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At Blenheim, we frequently help clients navigate commercial contracts drafted in English that are governed by Dutch law. Parties familiar with common law contractual principles are often surprised by certain peculiarities found in Dutch contract law. This blog will briefly identify some of these key differences and note five important things to be aware of when a commercial agreement is governed by Dutch law.
As opposed to common law, Dutch law places a great deal of importance on the subjective meaning behind agreements. Under the Haviltex Principle, a written agreement is to be interpreted in a way that both parties, in the circumstances, would have reasonably expected to have interpreted the provision. This involves a process of looking beyond the literal wording of the clause to the subjective intentions of parties. When interpreting a contract, courts will thus rely on a range of extrinsic material (such as pre-contractual negotiations). An entire agreement clause will not prevent Dutch courts from taking this approach. Foreign parties should be acutely aware of this aspect of Dutch law, and (as a practical tip) ensure that pre-contractual negotiations are well documented.
Where a matter is governed by Dutch law, parties will be bound by the Dutch legal principles of good faith and reasonableness and fairness, which enable courts to imply terms into contracts governed by Dutch law. These principles have a broad application to contractual dealings. For example, the principle of good faith restricts the extent to which parties can end pre-contractual negotiations without being liable, as far as doing so would conflict with the reasonable expectations of the other party.
As to the principle of reasonableness and fairness, this plays a broad role in Dutch commercial contracts, including in what circumstances parties are able terminate an agreement. Termination of an agreement will be governed by the terms of the agreement itself, as well as principles of reasonableness and fairness, as per section 6:248 of the Dutch Civil Code. Under section 6:258 of the Dutch Civil Code, a court may also change the legal effect of an agreement, or rescind an agreement in full or part, if there are unforeseen circumstances that mean that the other party, according to standards of reasonableness and fairness, could not expect the original agreement to continue. These principles have been of particular interest in relation to Covid-19, as the Dutch courts have held that Covid-19 could constitute an unforeseen circumstance that would enable courts to modify existing commercial arrangements.
Unlike in many common law jurisdictions (such as in the United States, Australia, Canada and New Zealand) penalty clauses in the Netherlands are readily enforceable (and extremely common). It is commonplace to find significant penalties included in agreements, particularly in provisions regarding breach of confidentiality, non-competition and non-solicitation. As to be expected, penalty provisions are often the subject of disputes, meaning parties would be wise to have these provisions drafted and/or reviewed by lawyers with expertise in Dutch commercial law.
Whereas in common law jurisdictions a breach of contract will not readily give rise to a right of termination (aside from where the breach is one that goes “to the root of the contract”), the Dutch Civil Code provides for an extensive right of termination in relation to almost any breach of contract. For example, under section 6:265 of the Dutch Civil Code, any breach by a party of any of its contractual obligations will provide the other party a discretion to completely or partially terminate the agreement for cause, unless the breach’s nature does not justify such termination. In effect, this means that, under Dutch law, a party to a contract that does not contain a termination provision may still be able to terminate the agreement on account of a breach by the other party, on the basis of the Dutch Civil code.
Certain English and common law terms (such as ‘termination’) can potentially have several meanings in the Dutch language and under Dutch law. The implanting of these terms, without defining appropriate Dutch equivalents and identifying their meaning as per the Dutch Civil Code and Dutch law, can be a nightmare when it comes to contractual interpretation. For this reason, parties are well advised to have agreements governed by Dutch law to be drafted and/or reviewed by lawyers specialised in Dutch commercial law.
Blenheim’s International Team of Foreign Associates are trained in both common law and Dutch law, enabling us to identify aspects of agreements governed by Dutch law that foreign parties (including those from common law systems) may not be aware of.
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