Interpretation of Contractual Provisions under Dutch law

On 25 August 2023, the Dutch Supreme Court essentially confirmed that parties can agree on their own standard for interpreting the provisions of an agreement. In this blogpost, Marcel Willems and Joanne Uiterwijk (Commercial Contracting and Dispute Resolution) will discuss the Supreme Court's ruling and explain its importance for anyone drafting contracts.

Facts

In 2008, a couple gets divorced and the District Court orders the man to pay the woman alimony in the amount of EUR 160 per month. The man and woman subsequently enter into a settlement agreement.

In summary, the preamble of the settlement agreement provides that in the event of a dispute, the competent court must interpret the provisions of the agreement in accordance with their grammatical meaning and is not to take into account parties' intentions (the so-called Haviltex-standard; further explained below). Thus, the preamble contains its own contractual interpretation clause.

In addition, the settlement agreement provides: "The alimony will end effective the date on which the woman reaches the pension age, i.e. 24 May 2021."

Rules of Interpretation

In the Netherlands, there are two standards for interpreting the provisions of an agreement: the Haviltex-standard and the CLA-standard.

The Haviltex-standard provides that when interpreting contractual provisions, not the purely grammatical interpretation of the provisions of the agreement is decisive, but rather the meaning which both parties could reasonably assign to these provisions and what they could reasonably expect from each other in the given circumstances. In this regard, it can be of importance to which social circles parties belong and the legal knowledge that can be expected from such parties.

If, however, the provisions of an agreement are intended to affect the legal position of third parties (as is the case with, for instance, a collective labour agreement or CLA), without those third parties being a party to the negotiations and able to influence the content or wording of that agreement, the wording of the relevant provisions, read in the light of the entire text of the agreement is, in principle, decisive when the underlying intentions are not clear to those third parties. This is the so-called the CLA-standard.

The Haviltex-standard and the CLA-standard are not on opposite sides of the spectrum. There is in fact a smooth transition between the two standards. Applying the CLA-standard does not lead to a pure grammatical interpretation. When applying the CLA-standard to a specific text, wording used elsewhere in the text and the plausibility of the legal consequences to which the various possible text interpretations would lead, may be taken into account. A written explanation accompanying the CLA should be taken into account as well.

Dispute

The man and the woman disagree about the date on which the man's obligation to pay alimony will cease to exist. The woman initiates legal proceedings and claims that the date mentioned in the settlement agreement (24 March 2021) is to be considered an error. According to the woman, it was the intention of parties that the man's obligation to pay alimony should continue until the woman receives her pension.

Therefore, she asks that the period during which the man must pay alimony does not terminate on the date mentioned in the agreement, but is to be extended to the date on which the woman reaches the state pension age (which is 25 May 2024) or the day on which she reaches the age of 65 (which is 25 May 2022 and which was the state pension age when they agreed to the provision).

District Court and Court of Appeal

The District Court agrees with the woman and rules that the man must pay alimony until the date on which the woman reaches the age of 65. The Court of Appeal does not follow the District Court decision and rules that the date mentioned in the agreement is not open to multiple interpretations. The term pension age, however, can be interpreted in multiple ways, which – given the exclusion of the Haviltex-standard – is not allowed. Therefore, the man's obligation to pay alimony ends on 24 May 2021.

Supreme Court

The woman complains that according to the Supreme Court's previous case law, even in case of a grammatical interpretation, the Court must take into account the plausibility of the legal consequences of the interpretation. According to the woman, the Court of Appeal did not sufficiently consider her arguments in this respect. The woman did not complain that the Court of Appeal interpreted the contractual interpretation clause in a way that was incorrect or incomprehensible.[1]

The Supreme Court dismisses the woman's complaint and notes that the preamble of the agreement contains a contractual interpretation clause, which provides that contrary to the Haviltex-standard, the literal text of the agreement prevails over parties' intentions.

Considering the interpretation by the Court of Appeal of the interpretation clause, it was not required to address the woman's claims. After all, these claims relate to the intentions of parties, which, according to the preamble of the agreement, cannot be taken into account. 

Lessons Learned

The Supreme Court's ruling shows that parties can agree on their own contractual interpretation standard for interpreting the provisions of an agreement. This is something to bear in mind when drafting agreements.

Important to note, however, is that the Supreme Court's ruling does not provide that the Haviltex-standard can be excluded when interpreting the interpretation clause itself. Therefore, one must be very careful when drafting an interpretation clause because interpretation of an interpretation clause may not lead to the desired outcome. 

[1] The Court of Appeal seems to interpret the contractual interpretation clause in a way that provides that interpretation of a provision in accordance with its grammatical meaning entails that one must only consider the elements that are not subject to multiple interpretations.