Short Reads

Termination clauses in agreements and Dutch standards of reasonableness and fairness

Termination clauses in agreements and Dutch standards of reasonablenes

Termination clauses in agreements and Dutch standards of reasonableness and fairness

21.02.2018 NL law

How can a party terminate an agreement? With the exception of certain specific agreements (i.e. employment or rent), the Dutch Civil Code (DCC) does not provide rules on termination as such. Whether and under what conditions a party is entitled to terminate an agreement is determined by the agreement itself and the general standards of reasonableness and fairness ("redelijkheid en billijkheid") in Article 6:248 DCC. In its decision of 2 February 2018 (ECLI:NL:HR:2018:141), the Dutch Supreme Court further developed its case law on the subject matter.

A patent licence agreement with a termination clause

Goglio and SMQ Group concluded a licence agreement with respect to certain patent rights held by SMQ for a term of fifteen years. The parties included a termination clause stating that if either party believed the other party to be in default under the agreement, the non-defaulting party had to give 60 days' written notice to the other party in which to remedy the default. If the default was not remedied within 60 days, the notifying party was entitled to terminate the agreement (effective after another period of 30 days) and a break-up fee.

Proceedings after termination by SMC

In 2013, Goglio was late paying the royalty fee for the previous year. As a result, SMQ gave notice to Goglio and, after 60 days had passed without payment, SMQ terminated the agreement. Goglio did not agree and refused to pay the break-up fee. In court proceedings initiated by SMQ, Goglio argued that the termination of the licence agreement by SMQ was invalid. This defence was not accepted by the District Court and Goglio was ordered to pay the break-up fee.

Ruling of the Court of Appeal

The Court of Appeal upheld the decision of the District Court and ruled that the termination clause in the licence agreement was in every sense reasonable ("alleszins redelijk"). The Court of Appeal took into account that Goglio and SMQ were professional parties and that Goglio was clearly in default (by failing to pay the royalty fee in time). It also took into account that the term of 60 days for Goglio to correct its default was long enough, Goglio's default was easy to correct (by simply paying) and the total term of 90 days agreed in the clause before actual termination was sufficient time for Goglio to make preparations. The Court of Appeal rejected Goglio's argument that SMQ was only entitled to terminate after a reasonable balancing of interests. It added that if parties have included a termination clause in their agreement, termination would only be impermissible if invoking termination was unacceptable ("onaanvaardbaar") according to the standards of reasonableness and fairness, which was not the case.

Goglio's complaint before the Dutch Supreme Court

Before the Supreme Court, Goglio complained that the Court of Appeal had only applied restrictive standards of reasonable and fairness (a strict test) in assessing whether invoking the termination clause by SMQ was unacceptable. According to Goglio, as the agreement included a termination clause, the Court of Appeal should have also considered whether supplementary standards of reasonableness and fairness (less strict) implied that SMQ was only allowed to terminate the agreement on compelling grounds, after observing a certain termination period or paying damages or both.

Ruling of the Dutch Supreme Court

In response to Goglio's complaint, the Supreme Court provided an overview of how  supplementary and restrictive standards of reasonableness and fairness work with respect to terminating agreements:

  1. In principle, an agreement for an indefinite term that does not provide for termination can be terminated. However, on the basis of supplementary standards (Art. 6:248.1 DCC) certain conditions may apply to the termination, depending on the nature of the agreement and the circumstances of the case (i.e. only on compelling grounds, after observing a certain termination period or combined with damages or both).
  2. If an agreement includes a provision for termination, supplementary standards may lead to further conditions being attached to the termination, but only if there is room to do so in the agreement.
  3. In both sub 1 and 2 above, restrictive standards (Art. 6:248.2 DCC) may prevent a party from invoking termination of an agreement on the grounds that it would be unacceptable given the circumstances of the case.
  4. Parties may agree that an agreement for an indefinite term cannot be terminated. If one of the parties invokes the clause not to terminate, the other party may invoke the restrictive standards, arguing that invoking this clause is unacceptable, or terminate or alter the agreement via the doctrine of unforeseen circumstances (Art. 6:258 DCC).

For Goglio and SMQ, the above overview means that supplementary standards of reasonableness and fairness may add further conditions to those actually included in the termination clause in the licence agreement (sub 2). Restrictive standards of reasonableness and fairness may prevent a party from invoking the termination clause on the grounds that it would be unacceptable (sub 3). Yet all of this did not help Goglio. According to the Supreme Court, the Court of Appeal had sufficiently acknowledged both standards, by holding that the termination clause in the licence agreement was in every way reasonable and only impermissible if invoking termination was unacceptable. The Supreme Court therefore rejected Goglio's complaint.

What about agreements for a definite term without a termination clause?

In its overview, the Supreme Court did not separately address termination of an agreement for a definite term without a termination clause. It only addressed termination of an agreement for an indefinite term without a termination clause (sub 1 and 4) and agreements in general with a termination clause (sub 2 and 3). Given the fact that the Supreme Court did not separately address termination of an agreement for a definite term without termination clause, one could wonder whether the specific regime for termination of such agreements still stands, in addition to sub 1-4. In its case law so far, the Supreme Court has held that termination of such an agreement is only possible via the doctrine of unforeseen circumstances. These are circumstances that the parties have not provided for in their agreement and are such that, in view of the standards of reasonableness and fairness, the other party may no longer expect the agreement to be maintained without adjustment.

A change of course?

To me, it seems that this case law on terminating an agreement for a definite term without a termination clause still stands. Presumably, if the Supreme Court wanted to  change course it would have done so explicitly. Maintaining this case law would also be in line with the specific regime for terminating an agreement for an indefinite term which parties have agreed cannot be terminated, in sub iv of the Supreme Court's overview. Such an agreement can arguably be compared to an agreement for a definite term without a termination clause, because in the latter case, the parties effectively agree that the agreement during this definite term cannot be terminated. The criterion to terminate an agreement for an indefinite term that parties have agreed cannot be terminated in sub iv could be compared as well, even though this criterion is arguably a little bit broader (unforeseen circumstances and restrictive standards of reasonableness and fairness).

Conclusion

The Supreme Court's ruling is a reminder for parties that a termination clause may be supplemented with conditions that the parties did not agree upon when concluding their agreement. In addition, parties may find themselves prevented from invoking a termination clause that they have agreed upon. At the same time, the Supreme Court's ruling in the case of Goglio and SMQ also shows that Dutch courts appear to be willing to exercise restraint in intervening in commercial agreements between professional parties. It seems termination clauses might survive Dutch standards of reasonableness and fairness after all.

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