Contract Law: Breach of Contract, Termination and Damages

A contract is the foundation of every business relationship. But what happens when your contracting party fails to meet its obligations? A supplier that does not deliver, a contractor that fails to complete the work, or a buyer that refuses to pay. Dutch contract law provides you with powerful instruments: demanding specific performance, terminating the contract or claiming damages.

Breach of Contract: When Does Non-Performance Occur?

Breach of contract (non-performance, Art. 6:74 DCC) occurs when a contracting party fails to fulfil its obligations, fails to do so on time, or fails to do so properly. Examples include:

• A supplier fails to deliver within the agreed timeframe
• A contractor delivers work that does not meet the contractual specifications
• A buyer fails to pay the invoices
• A software provider delivers a system that does not function as agreed
• A franchisee acts in breach of the franchise agreement

Not every failure to perform automatically leads to liability. The non-performance must be attributable to the debtor. In cases of force majeure (a circumstance that cannot be attributed to the debtor), the debtor is not liable for damages – however, you may still terminate the contract.

The Notice of Default: First Step in Breach of Contract Cases

Before you can take legal action, in most cases you must first serve a notice of default (Art. 6:82 DCC) on the other party. The notice of default is a written demand in which you:

• Establish that the other party is failing to perform its obligations
• Set a reasonable period for the other party to still perform
• State which measures you will take if performance is not forthcoming

Only after the set period has expired does the other party enter a state of default, enabling you to claim damages or terminate the contract. Without a notice of default, there is no default – and without default, no damages. This is a common mistake: entrepreneurs who go directly to court without a proper notice of default risk having their claim dismissed.

Note: a notice of default is not always required. In the case of a fatal deadline (when performance after a certain date is meaningless), when the debtor announces that it will not perform, or when performance is permanently impossible, default occurs automatically by operation of law.

Your Options in Case of Breach of Contract

Once the other party is in default, you have three main options. These can also be combined:

Option 1: Demanding Specific Performance

You demand that the other party still fulfils its contractual obligations. This is often the first choice when you still wish to receive the performance. The court can order specific performance, potentially reinforced by a penalty payment: an amount the other party forfeits for each day of non-compliance. Penalty payments of €1,000 to €10,000 per day are not uncommon.

Option 2: Termination of the Agreement

Upon termination (Art. 6:265 DCC), the contract is ended and restitution obligations arise: what has already been performed must be reversed. If, for example, you have already made a down payment for a machine that was not delivered, the other party must refund that down payment. Termination can be effected extrajudicially (by letter) or through the court.

Important: the non-performance must justify the termination. A minor shortcoming (such as a one-day delay in delivery) generally does not justify termination of the entire contract. The court applies a proportionality test.

Option 3: Damages

Damages can be claimed alongside specific performance or alongside termination. Upon termination, you claim supplementary damages for the loss caused by the non-performance. With substitute damages, you claim a monetary sum instead of the performance.

The loss must have a causal connection with the breach of contract and must have been reasonably foreseeable. Compensable losses include:

• Actual losses: direct costs, additional expenses, damage to other assets
• Lost profits: income you have missed due to the breach of contract
• Costs of establishing the loss: expert costs, accountancy costs
• Extrajudicial costs: legal fees incurred in the pre-litigation phase

Right of Suspension: Your Leverage

A powerful instrument that is often overlooked is the right of suspension (Art. 6:52 DCC). If the other party fails to perform, you may suspend your own performance. If the supplier does not deliver, you need not pay. This is an effective means of pressure to compel the other party to perform, without having to go to court immediately.

Caution: suspension must be proportionate. You may not suspend a payment of €100,000 due to a minor defect worth €500. Moreover, you must notify the other party of the suspension – silently withholding payment is rarely accepted by courts as lawful suspension.

Limitation of Liability Clauses

Many commercial contracts contain limitation of liability clauses: provisions that limit or exclude liability. Consider a maximum compensation equal to the contract value, or an exclusion of consequential damages. These clauses are in principle valid, but the court may set them aside if they are unacceptable according to standards of reasonableness and fairness (Art. 6:248(2) DCC) – for example, in cases of wilful misconduct or gross negligence.

Interim Injunctions in Urgent Contract Disputes

When a matter cannot wait for main proceedings, interim injunction proceedings offer a solution. In interim proceedings, the court can grant provisional relief within a few weeks: ordering performance, imposing a prohibition or awarding an advance on damages. This is particularly effective in ongoing contractual relationships where every day of delay causes loss.

Why Kasteelmeester?

Mr. Vulto has extensive experience with commercial contract disputes. We provide strategic advice: is demanding specific performance worthwhile, or is termination with damages the better route? Sometimes a firm notice of default is sufficient to prompt the other party into action. Sometimes interim injunction proceedings are needed to prevent acute loss. We always choose the route that is most effective for you – swift, sharp and results-oriented.