A bankruptcy proceeding can significantly impact the rights and obligations of various parties involved. However, it is often overlooked that, in principle, a bankruptcy does not affect ongoing contracts. This means that a contract generally continues to be effective during bankruptcy. Under certain circumstances, the agreement may be terminated. This raises the question of what rules govern termination and which party is authorized to effectuate such termination.
(Continuing) Contracts
Contracts differ in their nature and duration. For instance, purchase agreements typically govern a single transaction: the seller delivers the goods, and the buyer remits the purchase price, thereby discharging both parties from their respective obligations. In contrast to such short-term agreements, there are continuing performance contracts. These are agreements of a longer duration, under which parties undertake recurring obligations on an ongoing basis. A frequently encountered example of a continuing performance contract is a supply agreement, whereby goods are delivered periodically in exchange for payment of the agreed purchase price.
The general rule is that contracts remain in effect during bankruptcy proceedings, provided that the mutual obligations of the parties have not been fully performed. Consequently, parties are, in principle, still required to fulfill these obligations. However, performance of contracts by the bankruptcy trustee (curator) may not always be feasible, for instance, if the trustee lacks the necessary financial resources or if the business operations are discontinued. For this reason, it is essential to examine the exceptions to this general rule, which will be discussed below.
Article 37 of the Dutch Bankruptcy Act (Faillissementswet)
Following a declaration of bankruptcy, the trustee may decide to continue contracts with third parties. To do so, the trustee must first assess whether such continuation serves the interests of the bankruptcy estate. At the same time, counterparties to the bankrupt party often seek clarity on the trustee's decision as soon as possible. The law provides these counterparties with a mechanism to obtain certainty in this regard. Article 37 of the Dutch Bankruptcy Act (Fw) grants them the right to set a (reasonable) deadline for the trustee to indicate whether the contract will be performed by the bankruptcy estate. This is referred to as "affirmation" (gestanddoening). What constitutes a reasonable deadline depends on the nature of the contract and the obligations typically arising from it.
If the trustee fails to affirm the contract or does not communicate their intention to affirm within the stipulated timeframe, they lose the right to demand performance from the counterparty. Additionally, if the trustee does affirm the contract, they are required to provide security for fulfilling the obligations arising from it.
Article 37 Fw thus provides a solution in cases where a counterparty has already performed their part of the contract while the bankrupt party still needs to deliver their performance. Conversely, if the bankrupt party has fully performed their obligations and expects a counter-performance from their counterparty, the counterparty is generally required to fulfill their part of the agreement. No specific provisions under bankruptcy law apply in such cases.
Insolvency Clauses
Contracts may include provisions stipulating that they terminate automatically or that parties have the right to unilaterally terminate the agreement if one party is granted suspension of payments or declared bankrupt. Such an "insolvency clause" can help mitigate uncertainty.
However, it is not permissible to include provisions in an insolvency clause stating that rights to counter-performance lapse upon one party's bankruptcy or that penalties become payable. For example, parties cannot agree that claims of the bankrupt party against a supplier will be waived in case of bankruptcy. Such provisions would unfairly disadvantage other creditors in the bankruptcy proceedings. According to established case law, such insolvency clauses are therefore null and void due to their conflict with Article 20 Fw.
Conclusion
If your contractual counterparty is declared bankrupt, this does not automatically relieve you of your obligation to perform under the contract. However, continuing a contract during bankruptcy can create significant uncertainty. It is therefore advisable to anticipate potential bankruptcy scenarios when drafting contracts. This can be achieved by including an insolvency clause that allows you (if desired) to terminate or rescind the contract in case of bankruptcy.
Insolvency clauses in contracts or general terms and conditions must be carefully drafted. It is therefore recommended to seek legal advice when making your contracts and general terms and conditions bankruptcy-proof. We are also pleased to advise you on whether you can invoke Article 37 Fw.
Do you have questions about this topic? Please feel free to contact Alice van der Schee or Rhea Bask.
