any other courts” is included in light of the Hague Convention on Choice of Court Agreements. It is not mandatory to include it of course and parties may decide not to exclude the jurisdiction of other courts or make other arrangements they consider appropriate. The only requirement being that such arrangements comply with the rules of jurisdiction and contract. Please note that choice of court agreements are exclusive unless the parties have “expressly provided” or “agreed” otherwise (as per the Hague Convention and Recast Brussels I Regulation).
Parties in a pending case before another Dutch court or chamber may request that their case be referred to NCC District Court or NCC Court of Appeal. One of the requirements is to agree on a clause that takes the case to the NCC and makes English the language of the proceedings. The NCC recommends using this language:
We hereby agree that all disputes in connection with the case [name parties], which is currently pending at the *** District Court (case number ***), will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or ”NCC District Court). Any action for interim measures, including protective measures, available under Dutch law will be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCC Court of Appeal”).
To request a referral, a motion must be made before the other chamber or court where the action is pending, stating the request and contesting jurisdiction (if the case is not in Amsterdam) on the basis of a choice-of-court agreement (see before).
Additional arrangements in the proceedings before the Netherlands Commercial Court
Before or during the proceedings, parties can also agree special arrangements in a customized NCC clause or in another appropriate manner. Such arrangements may include matters such as the following:
- the law applicable to the substantive dispute
- the appointment of a court reporter for preparing records of hearings and the costs of preparing those records
- an agreement on evidence that departs from the general rules
- the disclosure of confidential documents
- the submission of a written witness statement prior to the witness examination
- the manner of taking witness testimony
- the costs of the proceedings.
Visiting lawyers and typical course of the procedure
All acts of process are in principle carried out by a member of the Dutch Bar. Member of the Bar in an EU or EEA Member State or Switzerland may work in accordance with Article 16e of the Advocates Act (in conjunction with a member of the Dutch Bar). Other visiting lawyers may be allowed to speak at any hearing.
The proceedings will typically follow the below steps:
- Submitting the initiating document by the plaintiff (summons or request as per Dutch law)
- Assigned to three judges and a senior law clerk.
- The defendant submits its defence statement.
- Case management conference or motion hearing (e.g. also in respect of preliminary issues such as competence, applicable law etc.) where parties may present their arguments.
- Judgment on motions: the court rules on the motions. Testimony, expert appointment, either at this stage or earlier or later.
- The court may allow the parties to submit further written statements.
- Hearing: the court interviews the parties and allows them to present their arguments. The court may enquire whether the dispute could be resolved amicably and, where appropriate, assist the parties in a settlement process. If appropriate, the court may discuss with the parties whether it would be advisable to submit part or all of the dispute to a mediator. At the end of the hearing, the court will discuss with the parties what the next steps should be.
- Verdict: this may be a final judgment on the claims or an interim judgment ordering one or more parties to produce evidence, allowing the parties to submit written submissions on certain aspects of the case, appointing one or more experts or taking other steps.
Continuous updates, online resources Netherlands Commercial Court
As a final note the English language website of the Netherlands Commercial Court provides ample information on procedure and practical issues and is updated with a high frequence. Under current circumstance even at a higher pace. In particular for practitioners it’s recommended to regularly consult the website. https://www.rechtspraak.nl/English/NCC/Pages/default.aspx
Summary – What can we learn in the time of Covid-19 that can be used in mediation? And what can we learn from mediation to be used in this crisis?
As you know, mediation is a way to solve conflicts in which the parties keep in their hands the possible solution. They do not need to come to a third party (judge or arbitrator) to impose the answer to them. Parties can imagine more freely what they need, and how to solve their differences.
Some of the elements and techniques mediators use in a mediation can also be used in and learnt from the current Time of Covid-19. And the current crisis also helps us to understand why they are so important in mediation.
Cooperation to get the solution is better than unilateral and imposed decisions
We usually tend to think that cooperation is a sign of weakness and that we recur to it only if we cannot impose or view or win our case. However, as in the time of Covid-19 where countries, scientists and people should fight together, when facing a conflict cooperation and going beyond your positions brings you the possibility to explore solutions that otherwise remain hidden.
« Now it is increasingly recognized that there are cooperative ways of negotiating our differences and that even if a “win-win” solution cannot be found, a wise agreement can still often be reached that is better for both sides than the alternative. […]
Three points about shared interests are worth remembering. First, shared interests lie latent in every negotiation. They may not be immediately obvious. Second, shared interests are opportunities, not godsends. Third, stressing your shared interests can make the negotiation smoother and more amicable. » [Fisher, Richard; Ury, William. “Getting to Yes: Negotiating an agreement without giving in”].
Listening is highly effective
In the time of Covid-19 we tend to accept better information that confirms our beliefs and we accept better indications that are in accordance with our preferences and beliefs. Nevertheless, also in this time, listening is of essential importance to understand the causes and solutions.
A mediator will always listen to the parties and will help them to do the same. Listening the other’s side arguments, its explanation of the facts, interests and needs, the reasons for its decisions… is also of utmost importance to find a joint solution.
«Whether you are a neutral third party (professional facilitator, friend, or manager) or one of the participants, as you listen to all the stories, you begin to sense the best solution. » [Levine, Stewart. “Getting to Resolution: Turning Conflict Into Collaboration.”]
A solution for me can also be a solution for you
In the time of Covid-19 it seems clear to all of us that a common solution is the only possible one. A vaccine will save the entire world. In mediation, the main benefit is to understand that, unlike a court judgement or arbitral award, a joint (not imposed) solution is possible and a benefit for me does not imply a damage or a lost for my opponent.
«A mediator works to understand each disputant’s perspective and to look for the value in it. In this role, you refrain from judging whose side is right or wrong. Instead, you try to see the merit in each side’s perspective. » [Shapiro, Daniel. “Building Agreement”].
We master the solution and we create the agreement in a safe environment
The solution to the current crisis does not only depend on the authorities and on the health professionals. A great part of the solution relies on everybody’s participation, washing our hands, respecting the social distance, staying safe at home avoiding contagion and the collapse of hospitals.
In court we leave the decision of the conflict in the hands of a third party –the judge, the arbitrator–. In a mediation, on the contrary, the solution remains in our hands. We know what our interests are, we create our agreement. Our imagination is our ally in finding the solution together with the counterparty and the assistance and experience of the mediator who does not impose it but helps the parties to find it. Quite often, what parties could get in mediation goes far beyond what a judge would’ve been able to grant. And this in a confidential environment.
«The Sage is self-effacing and scanty of words. When his task is accomplished and things have been completed, all the people say, “We ourselves have achieved it!” » [Lao Tzu]
Emotions do matter
Good and bad emotions are inevitable. Particularly in periods of uncertainty, crisis and loose of control, we all face strong emotions. This is true in situations like this Covid-19 and in all conflicts, and not only in personal ones. Egos, envies, fears, anxieties… are also part of our day-to-day life, work and business, but they are rarely considered in courts when solving your conflicts. A mediator helps you to take them into account in a safe environment and as a part of the conflict itself.
«Solving problems seems easier than talking about emotions. The problem is that when feelings are at the heart of what’s going on, they are the business at hand and ignoring them is nearly impossible. » [Stone, Douglas. “Difficult Conversations: How to Discuss What Matters Most”].
