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Negotiating a contract under conditions; subject to approval

Negotiating a contract under conditions; subject to approval

Negotiating a contract under conditions; subject to approval

28.01.2021 NL law

In Dutch legal practice, one of the most common conditions is the reservation of approval or the “subject to approval” clause. A “subject to approval” clause provides a condition under which an agreement will be concluded (totstandkomingsvoorwaarde), a suspensive condition (opschortende voorwaarde) or a resolutive condition (ontbindende voorwaarde). This depends on the wording of the clause and the circumstances of the case.

In most situations, professional contracting parties negotiate subject to the approval of supervisory bodies within the company as expressed by the works council, supervisory board or the general meeting of shareholders.

The situation may arise, however, in which professional contracting parties negotiate subject to the approval of the competent body itself; this means the board or another representative of the company. In this case, the reservation of approval will generally mean a suspensive condition. Whether or not this clause is valid is the subject of this blogpost.

Subject to approval and potestative condition

A potestative condition entails that parties negotiate subject to the prospective intent or will of only one of the parties (summarised as “I am bound under the condition that I want”). In Dutch literature, most writers argue that a reservation of approval of the competent body itself is a potestative condition. Such potestative conditions are not valid under Dutch law.

In such a case, no valid obligations will arise between the contracting parties and the agreement will remain in the pre-contractual phase; see Brunner in his note with regard to the Supreme Court 24 March 1995, NJ 1997/569. The Court can investigate whether breaking off negotiations in such a case is unlawful according to standards of reasonableness and fairness (art. 6:248 DCC).

See also District Court ‘s Hertogenbosch 14 April 2018 ECLI:NL:RBSHE:2008:BD0037 (Essent Vastgoed B.V. / A.H.M. Rijkers B.V.) where Essent’s representative had confirmed the sale, in great detail, in a letter. A designated representative had written in the letter: “This contract is concluded subject to the approval of the board.” The board however had not subsequently approved the transaction. During proceedings, Essent invoked the aforementioned clause. The Court however ruled that the reservation of approval was not valid since the reservation of approval was a potestative condition, and therefore no agreement had yet been concluded. The Court then investigated whether refusing approval was acceptable according to standards of reasonableness and fairness (art. 6:248 DCC).

Some writers however, argue that the reservation of approval is not a potestative condition in such a case. They point out that a potestative condition means that parties negotiate subject to the prospective intent or will of only one of the parties. If the condition also includes one or more other circumstances, for example the financial feasibility of the transaction for one of the parties, then there is no potestative condition.

They argue that since the board’s decision has to be acceptable according to standards of reasonableness and fairness (art. 6:248 DCC), the decision includes more circumstances than solely the prospective intent or will of only one of the parties. Therefore, the board’s decision cannot be regarded as arbitrary, and hence according to these writers there is no question of a potestative condition. See also AG Wissink’s opinion in Supreme Court 1 June 2012 ECLI:NL:HR:2012:BV1748 NJ 2012/471 (Gemeente Almere/Flevoland Invest e.a.) regarding this difference of opinion in literature and jurisprudence (nr.  4.8.1- 4.8.3).

Other writers, however, point out that where and how in the organisation the reservation of approval is made, rather than focusing on the nature of the board’s decision. They make a distinction between a reservation of approval from the competent body itself (“I am bound under the condition that I want”) and a reservation of approval from a hierarchically higher competent body (exemplified by the board) with reference to the results of negotiators who are competent to represent the company as well. In the first case, there is a suspensive potestative condition while in the latter case the conditions are not met for a suspensive potestative condition. This opinion connects well with Dutch legal practice as negotiations are often conducted by representatives at a lower (hierarchical) level, subject to approval of the board.

Finally, the general principle is that a reservation of approval of supervisory bodies within the company, exemplified by the works council, supervisory board or the general meeting of shareholders is not a potestative condition. These supervisory bodies are considered “third parties” within the company in this respect. Such a condition therefore is valid.

Conclusion

Most writers are of the opinion that, in the case of a reservation of approval of the competent body itself, a suspensive potestative condition exists – and suspensive potestative conditions are not valid. In Dutch legal practice, it is therefore recommended to lay down clearly a non-limitative list of circumstances that the competent body should consider (for example, the financial feasibility of the transaction) in its decision to grant or withhold approval to clarify that the decision includes more circumstances than solely the prospective intent or will of only one of the parties. In that case a suspensive potestative condition does not come into play. Another possibility is to include a reservation of approval of supervisory bodies within the company, instead of the competent body itself.

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