Dutch Contracts – Not Your Common Law Garden Contract
Category: Commercial contracts
When contracting in the Netherlands, people from common law jurisdictions should be aware of the differences in Dutch contract law and the contract law of their (common law) jurisdiction. In this article I will give a brief overview of two significant differences between common law contracts and Dutch contracts.
1. Good Faith is Implied
The duty of good faith does not play a big role in common law jurisdiction and thus has limited applications and, in most scenarios, will not be implied in contracts. However, in the Netherlands there is an overlying principle of reasonableness and fairness which gives good faith a central focus in governing the performance, enforcement and negotiation of a contract.
The Dutch reasonableness and fairness principle
The Dutch reasonableness and fairness principle is outlined in the Dutch Civil Code, and outlines that:
- Parties are obligated to act in a way that is reasonable and fair;
- Reasonableness and fairness is implied in contractual obligations; and
- Any rule, clause, obligation and other binding instruments that go against what is reasonable and fair have no legal effect.
- Thus reasonableness and fairness cannot be, as it were, forgotten or set aside on the grounds that it has no bearing on the contractual obligations as it was not written out and explicitly stated in the contract. This is quite a difference in common law jurisdictions, such as in Australia or the United Kingdom, where implied obligations are only given in certain circumstances. For example, among other requirements, the implied term would need to be necessary to give business efficacy and be so obvious that it goes without saying. At least in Australia, the position has been subject to great debate.
- Contractual obligations in the Netherlands include implicitly good faith and parties must act in a way that is reasonable and fair such that if a party knew of or ought to have known certain circumstances, their duty of good faith requires them to act positively and with regard to the societal and personal interests of the party. This is not just limited to situations where the parties have already entered into a contract; good faith is a general principle that is applicable even during the negotiating stage of an agreement, and may have legal consequences if a party were to act to the detriment of another party in such a way that would constitute bad faith. For example, parties are able to abandon negotiations during the later stages of negotiations in the United Kingdom, but parties in the Netherlands are not free to abandon at the later stages of the negotiations if the circumstances of the abandonment are in bad faith.
2. An Entire Agreement Clause Does Not Necessarily Mean You Cannot Reply On Extrinsic Material
As a consequence of this reasonableness and fairness doctrine, interpretation of the contracts may require delving deeper than just the plain words of the contract. It is standard for common law countries prevent extrinsic material (i.e. evidence outside the four corners of the contract) from being used to shed context in order to assist in the interpretation of the contractual clauses during a dispute (the Parol Evidence Rule). So long as the written contract is the entire agreement, pre-contractual letters, negotiations, discussions and anything else not specifically outlined in the words of the contract will largely be irrelevant in determining the obligations and rights of the parties, save as to circumstances of ambiguity. However, this is not the case in the Netherlands. While common law prioritise certainty in their contractual obligations, Dutch Law is more inclined to find the balance between certainty and flexibility.
Under Dutch law, the Haviltex Principle sets out the major difference between common law contracts and Dutch contracts in interpretation. This principle outlines that a written contract must be interpreted in a way that both parties in their circumstances would have reasonably expected to have interpreted that clause. This reasonable expectation not only looks at the literal meaning of the words in the clause, but also towards what the parties had intended the clause to say. This significantly deviates from common law reasoning as demonstrated in the Australian case of Toll (FGCT) v Alphapharm, where the Court specifically state that ‘it is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relation’ and puts far greater weight not on what the parties had understood their obligations to be, but rather what a reasonable person would have expected their obligations to be.
However Dutch law shifts closer towards the common law position of the Parol Evidence Rule under certain circumstances; the Lundiform/Mexx case confirmed that the Haviltex Principle applies to commercial contracts, but specified that greater significant may be given to the literal meaning of the contract under circumstances where the parties were professional parties entering into a commercial agreement with extensive negotiations and were assisted by lawyers. In light of this Lundiform/Mexx, the court opted to not attach great significance to the literal wording in the contract because the parties did not negotiate the contract, one of the parties was not assisted by a lawyer and the contract was just a ‘standard’ contract. However, if the parties had negotiated the contract and were assisted in the negotiations by a lawyer, then the court may have given much greater significance to the wording of the contract, and it may have been more in line with the common law position.
Good faith and entire agreement clause
In conclusion, it is important to remember that in Dutch contracts, good faith is implied into the agreement and must be adhered to during the negotiation period and not only during performance and enforcement. The second important aspect is whether the clause represents the literal meaning of the words or the subjective intention of the parties – and this will largely depend on the circumstances surrounding the agreement.