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Spagna
Mediation and Covid19 – What we can learn
13 Aprile 2020
- Contratti
- Contenzioso
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”].
The English common law is a primary choice of law for international business, because it consistently gives the parties exactly what they agreed: what you see in the contract is what you get.
The same cannot be said for the English legal system: there are barristers, solicitors, Inns of Court, chambers, compulsory disclosure, cross-examination and the loser pays rule. There is much to confuse non-English lawyers and mistakes can be expensive for their clients. Those who know enough to avoid confusion can add real value for clients who have English law disputes.
This blog focuses on a single feature which is key for international lawyers’ understanding of the English legal system: why it has two kinds of lawyer – barristers and solicitors – and what each of them does.
Barristers and solicitors: what is the difference?
To understand the difference, the key thing to bear in mind is that they run completely different business models to support their legal practices.
Solicitors practice within law firms: profit sharing entities, familiar to lawyers around the world. This risk-sharing model allows senior lawyers to employ teams of junior lawyers to do the heavy lifting on cases: corresponding with the client, the court and the opposing parties and collecting the evidence for trial.
Barristers are self-employed individuals. They operate from ‘chambers’, which are cost-sharing organisations; barristers practising in chambers together do not share profit or spread risk. They cannot employ junior lawyers to do the heavy lifting on cases; they do not collect evidence, correspond with the court, opposing party or the client. Instead, they are specialist sub-contractors to law firms in England and around the world. Those law firms do all that heavy lifting that allows barristers to conduct their practices.
What barristers do
What, then, do law firms ask them to do? Two things: to provide advocacy services and the detailed legal advice necessary for effective advocacy. That means they have particular familiarity with three key aspects of English dispute resolution:
- the detail of the cases which are the source of the common law,
- the cross-examination of witnesses; and
- the oral and written judicial argument that pulls the first two aspects together.
But aren’t those the fun bits of being a lawyer? Well, yes. So why would a law firm outsource the fun bits? Well, that depends on the kind of law firm…
English solicitors’ reasons for using barristers
Let’s take English solicitors first. You have to bear in mind two characteristics of common law dispute resolution. The first has already been mentioned: the source of law is not a readily-comprehensible, unifying civil code, but thousands of cases decided over centuries; it takes time to master the case law in sufficient detail to argue cases.
The second is the nature of hearings: they take time because of the detailed case law that needs to be considered and because a great deal of work is done orally: from argument to the cross-examination of witnesses. Trials are all-consuming and can last months. So the nature of common law trial work means you have to focus all your time and attention on it to succeed.
That gives the English law firm a choice: it can either recruit and manage expensive, in-house advocacy talent, or it can outsource it. The former is capital-intensive and risky. The latter involves no capital and no risk. You might object that risk is necessary for reward; and true it is. But the existence of a ready supply of barristers in England means solicitors do not have to take that particular business risk in addition to all the other risks they have to take in order to run successful disputes practices.
The existence of barristers allows solicitors to make the following calculation: few cases come to trial; most settle. Solicitors make most of their income preparing cases for trial, not in trial. So it is less risky and more profitable to recruit junior lawyers to help prepare cases for trial rather than recruit senior advocates to fight trials. If the trial happens, solicitors retain a barrister as advocate in the case; they make just enough of the barrister before trial to ensure the trial will run smoothly if it does happen. Meanwhile, the senior solicitors focus on managing their teams of lawyers and winning new business to keep their practices growing. It is an effective business model, even if it leaves the fun bits to barristers.
The risk-reduction that barristers offer to solicitors is more extensive than that basic analysis allows. First, solicitors do not take the risk of losing a client by instructing a barrister on their cases; the barrister’s clients are law firms: no risk there. Second, a firm’s choice to recruit in house advocates is a choice taken once and once only, for better or worse. By contrast, a firm’s choice to instruct a barrister is taken on each new case, so it can choose an advocate with precisely the right expertise for the case. That means the firm can sell its trial preparation practice to assist in disputes in which the firm itself lacks specialist expertise. That reduces the firm’s risk and maintains its profitability.
All in all, therefore, barristers’ and solicitors’ different business models allow them to run complimentary, not competitive practices.
Non-English lawyers’ reasons to use barristers
Now let us consider why non-English law firms would use barristers. The answer is: for the same reasons, but more so. Many non-English law firms have clients with disputes under English law. Most feel the need to pass those cases on to an English law firm; if they do, they lose all or almost all the revenue from the case. To the extent they stay involved, they have little control over the process or the outcome, but they do have the unenviable task of handing the English firm’s very large invoices to their client. It is rarely a comfortable experience.
Note, however: the more sophisticated non-English law firms engage a barrister as their own sub-contractor on English law cases. That completely changes their experience of conducting English law disputes.
In arbitrations, the non-English law firm is free to do exactly the same job an English solicitor; the sub-contracted barrister provides the English law advice and advocacy that the law firm itself cannot provide. By stepping into the shoes of the English law firm, the non-English firm both reduces its client’s legal costs and takes a larger share of them.
In litigation, the non-English law firms must engage a solicitor, but the sophisticated firm nevertheless engages a barrister as its own sub-contractor, rather than allowing the solicitor to engage the barrister. That gives the non-English firm a better flow of information and greater control over the process, so it can better manage its client’s expectations and liabilities.
So: sophisticated non-English law firms do not let the English law firms reap all the competitive advantages barristers offer to law firms; they take those advantages for themselves. Your firm should do so too. Be sophisticated: develop trusted relations with an internationally-minded barrister today; it will be invaluable when your client is involved in a dispute under English law.
Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?
Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.
In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).
The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.
A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).
One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.
Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.
The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.
Below are some typical examples of provisions that stipulate contractual penalty:
In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.
In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.
The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.
The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.
In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.
In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.
In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.
The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.
As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.
The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.
The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.
The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.
The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.
The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.
Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.
Not what you would expect
When can you terminate, how should you terminate, and how much are you exposed?!
The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.
This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.
However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.
In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.
Nevertheless, often the international corporation decides for various reasons (such as establishing an “in-house” operation” in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.
What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?
Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.
Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.
As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.
The truth is the reasonability of the due notice varies from case to case!
However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to “justify” avoiding a due notice period or adequate compensation.
In this respect, in many cases simple “non-satisfaction” was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.
There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.
Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.
Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.
The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.
In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.
E’ assai frequente nella pratica che una relazione commerciale continuativa si instauri poco alla volta, in seguito ad una successione di contratti di vendita, senza che si giunga mai alla firma di un vero e proprio contratto di distribuzione che regoli i reciproci diritti e obblighi.
A prima vista può sembrare una buona soluzione per evitare vincoli o impegni a lungo termine, ma non è sempre così, soprattutto se si opera sul piano internazionale.
Uno dei problemi principali, quando il rapporto contrattuale internazionale non è formalizzato per iscritto, è quello di individuare il giudice competente a conoscere delle eventuali controversie. Nell’Unione Europea la disciplina è contenuta nel Regolamento 1215/2012 (c.d. Bruxelles I bis), il quale prevede all’articolo 7 che, in alternativa al foro del convenuto, in materia contrattuale sia competente il giudice del luogo di esecuzione dell’obbligazione dedotta in giudizio. Accanto a questa regola generale sono indicati due criteri per individuare quale sia il “luogo di esecuzione” per due tipologie specifiche di contratto: per la compravendita, è il luogo di consegna dei beni; per la prestazione di servizi, il luogo in cui i servizi vengono prestati.
Pertanto, per individuare il foro competente è di fondamentale importanza ricondurre un contratto all’una o all’altra delle categorie “compravendita” o “prestazione di servizi”.
Se in molti casi la qualificazione non presenta problemi, per un contratto di distribuzione, o di concessione di vendita, la questione può farsi spinosa.
La Corte di Giustizia si è occupata più volte della questione, da ultimo con la sentenza dell’8 marzo 2018 (causa C-64/17) su rinvio di una Corte d’Appello portoghese, in una controversia che opponeva un distributore portoghese, la società Lusavouga, alla società belga Saey Home & Garden, che produce articoli per casa e giardino, tra cui una linea di prodotti con il marchio “Barbecook”.
A seguito della decisione di Saey di interrompere la relazione commerciale, comunicata con una mail del 17 luglio 2014, Lusavouga agiva in Portogallo per ottenere un risarcimento del danno per l’interruzione improvvisa del contratto ed una indennità di clientela. Saey eccepiva l’incompetenza dei giudici portoghesi a conoscere della causa, richiamando le proprie condizioni generali di vendita, menzionate nelle fatture, che indicavano un foro belga.
La vicenda presenta quindi due questioni da risolvere alla luce del Regolamento Bruxelles I bis: la validità di una clausola di scelta del foro contenuta nelle condizioni generali del venditore ai sensi dell’art. 25 del Regolamento e, in caso di risposta negativa alla prima domanda, l’individuazione del foro competente ai sensi dell’art. 7.
La clausola di scelta del foro competente contenuta nelle condizioni generali del venditore ha efficacia nel rapporto di distribuzione?
La società fornitrice considerava evidentemente il rapporto con il rivenditore portoghese solo una serie continuativa di vendite di beni, regolate dalle proprie condizioni generali: di conseguenza, riteneva che qualunque controversia relativa a tale rapporto fosse soggetta alla clausola di scelta del foro belga contenuta in tali condizioni generali.
Occorreva quindi stabilire se si fosse in presenza di una valida clausola di proroga di competenza ai sensi dell’articolo 25, paragrafo 1 del Regolamento 1215/2012.
Per la giurisprudenza costante della Corte di Giustizia, se la clausola attributiva di competenza è contenuta in condizioni generali di contratto predisposte da una delle parti, occorre che queste siano almeno richiamate nel contratto firmato anche dall’altra parte, al fine di garantire che sussista il consenso effettivo delle parti (sentenza del 14 dicembre 1976, Estasis Salotti di Colzani, c. 24/76; sentenza 16 marzo 1999, Castelletti, c. C-159/97; sentenza del 7 luglio 2016, Höszig, c. C-225/15). Inoltre, per essere valida la clausola deve riguardare un rapporto giuridico determinato (sentenza del 20 aprile 2016, Profit Investment SIM, c. C-366/13).
Ora, il giudice del rinvio considerava pacifico che il rapporto giuridico oggetto del giudizio fosse un contratto di concessione di vendita, avente ad oggetto la distribuzione dei prodotti Saey in Spagna, contratto non disciplinato per iscritto.
Partendo da questa premessa, risulta evidente che le condizioni generali contenute nelle fatture di Saey non potessero avere alcun rilievo ai fini del contratto di concessione: ammesso che fosse provato il consenso di Lusavouga, il foro belga si sarebbe applicato, semmai, ai singoli contratti di compravendita, ma non alle obbligazioni derivanti dal distinto contratto di distribuzione.
Quale è il foro competente per le obbligazioni derivanti dal contratto di concessione di vendita?
Esclusa la presenza di una clausola di scelta del foro, la competenza si determina in base all’art. 7, punto 1 del Regolamento 1215/2012, per cui diventa essenziale qualificare il contratto di distribuzione quale “compravendita di beni” o “prestazione di servizi”.
La “prestazione di servizi” è stata definita dalla Corte di Giustizia come un’attività, non meramente omissiva, svolta a fronte di una remunerazione (sentenza 23 aprile 2009, Falco, c. C-533/07).
Con le sentenze Corman Collins del 19 dicembre 2013 (c. C-9/12), e Granarolo del 14 luglio 2016 (c. C-196/15), la Corte ha affermato che nel contratto di distribuzione tipico il concessionario svolge un servizio, in quanto contribuisce ad ampliare la diffusione dei prodotti del concedente e riceve una remunerazione sotto forma di vantaggio concorrenziale, accesso a strumenti pubblicitari, know-how o agevolazioni di pagamento. In presenza di tali elementi, il rapporto contrattuale va considerato un contratto di prestazione di servizi. Se, al contrario, la relazione commerciale si limita ad una serie consecutiva di accordi, ciascuno aventi ad oggetto la consegna ed il ritiro di merce, siamo al di fuori del contratto di distribuzione tipico, ed il rapporto contrattuale deve essere qualificato come compravendita di beni.
Una volta qualificato il contratto come prestazione di servizi, occorre determinare “il luogo in cui i servizi sono prestati in base al contratto”: e la Corte precisa che tale luogo va individuato nello Stato membro in cui si trova il luogo della prestazione principale dei servizi, sulla base delle disposizioni del contratto oppure, come in questo caso, dell’esecuzione effettiva dello stesso. Solo qualora sia impossibile determinare tale luogo, si farà riferimento al domicilio del prestatore.
Da come il giudice del rinvio ha descritto il rapporto contrattuale, e da come la Corte di Giustizia intende la prestazione dei servizi del distributore, è logico dedurre che il luogo della prestazione principale dei servizi fosse la Spagna, dove Lusavouga “contribuiva ad ampliare la diffusione dei prodotti” di Saey.
Risulta evidente che né il produttore, né il distributore avrebbero mai voluto una simile soluzione, che avrebbero potuto però evitare disciplinando il rapporto per iscritto e stipulando una clausola di scelta del foro.
Parimenti, dall’esterno può sembrare discutibile l’apparente convinzione dei giudici portoghesi di trovarsi in presenza di un vero e proprio contratto di concessione di vendita, quando molti elementi potrebbero far pensare il contrario: ma anche sotto questo aspetto, la mancanza di un contratto scritto lascia spazio ad interpretazioni che possono portare a conseguenze impreviste, e potenzialmente assai rischiose.
In conclusione, l’opportunità di disciplinare i rapporti commerciali di distribuzione con un contratto scritto è evidente, non solo perché consente di evitare le situazioni di incertezza descritte, ma anche perché documenta l’accordo tra le parti su altri importanti elementi che è bene non lasciare indeterminati: l’eventuale esclusiva territoriale o per certi canali di vendita, la durata del rapporto e il periodo di recesso, gli eventuali obblighi promozionali, la titolarità dei dati dei clienti finali, la possibilità e le modalità di vendita dei prodotti online.
Francia 
Belgio 
Italia 
USA 
Ucraina 
Scrivi a Ignacio
Barristers: what they are, and why they exist
5 Aprile 2020
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Inghilterra
- Contenzioso
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”].
The English common law is a primary choice of law for international business, because it consistently gives the parties exactly what they agreed: what you see in the contract is what you get.
The same cannot be said for the English legal system: there are barristers, solicitors, Inns of Court, chambers, compulsory disclosure, cross-examination and the loser pays rule. There is much to confuse non-English lawyers and mistakes can be expensive for their clients. Those who know enough to avoid confusion can add real value for clients who have English law disputes.
This blog focuses on a single feature which is key for international lawyers’ understanding of the English legal system: why it has two kinds of lawyer – barristers and solicitors – and what each of them does.
Barristers and solicitors: what is the difference?
To understand the difference, the key thing to bear in mind is that they run completely different business models to support their legal practices.
Solicitors practice within law firms: profit sharing entities, familiar to lawyers around the world. This risk-sharing model allows senior lawyers to employ teams of junior lawyers to do the heavy lifting on cases: corresponding with the client, the court and the opposing parties and collecting the evidence for trial.
Barristers are self-employed individuals. They operate from ‘chambers’, which are cost-sharing organisations; barristers practising in chambers together do not share profit or spread risk. They cannot employ junior lawyers to do the heavy lifting on cases; they do not collect evidence, correspond with the court, opposing party or the client. Instead, they are specialist sub-contractors to law firms in England and around the world. Those law firms do all that heavy lifting that allows barristers to conduct their practices.
What barristers do
What, then, do law firms ask them to do? Two things: to provide advocacy services and the detailed legal advice necessary for effective advocacy. That means they have particular familiarity with three key aspects of English dispute resolution:
- the detail of the cases which are the source of the common law,
- the cross-examination of witnesses; and
- the oral and written judicial argument that pulls the first two aspects together.
But aren’t those the fun bits of being a lawyer? Well, yes. So why would a law firm outsource the fun bits? Well, that depends on the kind of law firm…
English solicitors’ reasons for using barristers
Let’s take English solicitors first. You have to bear in mind two characteristics of common law dispute resolution. The first has already been mentioned: the source of law is not a readily-comprehensible, unifying civil code, but thousands of cases decided over centuries; it takes time to master the case law in sufficient detail to argue cases.
The second is the nature of hearings: they take time because of the detailed case law that needs to be considered and because a great deal of work is done orally: from argument to the cross-examination of witnesses. Trials are all-consuming and can last months. So the nature of common law trial work means you have to focus all your time and attention on it to succeed.
That gives the English law firm a choice: it can either recruit and manage expensive, in-house advocacy talent, or it can outsource it. The former is capital-intensive and risky. The latter involves no capital and no risk. You might object that risk is necessary for reward; and true it is. But the existence of a ready supply of barristers in England means solicitors do not have to take that particular business risk in addition to all the other risks they have to take in order to run successful disputes practices.
The existence of barristers allows solicitors to make the following calculation: few cases come to trial; most settle. Solicitors make most of their income preparing cases for trial, not in trial. So it is less risky and more profitable to recruit junior lawyers to help prepare cases for trial rather than recruit senior advocates to fight trials. If the trial happens, solicitors retain a barrister as advocate in the case; they make just enough of the barrister before trial to ensure the trial will run smoothly if it does happen. Meanwhile, the senior solicitors focus on managing their teams of lawyers and winning new business to keep their practices growing. It is an effective business model, even if it leaves the fun bits to barristers.
The risk-reduction that barristers offer to solicitors is more extensive than that basic analysis allows. First, solicitors do not take the risk of losing a client by instructing a barrister on their cases; the barrister’s clients are law firms: no risk there. Second, a firm’s choice to recruit in house advocates is a choice taken once and once only, for better or worse. By contrast, a firm’s choice to instruct a barrister is taken on each new case, so it can choose an advocate with precisely the right expertise for the case. That means the firm can sell its trial preparation practice to assist in disputes in which the firm itself lacks specialist expertise. That reduces the firm’s risk and maintains its profitability.
All in all, therefore, barristers’ and solicitors’ different business models allow them to run complimentary, not competitive practices.
Non-English lawyers’ reasons to use barristers
Now let us consider why non-English law firms would use barristers. The answer is: for the same reasons, but more so. Many non-English law firms have clients with disputes under English law. Most feel the need to pass those cases on to an English law firm; if they do, they lose all or almost all the revenue from the case. To the extent they stay involved, they have little control over the process or the outcome, but they do have the unenviable task of handing the English firm’s very large invoices to their client. It is rarely a comfortable experience.
Note, however: the more sophisticated non-English law firms engage a barrister as their own sub-contractor on English law cases. That completely changes their experience of conducting English law disputes.
In arbitrations, the non-English law firm is free to do exactly the same job an English solicitor; the sub-contracted barrister provides the English law advice and advocacy that the law firm itself cannot provide. By stepping into the shoes of the English law firm, the non-English firm both reduces its client’s legal costs and takes a larger share of them.
In litigation, the non-English law firms must engage a solicitor, but the sophisticated firm nevertheless engages a barrister as its own sub-contractor, rather than allowing the solicitor to engage the barrister. That gives the non-English firm a better flow of information and greater control over the process, so it can better manage its client’s expectations and liabilities.
So: sophisticated non-English law firms do not let the English law firms reap all the competitive advantages barristers offer to law firms; they take those advantages for themselves. Your firm should do so too. Be sophisticated: develop trusted relations with an internationally-minded barrister today; it will be invaluable when your client is involved in a dispute under English law.
Are arbitration and jurisdiction clauses contained in insurance contracts enforceable against a third party which is acting directly against the insurer in third party liability insurances?
Such direct action is admitted by French law in liability insurances, as defined in article 124-3 of the Insurance Code.
In just a few months two radically different approaches have been taken by the French Cour de cassation (Civ.1, 19 December 2018, n°17-28.951) and the ECJ in Assens Havn v. Navigator Management UK Ltd (13 July 2017, C-368/16) and KABEG v. MMA IARD (20 July 2017, C-340/16).
The case submitted to the Cour de cassation represented a third party exercising a direct right of action before French Courts against the insurer of a floating barge which had caused him a damage. The Supreme Court accepted that the insurer could validly oppose the arbitration clause, which was in the policy against the third party, and therefore judged that French Court had no jurisdiction to decide on the case. The Supreme Court applied the well-established principle of Compétence-Compétence – materialized in article 1448 of the French Code de Procédure Civile – to stay the case, considering that the arbitration clause could not be set aside. The Court therefore judged that the applicability of the arbitration clause should be determined by the arbitrators by priority.
A year before, the ECJ had ruled in the opposite direction in a case where a jurisdiction clause was applicable in the insurance policy. In Assens Havn v. Navigator Management UK Ltd, the ECJ stated that the clause could not be opposed to the third party acting directly against the insurer. According to the Court, the insurers’ liability towards the insured has a contractual nature when based on the policy, whereas it is extra-contractual when the liability is based on a direct action from a third party. In a previous ruling the Court had considered (Sté financière et industrielle du Peloux (12 May 2005, C-112/03) that the jurisdiction clause cannot be opposed to the beneficiary of an insurance policy if he is not the policyholder (for instance in a collective insurance).
One sees a clear difference in treatment between arbitration clause and jurisdiction clause when it comes to deciding on their opposability to the victim exercising a direct action against the insurer.
Article 2061 paragraph 2 of the Civil Code states that an arbitration cannot be opposed to a party which has not contracted for the purpose of its business activity. The French Cour de cassation grounded its decision on the fact that the clauses of the main contract could be opposed to the third party. If the latter was entitled to apply the insurance contract, it was therefore entitled to invoke article 2061 paragraph 2 of the Civil Code.
The Russian law allows the parties to agree on recovery of contractual penalty for failure by the parties to fulfill contractual obligations.
Below are some typical examples of provisions that stipulate contractual penalty:
In the event of untimely delivery of the Goods under the Contract the Buyer shall be entitled to claim penalties in amount of 0,1 (zero point one) percent from the total value of untimely delivered Goods for each day of delay.
In the event of untimely payment for the Goods under the Contract the Seller shall be entitled to claim penalties in amount of 0,1 percent from the total value of untimely paid Goods for each day of delay.
The Civil Code of Russia (art. 333) allows the court to decrease the amount of penalty if such amount of penalty is disproportionate to the consequences of breach of contractual obligations, with that the court shall be entitled to decrease penalty only if the debtor files a motion with the request to decrease such excessive amount of penalty.
The decrease of penalty determined by the contract and subject to payment by the person who conducts business activities is allowed only in exceptional cases, if it is proved that the recovery of penalty in the amount stipulated by the contract can lead to receipt of the unjustified profit by the creditor.
In practice the parties file motions with the court of first instance with the request to decrease penalty with reference to art. 333 of the Civil Code and the court usually decreases the amount of penalty at its discretion.
In a recent case considered by the Supreme Court of Russia dated 29.05.2018 (case #A43-26319/2016) the Supreme Court ruled that the imposition of penalty even in the amount exceeding the total value of the contract was justified provided that the debtor failed to file a motion with the court of first instance with the request to decrease such penalty with reference to art. 333 of the Civil Code.
In this case the customer ordered the contractor to produce a pressure vessel. The price of such works of the contractor amounted to 2.700.000 rubles. The parties agreed that the pressure vessel will be produced by the contractor till 30.01.2015. The contractor produced the pressure vessel only on 01.03.2016.
The contract stipulated that in case of violation of terms of performance of works the contractor will pay to the customer a fixed fine in the amount of 5% from the price of works that the contractor failed to perform in time for each violation as well as penalty in the amount of 0,3% from the price of works that the contractor failed to perform in time for each day of delay starting with the 4th day of delay.
As a result, the customer demanded that the contractor pays penalty in the amount of 3.355.170 rubles.
The court of first instance ruled in favor of the contractor and ordered that the client shall pay the amount of penalty in full since the contractor failed to provide evidence that confirmed due fulfillment of the contract by the contractor, or that the contractor failed to perform its obligations in time due to circumstances that were out of his control. With that the contractor also failed to dispute the amount of penalty and failed to file a motion on application of art. 333 of the Civil Code.
The appeal court changed the ruling of the court of first instance and decreased the amount of penalty to 326.781 rubles based on its conclusions that the customer abused its rights by including in the contract the unfair penalty provisions.
The Cassation Court agreed with conclusions of the Court of Appeal, but the Supreme Court dismissed the rulings of both the Cassation Court and Court of Appeal and the decision of the court of first instance remained in force.
The Supreme Court based its decision on the fact that the contractor failed to file a motion with the request to decrease the amount of penalty and apply art. 333 of the Civil Code in the court of first instance. Therefore, the Court of Appeal had no right to decrease the amount of penalty at its own initiative.
The latest conclusions of the Supreme Court confirm that the contractual penalty can exceed the total value of the contract and the courts are not allowed to decrease such excessive amount of penalty at its own initiative.
Thus, if you have any dispute in Russia, please ensure that your company is duly represented in state commercial courts, since the failure of the parties to appear in court of first instance and file respective motions might lead to serious negative consequences that the failing party might not be able to cure in the courts of appeal.
Not what you would expect
When can you terminate, how should you terminate, and how much are you exposed?!
The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.
This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.
However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.
In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.
Nevertheless, often the international corporation decides for various reasons (such as establishing an “in-house” operation” in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.
What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?
Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.
Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.
As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.
The truth is the reasonability of the due notice varies from case to case!
However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to “justify” avoiding a due notice period or adequate compensation.
In this respect, in many cases simple “non-satisfaction” was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.
There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.
Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.
Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.
The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.
In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.
E’ assai frequente nella pratica che una relazione commerciale continuativa si instauri poco alla volta, in seguito ad una successione di contratti di vendita, senza che si giunga mai alla firma di un vero e proprio contratto di distribuzione che regoli i reciproci diritti e obblighi.
A prima vista può sembrare una buona soluzione per evitare vincoli o impegni a lungo termine, ma non è sempre così, soprattutto se si opera sul piano internazionale.
Uno dei problemi principali, quando il rapporto contrattuale internazionale non è formalizzato per iscritto, è quello di individuare il giudice competente a conoscere delle eventuali controversie. Nell’Unione Europea la disciplina è contenuta nel Regolamento 1215/2012 (c.d. Bruxelles I bis), il quale prevede all’articolo 7 che, in alternativa al foro del convenuto, in materia contrattuale sia competente il giudice del luogo di esecuzione dell’obbligazione dedotta in giudizio. Accanto a questa regola generale sono indicati due criteri per individuare quale sia il “luogo di esecuzione” per due tipologie specifiche di contratto: per la compravendita, è il luogo di consegna dei beni; per la prestazione di servizi, il luogo in cui i servizi vengono prestati.
Pertanto, per individuare il foro competente è di fondamentale importanza ricondurre un contratto all’una o all’altra delle categorie “compravendita” o “prestazione di servizi”.
Se in molti casi la qualificazione non presenta problemi, per un contratto di distribuzione, o di concessione di vendita, la questione può farsi spinosa.
La Corte di Giustizia si è occupata più volte della questione, da ultimo con la sentenza dell’8 marzo 2018 (causa C-64/17) su rinvio di una Corte d’Appello portoghese, in una controversia che opponeva un distributore portoghese, la società Lusavouga, alla società belga Saey Home & Garden, che produce articoli per casa e giardino, tra cui una linea di prodotti con il marchio “Barbecook”.
A seguito della decisione di Saey di interrompere la relazione commerciale, comunicata con una mail del 17 luglio 2014, Lusavouga agiva in Portogallo per ottenere un risarcimento del danno per l’interruzione improvvisa del contratto ed una indennità di clientela. Saey eccepiva l’incompetenza dei giudici portoghesi a conoscere della causa, richiamando le proprie condizioni generali di vendita, menzionate nelle fatture, che indicavano un foro belga.
La vicenda presenta quindi due questioni da risolvere alla luce del Regolamento Bruxelles I bis: la validità di una clausola di scelta del foro contenuta nelle condizioni generali del venditore ai sensi dell’art. 25 del Regolamento e, in caso di risposta negativa alla prima domanda, l’individuazione del foro competente ai sensi dell’art. 7.
La clausola di scelta del foro competente contenuta nelle condizioni generali del venditore ha efficacia nel rapporto di distribuzione?
La società fornitrice considerava evidentemente il rapporto con il rivenditore portoghese solo una serie continuativa di vendite di beni, regolate dalle proprie condizioni generali: di conseguenza, riteneva che qualunque controversia relativa a tale rapporto fosse soggetta alla clausola di scelta del foro belga contenuta in tali condizioni generali.
Occorreva quindi stabilire se si fosse in presenza di una valida clausola di proroga di competenza ai sensi dell’articolo 25, paragrafo 1 del Regolamento 1215/2012.
Per la giurisprudenza costante della Corte di Giustizia, se la clausola attributiva di competenza è contenuta in condizioni generali di contratto predisposte da una delle parti, occorre che queste siano almeno richiamate nel contratto firmato anche dall’altra parte, al fine di garantire che sussista il consenso effettivo delle parti (sentenza del 14 dicembre 1976, Estasis Salotti di Colzani, c. 24/76; sentenza 16 marzo 1999, Castelletti, c. C-159/97; sentenza del 7 luglio 2016, Höszig, c. C-225/15). Inoltre, per essere valida la clausola deve riguardare un rapporto giuridico determinato (sentenza del 20 aprile 2016, Profit Investment SIM, c. C-366/13).
Ora, il giudice del rinvio considerava pacifico che il rapporto giuridico oggetto del giudizio fosse un contratto di concessione di vendita, avente ad oggetto la distribuzione dei prodotti Saey in Spagna, contratto non disciplinato per iscritto.
Partendo da questa premessa, risulta evidente che le condizioni generali contenute nelle fatture di Saey non potessero avere alcun rilievo ai fini del contratto di concessione: ammesso che fosse provato il consenso di Lusavouga, il foro belga si sarebbe applicato, semmai, ai singoli contratti di compravendita, ma non alle obbligazioni derivanti dal distinto contratto di distribuzione.
Quale è il foro competente per le obbligazioni derivanti dal contratto di concessione di vendita?
Esclusa la presenza di una clausola di scelta del foro, la competenza si determina in base all’art. 7, punto 1 del Regolamento 1215/2012, per cui diventa essenziale qualificare il contratto di distribuzione quale “compravendita di beni” o “prestazione di servizi”.
La “prestazione di servizi” è stata definita dalla Corte di Giustizia come un’attività, non meramente omissiva, svolta a fronte di una remunerazione (sentenza 23 aprile 2009, Falco, c. C-533/07).
Con le sentenze Corman Collins del 19 dicembre 2013 (c. C-9/12), e Granarolo del 14 luglio 2016 (c. C-196/15), la Corte ha affermato che nel contratto di distribuzione tipico il concessionario svolge un servizio, in quanto contribuisce ad ampliare la diffusione dei prodotti del concedente e riceve una remunerazione sotto forma di vantaggio concorrenziale, accesso a strumenti pubblicitari, know-how o agevolazioni di pagamento. In presenza di tali elementi, il rapporto contrattuale va considerato un contratto di prestazione di servizi. Se, al contrario, la relazione commerciale si limita ad una serie consecutiva di accordi, ciascuno aventi ad oggetto la consegna ed il ritiro di merce, siamo al di fuori del contratto di distribuzione tipico, ed il rapporto contrattuale deve essere qualificato come compravendita di beni.
Una volta qualificato il contratto come prestazione di servizi, occorre determinare “il luogo in cui i servizi sono prestati in base al contratto”: e la Corte precisa che tale luogo va individuato nello Stato membro in cui si trova il luogo della prestazione principale dei servizi, sulla base delle disposizioni del contratto oppure, come in questo caso, dell’esecuzione effettiva dello stesso. Solo qualora sia impossibile determinare tale luogo, si farà riferimento al domicilio del prestatore.
Da come il giudice del rinvio ha descritto il rapporto contrattuale, e da come la Corte di Giustizia intende la prestazione dei servizi del distributore, è logico dedurre che il luogo della prestazione principale dei servizi fosse la Spagna, dove Lusavouga “contribuiva ad ampliare la diffusione dei prodotti” di Saey.
Risulta evidente che né il produttore, né il distributore avrebbero mai voluto una simile soluzione, che avrebbero potuto però evitare disciplinando il rapporto per iscritto e stipulando una clausola di scelta del foro.
Parimenti, dall’esterno può sembrare discutibile l’apparente convinzione dei giudici portoghesi di trovarsi in presenza di un vero e proprio contratto di concessione di vendita, quando molti elementi potrebbero far pensare il contrario: ma anche sotto questo aspetto, la mancanza di un contratto scritto lascia spazio ad interpretazioni che possono portare a conseguenze impreviste, e potenzialmente assai rischiose.
In conclusione, l’opportunità di disciplinare i rapporti commerciali di distribuzione con un contratto scritto è evidente, non solo perché consente di evitare le situazioni di incertezza descritte, ma anche perché documenta l’accordo tra le parti su altri importanti elementi che è bene non lasciare indeterminati: l’eventuale esclusiva territoriale o per certi canali di vendita, la durata del rapporto e il periodo di recesso, gli eventuali obblighi promozionali, la titolarità dei dati dei clienti finali, la possibilità e le modalità di vendita dei prodotti online.
