When a party fails to fulfil obligations under an agreement, it is in default. In that case, it must first be in default: the performance that should have been carried out on the basis of the agreement has failed to materialise. To be in default, a debtor, after being given notice of default and the opportunity to fulfil its obligations within a reasonable period, must still have failed to fulfil these obligations. At that point, the other party may decide to dissolve the contract.
The Supreme Court recently had to rule on the question of whether a seller was entitled to rescind a purchase agreement on the basis of the buyer's failure to perform, without having given that buyer notice of default: ECLI:NL:HR:2020:141
Sometimes a debtor can already be in default without a notice of default. In Article 6:83 of the Civil Code, the law has three situations in which this is possible:
Therefore, when one of these situations occurs, the creditor is not obliged to send a written notice of default to his debtor and offer the debtor a reasonable period to still fulfil his obligations.
In this case, the parties had entered into a purchase agreement regarding a property. It was agreed that the buyer would take possession of the property no later than 31 December 2011. In December 2011, the buyer indicated that this would not be possible, but that he was willing to do so a few months later.
The seller declined this offer, informing the buyer that he was dissolving the contract on the grounds of the buyer's failure to perform. He then asked the court to declare that the buyer had actually imputably failed and that the purchase agreement had been lawfully rescinded.
The seller argued that a notice of default was not necessary based on Section 6:83 of the Civil Code, because the buyer's default resulted from the expiry of a fatal deadline and the buyer's notification that he would not purchase by the end of December 2011. Earlier in the proceedings, the court already ruled that the agreement to deliver the property "no later than 31 December 2011" did not qualify as a fatal term within the meaning of Article 6:83(a) of the Civil Code. The Supreme Court agreed with this judgment.
Next, the Supreme Court had to determine whether the seller was entitled to infer from the notification that the buyer would not purchase by 31 December that the buyer would default on the contract.
The Supreme Court explains that the function of a notice of default is not to "establish default", but to give a debtor one last deadline for performance and to specify the time until which performance is still possible without default. When that time is reached and the debtor has failed to perform, he is in default.
Having ruled that the agreed term of delivery was not a fatal term as referred to in Article 6:83(a) of the Civil Code, the buyer did not default by letting that term expire without taking possession of the property. According to the Supreme Court, the buyer's notification that he would not be able to take possession of the property by 31 December 2011 at the latest was insufficient for the Supreme Court to hold that the seller had to infer that the buyer would default on his obligation.
In fact, the buyer could still take possession of the property after the agreed date, so there would be no default (and therefore no breach of the purchase agreement).
This ruling makes it clear that failure to meet an agreed term in an agreement does not automatically lead to default which does not need to be preceded by a notice of default. Even the fact that a counterparty indicates that it is not going to meet this agreed term cannot lead to a different conclusion. It is therefore wise to be careful when dissolving agreements without a notice of default preceding it.
Following this article, do you have any questions about sending a notice of default or dissolving an agreement? We would be happy to look into them with you.