Dutch Supreme Court grants parties full discretion to decide on how a contract should be understood

Introduction

The principle of good faith (reasonability and fairness) plays an important part in Dutch contract law. A provision of a contract may be restricted or excluded if said provision is considered unreasonable. Conversely, new rights and obligations may be reasonably created which were not originally intended by the parties to the contract.

Good faith and the interpretation of contracts

Good faith also plays a crucial role in the interpretation of contractual provisions.

Under Dutch contract law, the question of how a written contract should be interpreted cannot be answered solely on the basis of a purely linguistic or textual interpretation of the provisions of that contract.

The reasonable expectations of the parties and the meaning given to the words are decisive for the interpretation of what has been agreed upon by the contracting parties. The specific circumstances of the case, the social circle that the contracting parties belong to, and their legal knowledge are relevant factors amongst others.

Abovementioned criterium is applied by the court at its discretion and until recently it was widely accepted that the application thereof cannot be excluded by mutual agreement.

The decision of the Dutch Supreme Court of August 25, 2023 (ECLI:NL:HR:2023:1131), puts an end to this generally accepted rule.

Dutch Supreme Court decision of 8/25/'23

A divorced couple concluded a settlement contract in which it was agreed upon that the man would pay alimony to the woman until she had reached the retirement age, namely on May 24, 2021. The actual date on which the woman reached the retirement age was May 24, 2022.

The settlement contract included a specific provision on the manner in which the contract should be interpreted which stated that the contract should be interpreted according to its exact wording.

The woman argued that the date mentioned in the contract of May 24, 2021, was an error and claimed that the man was required to pay alimony until her actual retirement (AOW) age.

The court in first instance followed the general rule and applied its own reasonable interpretation of the provision and concluded that the man was reasonably required to pay alimony to the woman until the date of her retirement age of May 24, 2022.

The appeal court, however, respected the interpretation provision in the settlement contract and decided that the man was only required to pay alimony until May 24, 2021, because said date was unequivocal and explicitly mentioned in the settlement contract as being the end-date of alimony payment by the man.

Surprisingly, the Supreme Court confirmed the decision of the appeal court.

Consequence(s) of the Supreme Court Decision

The Supreme Court decision seemingly opens the possibility to leave it entirely up to the parties on the manner in which the contract should be interpreted, including the possibility to fully exclude good faith and parties' intentions and to interpret the contract purely grammatical.

The decision is especially consequential for non-commercial contracts concluded by non-professional parties without the assistance of attorneys, as the court is inclined to rely upon the grammatical interpretation of contractual provisions in case of commercial contracts concluded by professional parties with the assistance of attorneys.

It is noted that the Supreme Court Decision has consequences for the interpretation of contracts, only. Restrictions and supplementation of contractual provisions based on good faith are prescribed by law and cannot be mutually excluded by the contracting parties.