Interpretation of contracts under Dutch law
Cooperation between people is the engine of our progress. Miscommunication in cooperation is one of the largest sources of conflict. Making clear agreements is therefor essential. The parties are more certain they their expetactions about the collaboration are the same. A documented agreement can be used by a court for interpretation conflicts.
Why do conflicts arise when the parties have executed a clear agreement? Words and concepts can have a different meaning for different people. Parties often underestimate how much knowhow is involved in their business. An outsider without that knowhow, will often look differently at the same appointment. A contract should be so clear that an outsider without specific knowledge of the industry can understand the agreement after reading the document. In practice, it is not always possible to make such a clear contract.
In addition, the future is uncertain. It is not possible to prepare for all possible future eventualities. If market conditions change for a company, existing agreements can become unprofitable. The parties will examine the exisiting provisions differently. Do these provide a solution for the changed circumstances?
Typical conflict over contract interpretation
An interpretation conflict about a contract often proceeds as follows. One party refers to an obligation that is or is not incorporated in the literal text of the agreement. The argumentation is as follows: “As the text of the agreement creates an obligation, you are obligated” or “As the text of the agreement does not create an obligation, I am not obligated to do so.” This is the literal interpretation of the contract.
The other party relies on the intent of the provision and the agreement and the way in which parties deal with each other. The argumentation is here: “Although the agreement may not adress this situation in so many words, it was the intention that this situation is covered by it.” Or vice versa: “The provision is not intended that way for this situation. It should not be interpreted that way. “This is the explanation on the basis of the parties’ intentions.
Because both parties use a different method of argumentation, they may both be right. This fundamental conflict is hard to solve. If there is no strong commercial reason to resolve the conflict together, the question becomes relevant how the courts view interpretation of a contract.
The methods of interpretation exercised by the Dutch courts
A Dutch court will in a interpretation dispute (to which Dutch law applies) always examine what meaning the parties in the circumstances could reasonably attribute to each ithers declarations and behaviour en hwat they could reasonably expect from each other (“Haviltex measure”). The wording of the provision is important, but not decisive. The court will look at all circumstances. In Dutch practice we distinguish the following three benchmarks.
1. “CAO” standard
First, the so-called CAO method. This method of interpretation looks almost exclusively at the wording of the provision and possible accompanying notes. It is mostly used with texts that have been drafted for use by large groups of people (CAO is an abbreviation for collective labour agreement in Dutch). The rationale here is that in a text which is intended for use by a large number of people, the interpretation of the text should mean the same and differ according to the intention of the parties which make use of it. The literal meaning of the text is decisive, not what the parties themselves would perhaps have had different ideas or expectations about a text.
Test: is the document under interpretation intended for use by large number of third parties, and it is desirable that the interpretation of the contract for all those parties should be the same.
Interpretation: according to the text of the provision and any existing explanatory notes.
2. Professional parties and circumstances
Next, the interpretation of contracts between professional parties. Interpretation is often lead by the text of the provision, in conjunction with the other provisions of the agreement.
- are the parties to the agreement professionals,
- was the provsion under examination the subject of negotiations (adressed expressly),
- did the parties have legal assistance in drafting the contract,
- does the agreement contain an interpretation clause ,
- does the agreement contain a provision that states that the agreement constitutes the entire agreement between the parties and supersedes all prior agreements,
- are interests of third parties involved in the interpretation of this clause,
- what is the most obvious literal interpretation of the agreement,
- how does the provision fit in the agreement,
- are the effects of the interpretation advocated logical and in conjunction with the agreement,
- is the provision a standard clause that is used often in the industry,
- which party has drafted the provision (an obscure provision is the responsibility of the author).
3. Explanation on the basis of all the circumstances
Finally, the interpretation of a provision in the light of all the relevant circumstances of the case. The parties here most of the “freedom of movement” in the use of the evidence for their interpretation of the provision.
Interpretation on the basis of the foregoing circumstances, and further:
- what did parties communicate prior to conclusion of the agreement together
- what did the parties agree to in addition to the agreement,
- how did the parties behave after the conclusion of the agreement,
- did the parties fill in the provision in any way (communication or factual behaviour) after the conclusion of a particular interpretation of the provision.
The linguistic interpretation results in a limited review. The explanation based on the reasonable expectations of the parties leaves more room for interpretation with reasonableness or logic. In other words, this interpretation method allows more space for a not expressly included in the contract specification, duty or obligation.
The above framework is a reflection of what we are experiencing in practice. However, it is not cast in stone. The Dutch Supreme Court has emphasized that there is no absolute separation between the aforementioned benchmarks. The Dutch court has wide discretion to determine what meaning the parties could assign to each other’s statements and expectations. The circumstances mentioned above ways are not always the same weight, the court may decide what weight they are given in a particular case. The court therefore has the freedom to deviate from a strictly linguistic approach if he finds that this does not do justice to the case.
Look here (practical application) for more specific cases where the interpretation of one word or phrase in a contract has meant the difference between profit and loss. This will also give you a better understanding of the underlying problems and application of the rules interpretation by the Dutch courts.
Tips voor een conflict over uitleg van een overeenkomst Tips for a conflict over interpretation of a contract
- Write down what your interpretation of the disputed provision or term of the agreement. ( “… The term means in Article .. of the contract … and as a result …”)
- Make a note in the same way that the (expected) interpretation of the counterparty.
- In explaining conflicts, there is often a difference between relying on a linguistic interpretation and an appeal to the intention of the parties (evidenced in circumstances beyond the agreement), which give it a certain interpretation. Check whether your case is so, and if so, in what interpretation method you use.
- Verify if this subject was discussed in the underlying correspondence.
- Research if parties have behaved in a certain way with respect to the subject of the provision after the conclusion of the contract .
- Check what method of interpretation the court will most likely use on the basis of the different methods mentioned above.
- Check if there is a deadline for bringing complaints or claims (complaint deadline or limitation period).
- Confirm in a written message how you regard the provision and invite the counterparty to discuss the issue.
- Investigate the possibilities of a settlement, if you are willing.
- If someone relies on a particular interpretation of a provision, he usually has the burden of proving a procedure. If there is something to be said for the interpretations of both parties, it may have the burden of proof be fatal. Look if there is a way to ensure that the other party has the burden of proof.
- If applicable, take statements from those involved to prevent certain appointments or events by lapse of time may not be well remembered.
- Start your case in time, if it cannot be settled.
Tips for contractdrafting with an eye to Dutch contract interpretation
- In contract negotiations run through the whole contract in a short time. Keep in mind that if a conflict arises, this will be resolved by looking at at particular section. Soalways keep in mind what the ramifications of the literal interpretation of a provision may be.
- Through the “give and take” of negotiations a provision can be incorporated which you are not satisfied with it. You can then try to steer the intent of the provision in negotiation mails to reduce unwanted (unlimited) effects of the text of the provision.
- An agreement under Dutch law is concluded by offer and acceptance. A verbal agreement is as valid as a written contract. Always provide a documented confimation of a verbal agreement and the specifications.
- If you prefer that the linguistic explanation dominates a contract, try to capture as much as possible: (i) the professionality of the parties, (ii) which have been assisted by professional consultants and (iii) the parties have discussed and negotiatied all provisions and have had the opportunity to conclude the research important for this agreement. If you do not regularly enter into agreements, record (a) that your professionalism is in a different field than legal, (b) you have concluded the agreement yourself (and thus without professional assistance).
If you want to know more about the interpretation of a provision in your explanation conflict, please contact us to identify your options together, either in an analysis conversation, or via 0031 (0)6 52 67 59 57 or email@example.com
Jaap van Lynden is a lawyer at Malmberg Waling, specializes in setting up and dismantling business collaborations .