The Netherlands and the United States are two jurisdictions in which enormous amounts of international business take place. Their respective laws of contract  (In the United States contract law is usually a matter of an individual state's substantive law.) will often be applied to international commercial agreements. 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.

This piece considers briefly three areas of difference between "American" and Netherlands contract law. (My thanks to Stan Putter for his assistance in preparing this entry)

Many international agreements have clauses which require one party to pay to another a specified sum in the case of default - these clauses are sometimes referred to as "penalties" or liquidated damages. Are such clauses enforceable?

 A.       USA

In the United States the common law rule prohibiting the enforcement of contractual penalties is upheld. A penalty is understood generally under the Restatement of Contract Law as a clause requiring one party to pay to another a sum of money as a punitive measure or punishment for failure to perform a designated act under the terms of the contract (a clause may also qualify as a penalty when it is used to induce performance or provide security for performance). Such clauses have historically been held in American jurisprudence to violate public policy.

 Distinguished from a penalty condition is a clause requiring liquidated damages to be paid by a breaching party to its counterpart. The distinction between a  liquidated damages clause and a penalty clause is that a liquidated damages amount is a defined sum within a contract (usually defined expressly within its conditions) 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 nonperformance. Liquidated damages provisions are enforceable in contracts governed by the law of most American states.

The distinction between liquidated damages and a penalty reaches beyond simply a difference in terminology. If the intent and effect of a term which is labelled as a liquidated damages clause is found to be similar to a penalty, such a term may not be enforceable under American contract law principles.

1.  
   1. B.   NETHERLANDS

Netherlands civil law explicitly defines penalty clauses. Article 6:91 of the Netherlands Civil Code ("NCC") is phrased as follows:

"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." 

Under Netherlands law, penalty clauses as described above are enforceable. However, the Netherlands Supreme Court has found in the past that although penalty clauses are in principle valid, the constraining function of reasonableness and fairness (article 6:94 NCC) may prohibit the obligee from claiming the benefit of a full penalty when such a claim may be unreasonable in the given circumstances.[1]  

May parties who have not signed a contract still be held liable for its contents? In other words, does pre-contractual liability exist for parties who have only negotiated a contract, but for one reason or another not signed it? 

A.         USA

Generally under American contract law principles parties will not be liable for the contents of an agreement which has not been signed or otherwise formally entered into. Nevertheless, under the common law followed within the United States liability for the performance of the terms found within a contract which is yet unsigned may be incurred by a party if that party has induced its counterpart to rely upon a representation that the agreement will be executed. For example, if one party negotiating an agreement provides assurances or other representations to its counterpart that it will sign an agreement, 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 liable for the performance of that contract or other damages even though the agreement 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 or estoppel 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.

B.         NETHERLANDS

Under Netherlands contract law it is possible for a party who has decided during the advanced stages of a contractual negotiation to break off such negotiations and not enter into a contract, to be held liable for the performance of the terms of such contract. Unlike in the United States, 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 the Netherlands Supreme Court's Plas - Valburg decision[2] pre-contractual good faith principles found within Netherlands contract law may prohibit parties from walking away from an agreement where they have negotiated the terms to a fairly advanced level (The implications of this decision have been limited by more recent case law, however.). This Netherlands legal doctrine allows for a negotiating party who has not signed an agreement to be held liable for the performance of the terms of the agreement, if it is found that this party has broken off negotiations in bad faith. Remedies for this aspect of pre-contractual liability have been generally accepted in Netherlands jurisprudence 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 of the negotiations to full damages for lost profits (the latter being considered an extreme result).

Can draft versions of a contract, which were exchanged during negotiations prior to the signing of an agreement, be used to explain the intent of the parties? 

A.         USA

Common law rules of contract interpretation which are followed in most U.S. jurisdictions provide that 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 agreement,  and from that language alone. (American Jurisprudence 2nd )

 In addition to the above, American contract law generally follows what is known as the parol evidence rule. This common law doctrine stands for the principle that 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 ( Black's Law 8^th ).  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.

 Exceptions to this rule do exist (eg. where it can be proven from the contract language itself that an ambiguity exists), nevertheless parties must meet a high threshold before they are allowed to introduce extrinsic evidence - which would include prior drafts of a contract or letters of intent signed before entering into the main agreement. While it can often seem that it is a procedural rule of evidence, in fact the parol evidence rule is regarded by a number of authorities to be a substantive legal principle - although this may not be universally accepted. This distinction has implications for the issue of whether the parol evidence rule would be applied within an international arbitration context.

B.         NETHERLANDS

The interpretation of contractual clauses under Netherlands law is, according to the Netherlands Supreme Court,[4] 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 Netherlands 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.

[1] Netherlands Supreme Court December 17, 2004, NJ 2005, no. 271

[2] Netherlands Supreme Court June 18, 1982, NJ 1983, no. 723

[3] Ibid

[4] Netherlands Supreme Court March 13, 1981, NJ 1981, no. 635