On 2 July 2020, the Luxembourg court of appeal rendered a decision relating to the consequences of the non-fulfilment of a condition precedent (“condition suspensive”) included in a bilateral agreement and the court took this opportunity to describe the different types of termination (“résolution”) of an agreement in case of breach by a party of its obligations.
In the case at hand, the parties entered into a provisional sales agreement (“compromis de vente”) relating to real estate property subject to the granting of a bank financing to the purchasing party. As the condition precedent was not fulfilled due to the fault of the purchaser, the sellers availed themselves of the nullity (“caducité) and of the automatic termination (“résolution de plein droit”) of the agreement. As a consequence, those requested inter alia the payment of an indemnity equal to 10% of the purchase price of such real estate assets, as provided for by the agreement in case of termination by a party. As the ruling of the lower court awared certain damages to the sellers, the purchaser sought to appeal such decision.
The court of appeal reminded that under Luxembourg law, the termination (“résolution”) of an agreement when a party does not fulfil its obligations is governed by the Luxembourg civil code, which provides that each party to any bilateral agreement, as an alternative to requiring the forced execution of the obligations by the defaulting party, has the right to terminate such agreement and to be granted damages. Such termination (“résolution”) shall, in principle, be sought by application to the courts.
Alternatively, the agreement may also be terminated automatically (“résolution de plein droit”), without the intervention of the judge, when the agreement contains a clause to such effect (“clause résolutoire”), which was not the case in the provisional sales agreement submitted to the court.
According to the court’s decision, the provisional sale agreement did not include a clear provision on termination and only referred to the possibility of terminating (“résilier”) the agreement without specifying the relevant obligation whose breach which may give rise to such sanction.
Finally, the court of appeal referred to recent Luxembourg case law to add the third possibility for termination whereby a party has the right to terminate unilaterally (“résolution unilatérale”) the contractual agreement in case of serious breach of the other’s party obligations “at its own risk”, meaning that such termination might be subjected to the a posteriori review of the judge at the initiative of the party on which the termination has been imposed.
As the purchaser failed to demonstrate reasonable efforts aimed at fulfilling the condition precedent, the court ruled that this constituted a serious breach of the loyalty duty applicable between contractual parties and that the sellers had rightfully unilaterally terminated the agreement.
This decision illustrates the importance of the accurate and complete drafting of termination clauses (“clause résolutoires”) for any type of agreement, so that those may be terminated automatically without recourse to the courts, either prior to the termination of the agreement or afterwards.
For additional information in this respect, please contact our specialists.
