On 25 August 2023, the Dutch Supreme Court issued an decision (the Decision) on the question of how a contract should be interpreted in case the contract contains a provision stipulating that, in deviation from the so-called Haviltex criterion, the provisions as contained in contract are to be interpreted and applied only grammatically [1]. The Decision provides a cause to reflect in outline on the Dutch legal framework regarding the interpretation of contracts, placing the Decision within this framework. We conclude with some remarks on the potential effects of the Decision on the Dutch (corporate) practice.
What about – the interpretation of contracts in the Netherlands?
The core of the doctrine dates back to 1981 when the Dutch Supreme Court ruled the landmark Haviltex judgment [2]. In the Haviltex judgment, the Dutch Supreme Court ruled that, when interpreting the provisions of a contract, what matters is the meaning that the parties, in the given circumstances, could reasonably attribute to that provision on both sides and what they could reasonably expect from each other in that respect (the Haviltex Criterion) [3]. In other words, when interpreting contracts, not only the grammatical meaning of the contract must be considered, but other circumstances also should be taking into account. It may therefore be the case that a court comes to the conclusion that the parties’ intentions conflict with the wording of the contract at hand. In such cases, according to the Haviltex Criterion, the intention of the parties will prevail over the grammatical meaning of the contract [4].
The Haviltex Criterion is the standard that Dutch courts apply in principle when determining the meaning of a contract, a so-called subjective interpretation standard. In principle, as it seems to follow from the Decision that under certain circumstances the court may not take the intention of the parties into account when interpreting a contract, but more on that later.
Against a subjective standard of interpretation, there is logically the objective standard of interpretation. In 1993, a more objective standard of interpretation was adopted by the Dutch Supreme Court for the first time in cases where an agreement has an impact on parties not involved in its formation; the so-called CLA standard, derived from a collective labor agreement [5]. In such cases, the wording of the provisions of a CLA, read in light of the entire text of the agreement, has, in principle, decisive significance. Thus, when interpreting a contract, under certain circumstances, the party’s intention does not play a role insofar as it is not apparent from the contract, but a connection must be sought with more objective points of reference. Here, besides the literal wording of the CLA, any explanation of the CLA and the plausibility of the legal consequences may be relevant.
In later case law, the Dutch Supreme Court clarified the relationship between the subjective standard of interpretation on the one hand and the more objective standard of interpretation on the other. According to the Dutch Supreme Court, there is no contradiction but a smooth transition between the two standards of interpretation [6]. It is therefore not a choice between one or the other standard of interpretation, but when interpreting a contract, all circumstances of the concrete case, valued according to what the standards of reasonableness and fairness entail, are always of decisive importance [7]. Over the years, the Dutch Supreme Court has ruled several judgments in which, depending on the circumstances of the case, there is increasing scope for the application of an objective standard for interpreting contracts. This gives further colour to the lacklustre interpretation standard of the Haviltex Criterion.
According to the Dutch Supreme Court, the application of the Haviltex Criterion results, under certain circumstances, in a more objective standard of interpretation in which, as a starting point, decisive weight should be given to the linguistic/grammatical meaning of the contract. The nature of the transaction, the extent and detail of the contract, the manner of its formation and the provisions contained in the contract such as an entire-agreement-clause [8], are important in this respect [9]. The court is free to reach a tentative linguistic interpretation in the case of a commercial agreement where the parties have been assisted by (legal) expert counsel [10]. In a later judgment, the Dutch Supreme Court nuanced the criterion of interpretation whereby great weight must be given to the linguistic meaning of the chosen wording: after all, in some cases the other circumstances of the case may mean that a different (than linguistic) meaning must be attached to the provisions of the agreement. After all, the Haviltex Criterion remains decisive, the Dutch Supreme Court ruled in 2013 [11].
Nevertheless, a trend seems to have emerged over the years whereby the Dutch Supreme Court is opening the door to a more objective standard of interpretation in an increasing number of cases. In our view, this is a development that fits well with the needs of commercial corporate practice in which risks, in this case mainly the risk of lengthy and costly litigation on the interpretation of a contract, try to be excluded as much as possible. After all, if it is clear to each party what has been agreed, this will prevent disputes regarding the interpretation of the contract.
The Decision
Turning now to the Supreme Court’s Decision of 25 August 2023. The Decision focuses on the interpretation of a settlement agreement containing the following provision:
‘In the execution of the present agreement, the literal text of this agreement, notwithstanding the Haviltex Criterion, shall prevail over any party intentions so that in the event of any dispute arising in any way whatsoever from this agreement, even if only one of the parties deems a dispute to be present, the competent court shall interpret and apply the provisions as contained in the present agreement solely grammatically.’[12]
The Dutch Supreme Court reiterated the Court of Appeal’s consideration of the contractual standard of interpretation declared applicable, to the effect that in the interpretation of provisions from the agreement, only concepts that are not open to multiple interpretations can be referred to. After all, the interpretation of concepts that are open to multiple interpretations would have to involve the intentions of the parties, which is not allowed according to the agreed (objective) standard of interpretation [13].
It seems to follow from the Decision that the parties are free to agree that a contract should be interpreted linguistically and that, in the event the court has to consider the meaning of provisions in the contract, the intention of the parties cannot be involved. In short, the Haviltex Criterion need no longer be decisive in the situation where the parties expressly choose to exclude it. At the same time, it should be noted that no complaint has been made in the procedure about the validity of such an interpretation clause and the Dutch Supreme Court has therefore not been able to comment on that question. However, the Dutch Supreme Court applied the agreed objective standard of interpretation without taking a back seat. Would the Dutch Supreme Court be of the opinion that an interpretation clause is inadmissible under Dutch law, it would be obvious that the Dutch Supreme Court would have devoted some wording to it by, for example, including a consideration to the contrary (overweging ten overvloede). In addition, Advocte General Valk stated in his opinion on the Decision that the prevailing doctrine seems to be that “parties may validly determine the standard by which their contract is to be interpreted and that that interpretation may also be ‘grammatical interpretation’ if desired.” [14] Therefore, based on the above, we believe that such an interpretation clause in a contract may be considered permissible [15].
How can the Decision be placed in the legal framework regarding the interpretation of contracts in the Netherlands?
Until now, the Dutch Supreme Court arrived at an objective standard of interpretation via the key of the Haviltex Criterion. As discussed above, it seems to follow from the Decision that an objective standard of interpretation can also be applicable without application of the Haviltex Criterion, namely if the Haviltex Criterion is explicitly excluded by the parties. In our view, that makes this Decision different from previous Dutch Supreme Court rulings on the doctrine of contract interpretation. Previous judgments mainly gave substance to the Haviltex Criterion, while the Decision focuses on an agreement in which the Haviltex Criterion has actually been excluded. The Decision can thus be placed in the long list of relevant judgments on how (commercial) contracts should be interpreted.
To our knowledge, this is the first time that the Dutch Supreme Court has applied an objective standard of interpretation that the parties have agreed to by means of an interpretation clause. However, in lower case law, by various legal authors and by Advocate General Valk in his opinion on the Decision, it was already assumed that parties are free to include a grammatical interpretation clause in the contract [16]. Concluding, the Decision fits well with the trend whereby parties are increasingly given room to agree on a more objective standard of interpretation if the circumstances of the case give reason to do so. In our view, this is a desirable development.
Why might including an interpretation provision in a contract be desirable?
It may be desirable to include an interpretation provision in certain, complex (acquisition) contracts and financing agreements, stipulating that the contract should only be interpreted grammatically. This way, the risks for the parties are framed and the chances of litigation on the interpretation and content of the contract are reduced. In the applications of the Haviltex Criterion, the possibility always remains that a court concludes, based on the circumstances of the case, that a provision in a contract has a different meaning than its linguistic meaning. This possibility also exists if it is a commercial contract concluded between professional parties assisted by experts [17]. This uncertainty can be avoided by agreeing on a grammatical interpretation standard.
However, a clause by which the parties opt for an objective standard of interpretation does not mean that the court, when interpreting a contract containing such a clause, cannot under any circumstances deviate from what objectively follows from the wording of the contract. After all, it follows mandatorily from Article 6:248(1) of the Dutch Civil Code that a contract has not only the legal effects agreed by the parties, but also those which, according to the nature of the contract, follow from the law, custom or the requirements of reasonableness and fairness [18]. The court thus retains the possibility of filling in gaps in a contract, albeit that, in the case where an objective measure of interpretation has been agreed, this will not be possible through the applicability of the Haviltex Criterion but by applying reasonableness and fairness. The additional effect of reasonableness and fairness only comes into play if the contract contains voids [19]. This is different from the application of the Haviltex Criterion where the starting point is that all circumstances are relevant when interpreting a contract. Thus, the court will not be able to give a different meaning to a provision in a contract on the basis of the supplementary effect of reasonableness and fairness than its linguistic meaning, as long as the provisions in the contract are conclusively worded. This may entail legal certainty for the contracting parties.
Are there any drawbacks to choosing a grammatical standard of interpretation?
A disadvantage of applying an objective measure of interpretation is that the court may give meaning to a provision that does not correspond to the meaning that the parties intended it to have. In addition, language is, by definition, open to multiple interpretations and this may result in the linguistic meaning of the contract not being fully clear and other circumstances having to be taken into account in the interpretation. When drafting contracts, it is therefore of extra great importance that, and certainly those cases where the parties explicitly choose an objective standard of interpretation, great care is taken in their wording. This is also in keeping with the way professional parties contract – they can be expected to make changes to the wording of the contract during the negotiations on the formation of the contract if they believe it does not accurately reflect the parties’ intentions [20].
Does the Decision affect corporate M&A practice?
Corporate M&A practice generally involves lengthy consideration – and negotiation – of how the provisions in a contract are worded. Lawyers strive to include the parties’ intentions in the contract as fully and in no uncertain terms. This prevents a dispute about the meaning of the contract at a later date. Litigation is costly and the outcome of such a dispute is generally uncertain. Uncertainty, and therefore risk, should be avoided as much as possible. In respect of such complex contracts, it is therefore desirable that their interpretation should follow the literal wording of the contract as closely as possible. Our expectation is therefore that the Decision will potentially result in an increase in the use of an interpretation clause in corporate practice.
For further information, please contact:
Laurens Linnewiel, Bird & Bird
laurens.linnewiel@twobirds.com
- HR 25 August 2023, ECLI:NL:HR:2023:1131.
- HR 13 March 1981, ECLI:NL:HR:1981:AG4158 (Ermes/Haviltex).
- HR 13 March 1981, ECLI:NL:HR:1981:AG4158 (Ermes/Haviltex).
- See, for example, HR 1 December 2000, ECLI:NL:HR:2000:AA8721 (Brown/NVC), para 3.4.
- HR 17 September 1993, ECLI:NL:HR:1993:ZC1059 (Gerritse/Hydro Agri Sluiski), para 3.3.
- HR 20 February 2004, ECLI:NL:HR:2004:AO1427 (DSM/Fox), para 4.4.
- HR 20 February 2004, ECLI:NL:HR:2004:AO1427 (DSM/Fox), para 4.5.
- An entire-agreement-clause is a common provision in a commercial contract in which the parties agree that the agreement in question contains all the agreements that apply between the parties involved.
- HR 19 January 2007, ECLI:NL:HR:2007:AZ3178 (Meyer Europe/PontMeyer), para 3.4.3.
- HR 29 June 2007, ECLI:NL:HR:2007:BA4909 (Deksen/Homburg), para 4.1.3.
- HR 5 April 2013, ECLI:NL:HR:2013:BY8101 (Lundiform/Mexx), para 3.4.3.
- HR 25 August 2023, ECLI:NL:HR:2023:1131, para 2.1; please note that the provision has been translated to English but originally, the provision was in the Dutch language.
- HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.2.2.
- Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, to HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.4.
- An interesting legal question that remains undiscussed in the Decision is the question by which standard of interpretation an interpretation clause should be interpreted. For the sake of the scope of this article, we will not discuss this further.
- R.P.J.L. Tjittes, Commercieel Contractenrecht, Den Haag: Boom Juridisch 2022, p. 452 and footnote 571 there; M. Wallart, ‘Drafting tips & skills: het contractueel regelen van de uitleg’, ORP oktober 2018, p. 28; Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, at HR 25 Aug 2023, ECLI:NL:HR:2023:1131, para 3.4; H.N. Schelhaas, ‘Het Haviltex-criterium en de uitleg van commerciële contracten. Het Mexx/Lundiform-arrest nader beschouwd’ ORP oktober 2013, p. 40.
- HR 5 April 2013, ECLI:NL:HR:2013:BY8101 (Lundiform/Mexx), para 3.4.3.
- There is debate in the legal literature as to whether Section 6:248 of the Civil Code is of mandatory law. We concur with the view of Advocate General Valk as expressed in the opinion accompanying the Decision, namely that Section 6:248 of the Dutch Civil Code is mandatory law and cannot be excluded by contract: Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, to HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.6.
- H.N. Schelhaas, ‘Het Haviltex-criterium en de uitleg van commerciële contracten. Het Mexx/Lundiform-arrest nader beschouwd’ ORP 1 oktober 2013, p. 40.
- R.P.J.L. Tjittes, Commercieel Contractenrecht, Den Haag: Boom Juridisch 2022, p. 327.
