Disappointing turnover of company: error or entrepreneurial risk?
In recent proceedings a seller claims compliance with a purchase agreement, including compliance with the secondment agreements concluded with the purchase. The buyer is in financial trouble and terminates the secondment agreements. Can he do this? Corporate lawyer Marco Guit explains the court ruling.
Assets and liabilities transaction: secondment agreement
The purchase agreement states that the buyer takes over the assets and liabilities of a company component of the seller. The employees would still be employed by the seller, but would be seconded to the buyer. It was agreed that the buyer would make all reasonable best efforts to permanently continue the business activities. Unfortunately the proceeds of the buyer are disappointing and he wants to get rid of the secondment agreements fairly quickly. The seller refuses to accept the termination. The seller summons the buyer and demands, among others, continued payment of the invoices for the seconded employees.
Court: no error but disappointed expectation
In the proceedings the buyer states that at the time of the conclusion of the purchase agreement, he erred in the turnover prognosis. The court reject this argument summarily. The buyer was assisted by an accountant in the negotiations. The buyer also works in the same industry as the seller and could therefore have known what he was getting into. A disappointing turnover means disappointing proceeds. Or, as literally stated by the court: ‘If an expectation for the future does not materialize, that is not an error, but a disappointed expectation’.
Secondment agreement can be terminated
The court also states that the buyer knew that the component he bought from the seller was operating at a loss. The buyer knew or could have known that which costs were related to the secondment agreements. The buyer cannot then renege on the agreements shortly after the takeover. However, several circumstances led to declining turnovers in the printing industry. The economic crisis, the shrinking printing market and the loss of grants in the non-profit sector, are some of the contributing factors.
Profits fell, costs remained the same
Obviously, turnover had to increase to make a profit. However, the profits fell and the costs remained the same. According to the court, it is inevitable that the buyer operates at a loss and enters the danger zone. Under these circumstances the seller cannot fully maintain the secondment agreement. That is unacceptable according to standards of reasonableness and fairness. The court finds that these secondment agreements can be terminated.
Economic crisis: ground for amendment of contract?
The economic crisis is ever more often cited as a reason to dissolve current agreements or to request amendments. The jurisprudence deals cautiously with such issues. Mostly, changes in the economic climate are to the risk and account of the entrepreneur. In exceptional circumstances a party can persuade the court to set aside an agreement. If you have any questions about this issue, please contact us.