Loyens loeff sabine kerkhof

THE NETHERLANDS – UNITED STATES

A BRIEF OVERVIEW OF THE KEY DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW

Sabine KerkhofAttorney in Rotterdam, the Netherlands since 2001Practiced in the New York office in 2005 - 2009 April 18, 2012

LOYENS & LOEFF

• Independent full-service law firm specialized in providing legal and tax advice.

• Home market: Benelux.

• Worldwide: 1,500 employees, including more than 800 legal and tax experts.

• 12 branches in the major international financial centers, such as London, Tokyo and New York.

• Recently opened a branch in Hong Kong.

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INTERNATIONAL TRADE

• The economies of the Netherlands and the US largely depend on international trade.

• The Netherlands are one of the major investors in the United States and, vice versa, are the United States the largest investor in the Netherlands. As a result, a large number of commercial contracts is concluded between Dutch and US contract parties.

Source: 'Economic Ties between the USA and the Netherlands' of the Dutch embassy in Washington DC (see: http://economicties.org/key-findings/).

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CONTRACTING WITH A US COUNTERPART (1)

When contracting with a US counterpart, the commercial contract will usually provide which laws (Dutch law or the laws of a certain US state) govern the agreement and any disputes arising out of or in connection therewith.

While these two legal systems have many points of convergence, there are some important differences in the way they approach certain key issues regarding the performance and interpretation of contractual duties and rights.

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CONTRACTING WITH A US COUNTERPART (2)

Three important differences between Dutch and US contract law are:

1. pre-contractual liability;

2. interpretation of contractual duties and rights; and

3. penalties or liquidated damages.

Before I will discuss these differences, I will briefly explain:

4. the consequences of the choice of law for either Dutch law or the laws of a certain US state; and

2. the consequences of a submission to jurisdiction of a Dutch or a US court or to arbitration.

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GOVERNING LAW (1)

Question: which law governs the commercial contract concluded between a Dutch and a US counterpart?

Note: US contact law does not exist. In the US contract law is usually a matter of an individual state’s substantive law. Most US states have enacted the Uniform Commercial Code (UCC) which contain amongst others rules regarding sales contracts.

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GOVERNING LAW (2)

1. Choice of law

In principle, when the commercial contract contains a choice of law provision, the chosen law will govern the contractual rights and obligations contained therein.

A Dutch court may, however, give effect to mandatory rules the laws of another jurisdiction with which the situation has a close connection, if and insofar as, under Dutch law or of the laws of that other jurisdiction, those rules must be applied, irrespective of the chosen law.

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GOVERNING LAW (3)

2. United Nations Convention on Contracts for the International Sale of Goods

The Netherlands and the US are party to the United Nations Convention on Contracts for the International Sale of Goods. The UN Convention provides a uniform text of law for international sales of goods and applies to contracts concluded between international parties, unless the parties have explicitly excluded the applicability of the UN Convention. The UN Convention does not apply to contracts for services.

In the event that the commercial contract does not exclude the applicability of the UN Convention, the UN Convention will determine e.g. the validity of the commercial contract and the non-performance by a party of his obligations thereunder. The chosen law continues to play a (minor) role as certain matters (e.g. compatibility with the public policy) are not governed by the UN Convention.

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GOVERNING LAW (3)

To the extent that the commercial contract does not contain a choice of law provision, but excludes the applicability of the UN Convention, the laws of the jurisdiction with which the matter has the closest connection will be applied by a Dutch court.

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CHOICE OF VENUE; JURISDICTION/ARBITRATION (1)

Question: which court or tribunal has jurisdiction to hear disputes arising out of or in connection with the commercial contract?

Jurisdiction of a Dutch or a US court

In principle, the court designated in the commercial contract as the court that has exclusive jurisdiction to hear any dispute arising out of or in connection therewith, is valid and binding under Dutch law insofar as such laws are applicable. The parties may always bring claims before the provisional measures judge (voorzieningenrechter) of a competent Dutch court.

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Note: There is no treaty between the Netherlands and the US regarding the acknowledgement and enforcement of a judgment rendered by a Dutch court in the US and vice versa. In the absence of an applicable treaty, a judgment rendered by a US court will not be enforced by Dutch courts. In order to obtain a judgment which is enforceable in the Netherlands the claim must be re-litigated before a competent Dutch court. The Dutch court will, under current practice, generally grant the same judgment without re-litigation on the merits.

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Arbitration

If the commercial contract contains a provision pursuant to which the parties agree to submit disputes to arbitration in the US, the enforcement in the Netherlands of an arbitral award rendered in the US will be subject to the provisions of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of New York, 1958.

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DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW: PRE-CONTRACTUAL LIABILITY (1)

Question: does pre-contractual liability exist for parties who have negotiated a contract, but in the end no contract was signed?

USA

General rule: no liability for the contents of a contract that has not been signed or otherwise entered into.

However: liability for the performance of the contract terms may be incurred by a party if that party has induced its counterpart to rely upon a representation that the contract will be executed.

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For example, if one party negotiating an agreement provides assurances or other representations to its counterpart that it will sign a contract, and that counterparty commits an act or relies in some manner upon that promise to sign the contract, the party who made such representations may be held liable for the performance of that contract or other damages even though the contract was never formally entered into. Other acts inducing a party to rely on some or all of the conditions found within an unsigned contract may also cause liability for the inducing party to arise.

Aside from issues of reliance described above, under the relevant principles of common law parties generally will not be held to the terms of an agreement prior to its formal execution.

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THE NETHERLANDS

Under Dutch contract law a party may be held liable for the performance of the terms of a contract if such party breaks off the contract negotiations during the advanced stages of contract negotiations.

Unlike in the US, this type of pre-contractual liability does not depend on whether there has been reliance by one party on another's representations - but rather it is a question of contractual "good faith". According to Dutch case law, the pre-contractual good faith principles found within Netherlands contract law may prohibit parties from walking away from a contract where they have negotiated the terms to a fairly advanced level.

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DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:

PRE-CONTRACTUAL LIABILITY (4)

This Netherlands legal doctrine allows for a negotiating party who has not signed a contract to be held liable for the performance of the terms thereof, if it is found that this party has broken off the negotiations in bad faith. Remedies for this aspect of pre-contractual liability have been generally accepted in Dutch case law to include variable levels of possible damages. Where a party is found to have negotiated in bad faith they may be held liable to pay compensation ranging from reimbursing a counterparty for the costs the of negotiations to full damages for lost profits (the latter being considered an extreme result).

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DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW: INTERPRETATION (1)

Question: can draft versions of a contract, which were exchanged during negotiations prior to the signing of the contract, be used to explain the intent of the parties?

USA

Grammatical interpretation

Where the language of a contract is plain and unambiguous its meaning should be determined without reference to extrinsic facts or aids. The intention of the parties must be gathered from the language of the executed version of the contract, and from that language alone.

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Parol evidence rule

In addition, US contract law generally follows the parol evidence rule. According to the parol evidence rule a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence of earlier or contemporaneous agreements that might add to, vary, or contradict the writing. This rule operates to prevent a party from introducing previous extrinsic evidence of negotiations to modify the content or explain the meaning of an express agreement.

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Exceptions

Exceptions to this rule exist, for example where it can be proven from the contract language itself that an ambiguity exists. Parties must, however, meet a high threshold before they are allowed to introduce extrinsic evidence such as prior drafts of a contract or letters of intent signed before entering into the main contract.

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THE NETHERLANDS

The interpretation of contract provisions under Dutch law is, according to the Dutch Supreme Court, not merely governed by the grammatical interpretation of the text of a contract (although the textual analysis may be persuasive).

The prevalent rule of contract interpretation under Dutch law is that the interpretation of a term is guided by the meaning which the parties in the given circumstances might reasonably attribute to that clause. Essentially this means that an investigation may be conducted into what meaning the parties attributed to the relevant term at the time of contracting.

Events which occurred before contract closure will play a central role in ascertaining the intent of the parties and the evidence introduced on this issue will often include prior drafts of the contract which were negotiated but not signed, as well as correspondence exchanged between the parties prior to the signing of an agreement.

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DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW: PENALTIES OR LIQUIDATED DAMAGES (1)

Often an international commercial contract contains a provision which requires one party to pay to the other party a specified sum in the case of default.

Example:

Upon the occurrence of any event which constitutes a breach of the duties of party A, it shall without notice of default being required, forfeit to party B a penalty in the amount of EUR 50,000 and, in addition, a penalty in the amount of EUR 5,000 for each day or part thereof that aforementioned breach continues.

Question: Is such clause enforceable in the US and in the Netherlands?

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USA

In the US a distinction must be made between:

1.penalties; and

2.liquidated damages.

A clause requiring one party to pay the other party a sum of money as a punitive measure/punishment for failure to perform a contractual obligation or duty, is regarded as a penalty. In the US such penalty clause is held to violate public policy and will not be enforceable.

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A penalty clause must be distinguished from a clause requiring liquidated damages to be paid by a party breaching its contractual duties/obligations towards the other party.

The distinction between such clauses is that a liquidated damages amount is a defined sum within a contract which is a just or reasonable estimation of the damage which a party would likely suffer in the event of a breach. In contrast, a penalty clause does not bear a connection to what may be reasonably anticipated as just compensation for a breach of contract - but rather is intended to act as security against non-performance or as a means of punishing non-performance. Liquidated damages provisions are enforceable in contracts governed by the law of most American states.

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THE NETHERLANDS

The Dutch Civil Code contains the following definition of a penalty clause:

"Any clause which provides that an obligor, should he fail in the performance of his obligation, must pay a sum of money or

perform another obligation, is considered to be a penalty clause, irrespective of whether this is to repair damage or only to encourage performance."

Pursuant hereto, penalty clauses as described in the Dutch Civil Code are enforceable. However, a contractual penalty may be mitigated by the court.

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MISCELLANEAOUS

1. Employment

2. Product Liability

3. Discovery in legal proceedings

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EMPLOYMENT

In the event that the Dutch company decides to set up a branch or a US legal entity through which it will enter the US market, it may wish to engage personnel for e.g. the marketing and sale of its products in the US.

USA – THE NETHERLANDS

Contrary to the Netherlands, most employment in the US is “at-will”, which means that there is no contractual agreement between the employer and the employee. Either party can terminate the relationship at any time, without showing cause and without incurring any liability. There are, however, some important exceptions hereto:• collective bargaining agreements negotiated by labor unions;• employment contracts which are occasionally used for key employees;• termination involving unlawful discrimination or violation of public policy;• companies with written internal policies or employee handbooks that

confer broader rights to employees, such as notice periods and severance.

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PRODUCT LIABILITY

When a Dutch company sells goods to a US counterpart and a person is injured as the result of using such product, he or she may sue the Dutch company to recover money to compensate for the injury. This area of law is known as products liability. Especially the high damages awarded in product liability cases, makes US product liability different from Dutch product liability.

Both in the US and in the Netherlands the following applies:

Everyone in the distribution chain can be sued for the full amount of damages; from the manufacturer, to the retailer who sold the product, to the end user. However, just because the product distributor and retailer can usually be sued does not mean that they are ultimately responsible even though they may end up paying some or all of the damages. Ultimately, it is only the party that caused the injury, that is responsible.

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LIMITATION OF EXPOSURE (1)

1. Product safety plan.

To limit the Dutch company’s exposure to product liability suits in the US, it should develop a plan that is aimed to address real safety concerns and also to prepare the company for litigation.

The product safety plan should (amongst others) include:

a) the company’s and its suppliers’ manufacturing quality control programs;

b) the adequacy of the company’s product warnings and instructions; and

c) the adequacy of the company’s accident reporting and investigation procedures.

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LIMITATION OF EXPOSURE (2)

2. Insurance.

The Dutch company should obtain insurance against product liability claims in the US. The fact that the Dutch company has a product safety plan may decrease the amount of insurance premiums due.

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DISCOVERY (1)

In the event that the Dutch company has a dispute with its US counterpart regarding the performance of the commercial contract, it may be faced with discovery.

Discovery is the pre-trial phase in a lawsuit in which each party can obtain evidence from the opposing party by means of discovery devices.

Discovery should enable a party to procure evidence in admissible form directly relevant to the claims and defenses asserted in the pleadings through the most efficient, non-redundant, cost-effective method reasonably available. Discovery should not be an end in itself; it should be merely a means of facilitating a just, efficient and inexpensive resolution of disputes. Often, however, discovery is used to ‘convince’ the other party to settle the dispute.

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DISCOVERY (2)

The discovery devices include:

1.requests for answers to interrogatories;

2.requests for production of documents; and

3.requests for admissions and depositions.

Discovery in the US is mostly performed by the litigating parties themselves, with relatively minimal judicial oversight.

A duty to preserve evidence arises when there is knowledge of a potential claim, namely when litigation is pending or imminent, or when there is reasonable belief that litigation is foreseeable.

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DISCOVERY (3)

Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold to ensure preservation of relevant documents.

Sanctions are appropriate when there is evidence that a party’s spoliation of evidence threatens the integrity of the court.

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INTERNATIONAL TRANSACTIONS (1)

A Dutch company that wishes to do business in the US can structure its US business activities in various ways:

a. set up a separate US legal entity, e.g. a corporation (Inc.), or a limited liability company (LLC);

b. enter into a joint venture with a US counterpart (either through a jointly owned legal entity or based on an agreement); or

c. enter into commercial contracts with US counterparts.

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Distribution or agency

Often Dutch companies sell their goods through a US distributor or a US agent, whereby:

1. the distributor will (directly) purchase the products from the Dutch company and resell them on the US market for its own risk and account; and

2. the agent will sell the Dutch company’s products in the name and on behalf of the Dutch company. In return for his services, the agent will receive a commission.

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Direct sales

• Alternatively, the Dutch company may sell its goods in the US by entering into sales contracts with customers in the US directly.

• Advantage of the direct sale of goods is that the Dutch company does not have to pay the distributor or agent for its services.

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Loyens & Loeff is the only Benelux-based firm listed in the American Lawyer Global 100.

Loyens & Loeff is ranked first, based on the number of transactions, in the Mergermarket Benelux M&A League Table for 2011. Consistent top 2 ranking since 2006.

This Benelux firm is synonymous with expertise in tax law ... clients appreciate the firm’s high-level service and expertise in all areas of tax law".

Loyens & Loeff achieves the highest score for tax advice in the Netherlands in International Tax Review’s World Tax 2010.

Once again Loyens & Loeff is # 1 in PropertyNL’s compiled list of real estate lawyers based on numbers of lawyers. We head the list way ahead of our competitors.

Loyens & Loeff again scored highly in the Legal 500 in 2011: "Loyens & Loeff is outstanding, with its width of services and large network of almost 400 tax specialists".

Loyens & Loeff Belgium was selected as Belgium Tax Firm of the Year by the professional journal International Tax Review.

Loyens & Loeff has been named the ‘Best Benelux Law firm’ of 2011 by the jury of the International Legal Alliance Summit Awards (ILASA).

International Recognition & Awards

What Others Say About Us

Loyens & Loeff is a recommended law firm in the 2012 edition of the IFLR Guide.

Loyens & Loeff ranks second in Overfusies.nl's League Tables for 2010, in terms of number of deals.

Amsterdam, 16-3-2012 Willem Bongaerts

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Contact details

Sabine Kerkhof

Loyens & Loeff N.V.

Blaak 31, 3011 GA Rotterdam

P.O. Box 2888, 3000 CW Rotterdam

T: +31 10 224 61 67

M: +31 653 58 80 74

[email protected]

© Willem Bongaerts 2011

Any advice contained herein (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.

Although this information was composed with the greatest possible diligence, Loyens & Loeff cannot accept any liability for consequences arising from the use of this information without its cooperation.

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