Presentation at Seminar Doing Business: NL vs USA (2012 April 19, Amsterdam) Organised by: - Leading Edge Alliance - Bol International - Van Oers International

1. THE NETHERLANDS – UNITED STATES
A BRIEF OVERVIEW OF THE KEY DIFFERENCES BETWEEN
US AND DUTCH CONTRACT LAW
Sabine Kerkhof
Attorney in Rotterdam, the Netherlands since 2001
Practiced in the New York office in 2005 - 2009 April 18, 2012

2. 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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3. 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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4. 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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5. 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:
1. 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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6. 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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7. 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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8. 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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9. 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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10. 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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11. CHOICE OF VENUE; JURISDICTION/ARBITRATION (2)
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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12. CHOICE OF VENUE; JURISDICTION/ARBITRATION (3)
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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13. 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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14. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
PRE-CONTRACTUAL LIABILITY (2)
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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15. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
PRE-CONTRACTUAL LIABILITY (3)
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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16. 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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17. 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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18. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
INTERPRETATION (2)
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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19. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
INTERPRETATION (3)
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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20. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
INTERPRETATION (4)
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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21. 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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22. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
PENALTIES OR LIQUIDATED DAMAGES (2)
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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23. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
PENALTIES OR LIQUIDATED DAMAGES (3)
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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24. DIFFERENCES BETWEEN US AND DUTCH CONTRACT LAW:
PENALTIES OR LIQUIDATED DAMAGES (4)
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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25. MISCELLANEAOUS
1. Employment
2. Product Liability
3. Discovery in legal proceedings
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26. 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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27. 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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28. 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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29. 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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30. 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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31. 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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32. 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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33. 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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34. INTERNATIONAL TRANSACTIONS (2)
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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35. INTERNATIONAL TRANSACTIONS (3)
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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36. What Others Say About Us
International Recognition & Awards
This Benelux firm is synonymous with Loyens & Loeff is ranked first, based on the
expertise in tax law ... clients appreciate the number of transactions, in the Mergermarket
firm’s high-level service and expertise in all Benelux M&A League Table for 2011.
areas of tax law". Consistent top 2 ranking since 2006.
Loyens & Loeff achieves the highest score for Loyens & Loeff Belgium was selected as
tax advice in the Netherlands in International Belgium Tax Firm of the Year by the
Tax Review’s World Tax 2010. professional journal International Tax Review.
Loyens & Loeff again scored highly in the
Legal 500 in 2011: "Loyens & Loeff is Loyens & Loeff is the only Benelux-based firm
outstanding, with its width of services and listed in the American Lawyer Global 100.
large network of almost 400 tax specialists".
Once again Loyens & Loeff is # 1 in Loyens & Loeff has been named the ‘Best
PropertyNL’s compiled list of real estate Benelux Law firm’ of 2011 by the jury of the
lawyers based on numbers of lawyers. We head International Legal Alliance Summit Awards
the list way ahead of our competitors. (ILASA).
Loyens & Loeff ranks second in Overfusies.nl's
Loyens & Loeff is a recommended law firm in
League Tables for 2010, in terms of number of
the 2012 edition of the IFLR Guide.
deals.
Amsterdam, 16-3-2012 Willem Bongaerts
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37. 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
Sabine.Kerkhof@loyensloeff.com
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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