2 January 2020

Tips for drafting commercial contracts in English

Category: Contract law

Tips for drafting commercial contracts in English

Drafting commercial contracts in English and contracting with parties from common law jurisdictions poses several considerations which should be taken into account. This article will provide an overview of those considerations as well as a brief explanation of the difference in interpretation of contracts; the meaning and significance of certain contractual terms; and lastly some other key differences between common law and Dutch contracts.

Interpretation of contracts and entire agreement clauses

Common law countries generally restrict material outside of the plain text of the agreement from being relied upon in the interpretation of a contractual provision. This is particularly true when the agreement is intended to be a complete and final expression of the parties’ agreement. This is known as the Parol Evidence Rule, and means that other evidence (such as letters, correspondence and oral discussions) will largely be irrelevant in the interpretation of a contract.

This common law approach differs significantly from the Haviltex Principle found in Dutch law which requires courts to look at both the literal meaning of the text in the agreement, as well as the subjective intentions of the parties in concluding a particular provision or the contract as a whole.

In order to avoid some exceptions that have developed to the Parol Evidence Rule, parties may choose to insert an entire agreement clause. These are contractual provisions stating that the contract constitutes the entire agreement between the parties. Entire agreement clauses are often found in common law contracts to provide parties with further certainty that the clauses provisions contained therein are conclusive. In Dutch law, an entire agreement clause does not have much effect in light of the overruling Haviltex Principle.

The meaning of terms (warranties; guarantees; conditions; best and reasonable endeavours)

It is important to be aware that some English contractual terms have different meanings to their Dutch equivalent. In addition, the meaning of certain English legal terms differs between the United Kingdom (UK) and United States (US).

Guarantees, warranties and conditions

For example, in the context of contractual commitments, the Dutch term ‘garantie’ is considered to be similar in effect to that of a ‘warranty’ under US law. On the other hand, under UK law, a ‘warranty’ is a minor term of a contract and a breach thereof will only result in the other party being entitled to damages, not to a right of termination. A major term of a contract under UK law is a ‘condition’, of which a breach will give the other party the right to terminate the contract.

Best endeavours and reasonable endeavours

In Dutch law, there is no definitive meaning for the terms ‘best endeavours’ and ‘reasonable endeavours’. Conversely, in common law systems, these terms are well-defined. A ‘best-endeavours’ clause generally imposes an obligation on a party to take all necessary measures to fulfil the relevant requirement, even if this is harmful to its commercial interests. A ‘reasonable endeavours’ clause can be defined as an obligation to use one’s best endeavours which does not lead to the party’s financial disadvantage.

Key terms (Good faith, penalty clauses, time being of the essence, force majeure clauses)

Good Faith

When drafting a contract in English, parties should be aware that, unlike the Netherlands, the duty of good faith does not play as a significant role in common law countries and, in most situations, will not be implied into contracts. In common law jurisdictions such as UK, US and Australia, implied obligations are only given in certain circumstances. For example, an implied term would be necessary to give business efficacy (the power to produce intended results) or alternatively be so obvious that it goes without saying.

Penalty clauses

Penalty clauses are contractual provisions which enable a party to impose a penalty, usually in the form of a sum of money after a party has breached a contractual obligation. Under Dutch law, penalty clauses will be enforceable even in situations where there is no correlation between the penalty and the loss or harm that will be incurred in the event of a breach of contract. In most common law countries, penalty clauses are invalid. On the other hand, contracts in common law countries can contain ‘liquidated damages’ clauses. These clauses impose a reasonable compensation obligation for a contractual breach which is not allowed to be disproportionate to any actual or anticipated damage.

Time being of the essence

Particular attention should be paid to clauses in English contracts that state that time is ‘of the essence’. These clauses create a strict deadline, for which non-performance may entitle the other party to terminate the contract. Such clauses are far less common in Dutch commercial contracts.

Force majeure clauses

Force majeure refers to a situation where the performance of a contractual obligation has become impossible for a party on account of an event outside of their control. Common scenarios include natural disasters, such as earthquakes, cyclones or tsunamis. Whilst under Dutch law, statutorily enforced force majeure provisions are imposed on all contracts. Conversely, In some common law countries, parties to a contract who wish to have force majeure relief must clearly set this out in the terms in the contract.

Drafting English contracts in the Netherlands

From the above explanation it is clear that several factors must be taken into account when contracting with commercial parties under a common law system and choosing ones choice of law provision in a commercial contract. These considerations are essential in how certain clauses and terms are interpreted by the court or tribunal having jurisdiction, and affect the remedies each party may be entitled to for any contractual breaches. Being aware of considerations such as of good faith, penalty clauses, and the difference between guarantees and warranties could make a big difference in the outcome of your matter. If you would like any advice relating to the drafting of commercial contracts in English, please don’t hesitate to contact contract lawyer, Marie-Louise van Kleef.