assignment of contract under dutch law

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8 December 2020

Lending focus – December 2020 – 6 of 8 Insights

Non-assignment clauses in Dutch law: the end of the road?

On 2 June 2020, an act to abolish the practice of contractually agreeing prohibitions/restrictions on the transfer or pledging of receivables – insofar as they have been obtained in the exercise of a profession or business – was submitted to the House of Representatives (the Act).

If the Act is passed by the Dutch Parliament and enters into force, any such contractual clauses will be null and void.

What are the policy objectives?

The Act aims to stimulate the growth and development of smaller businesses.

Smaller businesses commonly assigned or pledged their receivables to a lender, who might then lend them up to 80% of the value of such receivables. This assisted them with raising capital for growth. However, other parties contracting with SMEs have begun to insist on barring such assignments or pledges, making invoice financing a near-impossibility for smaller traders.

The Act will counter this recent practice, making it easier once more for SMEs to raise capital.

Current law

In principle, under Dutch law, the ownership of receivables is transferable, unless the law or the nature of the receivable prevents a transfer. Contracting parties are therefore free to determine the parameters and limitations of such receivables.

Exclusively for receivables, s3:83 paragraph 2 of the Dutch Civil Code (DCC) determines that their transferability can be prohibited contractually. If a contract prohibits the transfer of receivables, then they can neither be transferred nor pledged.

A transfer contrary to such clause will, depending on the exact wording of the clause and its interpretation, result in a default (under contract law) or the non-transferability of the receivable, and thus the invalidity of any attempted transfer or pledge (under property law). 

To stimulate the provision of loans to SMEs, the Dutch legislator intends to amend s3:83 of the DCC. 

The Act states that the transferability or pledging of a business’s receivables can no longer be contractually excluded. Any such clause will be null and void. The expectation is that this will increase the credit potential of borrowers, enabling them to use these receivables as security for their borrowings. 

Any transfer or pledge of receivables arising from a business or profession must be in writing. Furthermore, notification of transfer or pledge to the third party (debtor of the receivable) must also be in writing. These latter requirements are not particularly onerous, since written agreements are the norm in international financing practice.

The amended s3:83 of the DCC will not only apply to new agreements but also to existing ones, as from three months after the Act comes into force. 

The legislator intends to include several exceptions to the new rule. The following receivables are excluded and may therefore still be subject to transferability and pledging restrictions:

• receivables arising from a current or savings account
• receivables arising from syndicated loans
• receivables from or on a clearing institution, centralised counterparty, settlement agent, clearing institution, or central bank, and
• pecuniary claims which are to be paid on the basis of an agreement as referred to in s34(3), s35(5) or s35a(4) of the Collection of State Taxes Act 1990 into a bank account held for the payment of wage tax, turnover tax and social insurance contributions.

As noted above, receivables arising in the context of syndicated loans concluded on standard LMA documentation will not fall within the scope of the new rule.

The ability to provide collateral for credit facilities should boost lending sources for SMEs and provide a much-needed stimulus for growth.

Find out more

To discuss any of the issues raised in this article in more detail, please contact a member of our Banking & Finance team.

In this series

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Dovetailing loan and hedging arrangements: English courts hold the line

Directors in the spotlight: wrongful trading.

by Kate Bowden

Pathway Finance: construction or rectification?

Taking security over a domain name, appointing administrators: victory for secured lender.

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The Netherlands

An outline of pre contractual obligations in relation to the Netherlands.

Key contacts

Pre contractual negotiations, is there an implied duty of good faith to continue to negotiate.

Under Dutch law, the relationship between parties in negotiations is governed by the principles of good faith, reasonableness and fairness. Generally, parties are free to break off negotiations unless they have led the counter-party to have justified expectations.

If such expectations exist, ending the negotiations may be regarded as frustrating the reasonable expectations of the other party that an agreement would be reached. This is treated as a breach of good faith principles.

In Dutch case law, four separate negotiating phases are identifiable. The rights and obligations of the parties to the negotiations - and in particular whether unilateral termination is possible (with or without compensation for damages) - differ depending on which negotiation phase the parties are in. During the negotiations the parties may shift from one phase to the other and back depending on the specific circumstances. The four phases are:

• phase 1: introductory discussions:  the discussions between the parties have not reached the stage where breaking off the negotiations would constitute a wrongful act
• phase 2: discussions between the parties have reached such a stage that breaking off the negotiations would constitute a wrongful act if the breaking party did not compensate the other party for its costs
• phase 3: discussions between the parties have reached such a stage that the non-breaking party has developed a justified expectation that an agreement will be reached
• phase 4: the parties have reached a binding agreement on the transaction. Note that this phase may even be reached before the parties have executed a written agreement.

The parties are, however, free to specifically agree on the negotiations process to be followed and the stage at which binding obligations will arise, so that the aforementioned phases and accompanying rights and obligations do not apply.

Typically, this would be agreed upon in writing through a letter of intent or similar document before negotiations commence in earnest. Such document may state that no binding obligations will arise until, for example, an agreement in writing is executed or certain specific conditions have been met. It should be noted that these arrangements on the transaction process are subject to the requirements of reasonableness and fairness, and the fair expectations of the other party. Breach of these arrangements may again lead to liability for damages.

If, for example, the letter of intent provides that no agreement will be deemed to have been reached until a written agreement has been executed, then walking away from the transaction may still constitute a wrongful act if all conditions precedent (e.g. satisfactory outcome due diligence) are fulfilled and the parties have (more or less) reached full agreement on the wording of the agreement.

In such case the breaking party has to have a good reason for breaking off the negotiations, e.g. an unexpected development of results below budget or other unexpected material adverse change.

Generally, specifically agreed conditions precedent will be upheld by the courts if they are objective conditions. Conditions precedent such as availability of bank financing, a satisfactory outcome of the due diligence and prior board or shareholder approval are regular and will generally be upheld. However, invoking such conditions may still constitute a wrongful act if the withdrawing party has caused the non-fulfillment of the conditions, or if the justified expectation was created in the opposite party that conditions will be fulfilled.

For instance, if the party invoking the conditions has throughout the process referred to the conditions as 'a mere formality', or if it becomes clear that the corporate body whose approval was required, was actively involved in the entire process, invoking the conditions may still constitute a wrongful act. In other words, the principle of law applied is 'substance over form'.

The factual behavior of the parties and the expectations they have raised with each other as to the outcome of the negotiations will be taken into account in judging whether breaking off the negotiations was acceptable or not.

What are the consequences of termination of negotiations by one party unilaterally?

Under Dutch law, the breach of a binding agreement may give rise to liability on the part of the breaching party.

Even where there is no binding agreement, an unacceptable termination of negotiations could lead to liability for costs (negative contractual value) and - in extreme circumstances - for loss of profits (positive contractual value).

The consequences of unilaterally terminating negotiations will depend on which negotiating phase the negotiations are in:

• phase 1 - the parties are free to terminate the negotiations at will without consequence
• phase 2 - the parties may terminate the negotiations, but the terminating party may be required to compensate for the costs incurred by the non-terminating party
• phase 3 - If a party terminates the negotiations, it may be compelled to resume the negotiations by court order given in injunction proceedings. Terminations of discussions will constitute a breach of contract and may result in liability for damages, including loss of profit. Courts tend to be more reluctant to order a party to continue negotiations or to attribute damages on the basis of positive contractual value than on the basis of negative contractual value, and these will only be attributed under exceptional circumstances, and
• phase 4 - a binding agreement has been reached, and a termination of the negotiations will be considered a breach of contract. The non-breaching party may claim specific performance and/or compensation of damages.

What is the potential impact on third party rights?

Unless specifically stipulated otherwise, agreements and negotiations do not create third party rights. However, if certain expectations were created in a third party (for instance that a transaction would take place) on the basis of the conduct or verbal or written undertakings of a party, the party breaching those expectations may be liable on the grounds of tort.

Confidentiality agreements

Are there implied confidentiality obligations where there are no formal confidentiality agreements entered into by the parties.

Under Dutch law, there is no implied duty of confidentiality. In the absence of an express commitment, the aggrieved party can only make a claim on the basis of a wrongful act ( onrechtmatige daad ) by the other party.

This carries with it a heavy burden of proof, so it's therefore common to specifically agree on confidentiality before entering into negotiations.

A confidentiality agreement will be binding on the parties to it. Penalty clauses pursuant to which the party in breach forfeits a penalty to the aggrieved party, are allowed and in fact customary. The court may mitigate the amount of the penalty if excessive.

What are the consequences of breach?

In the event of a breach, the aggrieved party may seek specific performance (forcing the party in breach to stop using or disclosing confidential information) and/or compensation of damages. If a penalty clause was agreed, the party in breach may forfeit a penalty.

Are specific terms/formalities required for a binding confidentiality agreement?

Exclusivity arrangements, can an obligation to negotiate exclusively be implied where no formal agreements are entered into by the parties.

Under Dutch law there is no implied duty of exclusivity. Exclusivity agreements are customary in Dutch law.

Are any specific terms/formalities required to make exclusivity arrangements enforceable?

Subject to the overriding principles of reasonableness and fairness, there are no legal constraints or requirements on those agreements and they will be binding.

Heads of agreement

Are they legally binding.

The fact that a document is called letter of intent or heads of agreement is in itself not decisive under Dutch law as to whether or not the document contains binding and enforceable commitments.

Even remarks in the headings, such as 'subject to contract', may be mitigated by the text of the document itself and more importantly by the factual behavior and the content of communications between the negotiating parties (substance over form).

It is therefore very important to carefully word letters of intent or similar pre contractual documents so that there can be no misunderstanding about the extent of their desired binding effect. Compensation may be awarded if a party who terminates the negotiations clearly disappointed the non breaking party's justified expectations that an agreement would be reached.

In that case the non binding agreement provision or a condition precedent will have no effect. In order to prevent such justified expectations arising it is advisable to first of all include clear and objective conditions precedent and secondly clearly communicate on the conditions precedent and the (expected) fulfillment thereof.

Breach of pre contractual agreements may result in liability for the defaulting party. In general, damages will be the remedy but actions for specific performance may also be brought. In exceptional circumstances, compensation for "lost opportunity" can be claimed.

A pre contractual agreement may also set out a specific basis on which damages will be payable (eg liquidated damages). The courts tend to be more reluctant to order a party to continue negotiations or to award damages on the basis of positive contractual value.

The courts would be less reluctant to award compensation of costs (e.g. of professional advisers) but again only where the party that terminates the discussions has clearly disappointed the non breaking party's justified expectations that an agreement would be reached, or has caused the other party to incur extraordinary costs in the negotiation process.

Letters of intent which are intended to be legally binding are enforceable by and against the parties to the agreement. A third party (e.g. the target company) may in some circumstances make a claim on the basis of a wrongful act ( onrechtmatige daad ).

Can heads of agreement have any tax implications/adverse consequences?

Letters of intent serve the valuable purpose of setting out the commercial reasons for the transaction, especially those transactions that are tax driven. This might assist the parties in avoiding any tax avoidance challenges by the local tax authorities under applicable anti abuse provisions.

Depending on the content of the letter of intent, signing of such a letter could be considered as constituting an obligation and/or alienation which could trigger Dutch tax consequences, such as the termination of a fiscal unity, or the use of existing losses of the target company, etc. 

Are break fees usually payable?

Termination of pre contractual agreements such as letters of intent may result in the payment of a break fee, if this is specified in the agreement.

What are the main legal issues to be considered e.g. enforceability?

The pre contractual agreement may set out specific termination events in which break fees are payable. An arrangement for the payment of break fees in pre contractual agreements is legally binding and enforceable. Break fees may increase as negotiations become more advanced.

In public takeovers, standard market practice is a doctrine that the extent of break fees payable by a target company should be reasonable in the given circumstances and should not act as a de facto block to terminating negotiations.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

Rob Hendriks

Partner Amsterdam, The Netherlands

This website uses cookies and other similar technologies to ensure you get the best experience on our website. Please review our cookie policy and our data protection privacy notice for more information on how the data that is collected is used.

Prins Bernhardplein 200, 1097 JB Amsterdam, Nederland    [email protected]    +31 (0)20 24 00 710

Termination of contracts or agreements under Dutch law

In a short period of time the economic mood has evolved drastically due to the coronavirus: in the beginning of March 2020, the focus was on collaboration, transactions and new projects. However, in that same month, the central question became what legal measures can be taken during the corona crisis. No one was prepared for this situation, which requires solidarity and a helping hand in managing the crisis as effectively as possible.

One of the themes that we are now dealing with on a daily basis concerns the termination of agreements in accordance with Dutch law. After all, in times of crisis everyone needs to save costs which often results in the termination of a contract. For the avoidance of misunderstandings: the terms ‘contract’ and ‘agreement’ will be used as synonym throughout this blog.

How to terminate an agreement under Dutch law?

This question is relevant at all times and in every context. However, in times of crisis, ‘business-as-usual’ may become uncertain and this question becomes one of the most frequently asked questions. During the past few weeks we already received the following examples:

• The buyer of a company desired to cancel the acquisition;
• The tenant of a new office building wanted to terminate the just signed Letter of Intent (LOI) because the unexpected mitigated forecast following the corona virus outbreak;
• A client had to cancel all its assignments with freelancers;
• Due to the lack of funding a proposed collaboration concerning the development of software had to be terminated; · A loan agreement became due because the collateral decreased in value too much; and
• An important investor pulled back the day before the execution of an agreed share issuance.

There will be many more examples involving the termination or cancellation of contracts the upcoming weeks and months. In view hereof, the question remains:

What are the possibilities for termination? Will such termination lead to liability for damages?

In answering this question, we will not discuss situations where a party relies upon ‘force majeure’, ‘changed circumstances’ or ‘material adverse events’. Although very relevant indeed, we will discuss these themes separately soon.

Preliminary question: is there a breach of contract?

If you desire to terminate an agreement, the first question is, whether there exists a breach of contract or default. A default situation generally exists if a party does not fulfill its contractual obligations. In such event, under Dutch law, the other party has the option to dissolve (in Dutch: ontbinden) the agreement (unless such option has been explicitly excluded in the agreement).

A prerequisite for invoking the right to dissolve the agreement, is that the defaulting party has been given written notice of the default (generally through a reminder or summons), thereby setting a reasonable term to fulfill its obligations under the agreement. If the defaulting party still fails to comply with the agreement after that notice term, the defaulting party will be in default and the agreement may be dissolved. In addition, the defaulting party can be held liable for damages resulting from the breach of contract.

In the event it is no longer possible for a party to fulfill the contractual obligation, or if that party directly indicates that he will not going to (be able to) fulfill the contractual obligation, the other party may immediately dissolve the agreement, without first having to provide written notice of the default.

Termination for convenience (“opzegging”)

Most agreements under Dutch law may also be terminated for convenience. However, some contracts cannot be terminated for convenience, for example: or a perpetual leasehold or a shareholders agreement (unless indicated otherwise in the agreement).

How do you terminate an agreement for convenience under Dutch law?

In most cases, contracts under Dutch law contain a provision that provides for the termination of the agreement for convenience. Therefore, a first step would be to verify the contract (including the general terms and conditions that may apply) and inspect the termination provisions. In many contracts, the termination notice must be provided in writing thereby taking a notice period into account. If such formalities have not been properly applied, the termination will in principle not take effect.

Important: check the law too!

For some specific types of agreements, Dutch law contains obligatory termination provisions. This for example applies to employment contracts, lease contracts and agency contracts. Consequently, in certain cases, additional rules or restrictions may prevent an easy termination.

What if the contract does not contain a termination clause?

If the agreement does not contain a termination clause, the termination of the agreement could be effected on the basis of applicable legal provisions. Under these circumstances, the following principles apply:

• if the agreement has been entered into for a definite period of time, the agreement will terminate after the expiry of that period;
• if the contract has been entered into for the performance of a specific assignment (for example, for building certain software), the agreement will terminate after that assignment has been completed;

Does this mean that there are no opportunities for early termination of such agreement? No, the following options remain available:

• a first option may be to come to a mutual termination arrangement in consultation with the other party. This requires the consultation with the other contracting party and potentially also some financial compensation as a result of the early termination;
• a second option can be to rely upon force majeure or changed circumstances (e.g. the corona virus outbreak). This may trigger the possibility to dissolve the agreement (in case of force majeure) or to terminate, or amend the consequences of the agreement (in case of changed circumstances).

The termination of continuing performance agreements under Dutch law

Continuing performance agreements are agreements that have been an ongoing or perpetual nature. Distribution agreements, license agreements, (indefinite) employment contracts, (indefinite) lease agreements and franchise contracts are examples of continuing performance contracts.

Either the law (i.e. employment or lease agreement) or the contractual terms (i.e. general terms and conditions) generally determine the termination conditions. Even in the event the ongoing performance agreement or the law do not provide for termination conditions, the starting principle is that such ongoing agreement could be terminated for convenience. Depend on the circumstances of the specific case, special attention must be paid to (i) the length of the notice period that should be taken into account and (ii) the possible duty for the terminating party to compensate the other party financially.

Would you like to know more about the termination of contracts under Dutch law, do not hesitate to contact us at [email protected] or Lukas Witsenburg directly at [email protected] .

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Conventus Law

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The Interpretation Of Contracts In The Netherlands – An Overview Of The Legal Framework.

October 30, 2023 by Rohin Pujari

On 25 August 2023, the Dutch Supreme Court issued an decision (the  Decision ) on the question of how a contract should be interpreted in case the contract contains a provision stipulating that, in deviation from the so-called Haviltex criterion, the provisions as contained in contract are to be interpreted and applied only grammatically [1]. The Decision provides a cause to reflect in outline on the Dutch legal framework regarding the interpretation of contracts, placing the Decision within this framework. We conclude with some remarks on the potential effects of the Decision on the Dutch (corporate) practice.

What about – the interpretation of contracts in the Netherlands?

The core of the doctrine dates back to 1981 when the Dutch Supreme Court ruled the landmark Haviltex judgment [2]. In the Haviltex judgment, the Dutch Supreme Court ruled that, when interpreting the provisions of a contract, what matters is the meaning that the parties, in the given circumstances, could reasonably attribute to that provision on both sides and what they could reasonably expect from each other in that respect (the  Haviltex Criterion ) [3]. In other words, when interpreting contracts, not only the grammatical meaning of the contract must be considered, but other circumstances also should be taking into account. It may therefore be the case that a court comes to the conclusion that the parties’ intentions conflict with the wording of the contract at hand. In such cases, according to the Haviltex Criterion, the intention of the parties will prevail over the grammatical meaning of the contract [4].

The Haviltex Criterion is the standard that Dutch courts apply in principle when determining the meaning of a contract, a so-called subjective interpretation standard. In principle, as it seems to follow from the Decision that under certain circumstances the court may not take the intention of the parties into account when interpreting a contract, but more on that later.

Against a subjective standard of interpretation, there is logically the objective standard of interpretation. In 1993, a more objective standard of interpretation was adopted by the Dutch Supreme Court for the first time in cases where an agreement has an impact on parties not involved in its formation; the so-called CLA standard, derived from a collective labor agreement [5]. In such cases, the wording of the provisions of a CLA, read in light of the entire text of the agreement, has, in principle, decisive significance. Thus, when interpreting a contract, under certain circumstances, the party’s intention does not play a role insofar as it is not apparent from the contract, but a connection must be sought with more objective points of reference. Here, besides the literal wording of the CLA, any explanation of the CLA and the plausibility of the legal consequences may be relevant.

In later case law, the Dutch Supreme Court clarified the relationship between the subjective standard of interpretation on the one hand and the more objective standard of interpretation on the other. According to the Dutch Supreme Court, there is no contradiction but a smooth transition between the two standards of interpretation [6]. It is therefore not a choice between one or the other standard of interpretation, but when interpreting a contract, all circumstances of the concrete case, valued according to what the standards of reasonableness and fairness entail, are always of decisive importance [7]. Over the years, the Dutch Supreme Court has ruled several judgments in which, depending on the circumstances of the case, there is increasing scope for the application of an objective standard for interpreting contracts. This gives further colour to the lacklustre interpretation standard of the Haviltex Criterion.

According to the Dutch Supreme Court, the application of the Haviltex Criterion results, under certain circumstances, in a more objective standard of interpretation in which, as a starting point, decisive weight should be given to the linguistic/grammatical meaning of the contract. The nature of the transaction, the extent and detail of the contract, the manner of its formation and the provisions contained in the contract such as an entire-agreement-clause [8], are important in this respect [9]. The court is free to reach a tentative linguistic interpretation in the case of a commercial agreement where the parties have been assisted by (legal) expert counsel [10]. In a later judgment, the Dutch Supreme Court nuanced the criterion of interpretation whereby great weight must be given to the linguistic meaning of the chosen wording: after all, in some cases the other circumstances of the case may mean that a different (than linguistic) meaning must be attached to the provisions of the agreement. After all, the Haviltex Criterion remains decisive, the Dutch Supreme Court ruled in 2013 [11].

Nevertheless, a trend seems to have emerged over the years whereby the Dutch Supreme Court is opening the door to a more objective standard of interpretation in an increasing number of cases. In our view, this is a development that fits well with the needs of commercial corporate practice in which risks, in this case mainly the risk of lengthy and costly litigation on the interpretation of a contract, try to be excluded as much as possible. After all, if it is clear to each party what has been agreed, this will prevent disputes regarding the interpretation of the contract.

The Decision

Turning now to the Supreme Court’s Decision of 25 August 2023. The Decision focuses on the interpretation of a settlement agreement containing the following provision:

‘In the execution of the present agreement, the literal text of this agreement, notwithstanding the Haviltex Criterion, shall prevail over any party intentions so that in the event of any dispute arising in any way whatsoever from this agreement, even if only one of the parties deems a dispute to be present, the competent court shall interpret and apply the provisions as contained in the present agreement solely grammatically.’ [12]

The Dutch Supreme Court reiterated the Court of Appeal’s consideration of the contractual standard of interpretation declared applicable, to the effect that in the interpretation of provisions from the agreement, only concepts that are not open to multiple interpretations can be referred to. After all, the interpretation of concepts that are open to multiple interpretations would have to involve the intentions of the parties, which is not allowed according to the agreed (objective) standard of interpretation [13].

It seems to follow from the Decision that the parties are free to agree that a contract should be interpreted linguistically and that, in the event the court has to consider the meaning of provisions in the contract, the intention of the parties cannot be involved. In short, the Haviltex Criterion need no longer be decisive in the situation where the parties expressly choose to exclude it. At the same time, it should be noted that no complaint has been made in the procedure about the validity of such an interpretation clause and the Dutch Supreme Court has therefore not been able to comment on that question. However, the Dutch Supreme Court applied the agreed objective standard of interpretation without taking a back seat. Would the Dutch Supreme Court be of the opinion that an interpretation clause is inadmissible under Dutch law, it would be obvious that the Dutch Supreme Court would have devoted some wording to it by, for example, including a consideration to the contrary ( overweging ten overvloede ). In addition, Advocte General Valk stated in his opinion on the Decision that the prevailing doctrine seems to be that “parties may validly determine the standard by which their contract is to be interpreted and that that interpretation may also be ‘grammatical interpretation’ if desired.” [14]  Therefore, based on the above, we believe that such an interpretation clause in a contract may be considered permissible [15].

How can the Decision be placed in the legal framework regarding the interpretation of contracts in the Netherlands?

Until now, the Dutch Supreme Court arrived at an objective standard of interpretation via the key of the Haviltex Criterion. As discussed above, it seems to follow from the Decision that an objective standard of interpretation can also be applicable without application of the Haviltex Criterion, namely if the Haviltex Criterion is explicitly excluded by the parties. In our view, that makes this Decision different from previous Dutch Supreme Court rulings on the doctrine of contract interpretation. Previous judgments mainly gave substance to the Haviltex Criterion, while the Decision focuses on an agreement in which the Haviltex Criterion has actually been excluded. The Decision can thus be placed in the long list of relevant judgments on how (commercial) contracts should be interpreted.

To our knowledge, this is the first time that the Dutch Supreme Court has applied an objective standard of interpretation that the parties have agreed to by means of an interpretation clause. However, in lower case law, by various legal authors and by Advocate General Valk in his opinion on the Decision, it was already assumed that parties are free to include a grammatical interpretation clause in the contract [16]. Concluding, the Decision fits well with the trend whereby parties are increasingly given room to agree on a more objective standard of interpretation if the circumstances of the case give reason to do so. In our view, this is a desirable development.

Why might including an interpretation provision in a contract be desirable?

It may be desirable to include an interpretation provision in certain, complex (acquisition) contracts and financing agreements, stipulating that the contract should only be interpreted grammatically. This way, the risks for the parties are framed and the chances of litigation on the interpretation and content of the contract are reduced. In the applications of the Haviltex Criterion, the possibility always remains that a court concludes, based on the circumstances of the case, that a provision in a contract has a different meaning than its linguistic meaning. This possibility also exists if it is a commercial contract concluded between professional parties assisted by experts [17]. This uncertainty can be avoided by agreeing on a grammatical interpretation standard.

However, a clause by which the parties opt for an objective standard of interpretation does not mean that the court, when interpreting a contract containing such a clause, cannot under any circumstances deviate from what objectively follows from the wording of the contract. After all, it follows mandatorily from Article 6:248(1) of the Dutch Civil Code that a contract has not only the legal effects agreed by the parties, but also those which, according to the nature of the contract, follow from the law, custom or the requirements of reasonableness and fairness [18]. The court thus retains the possibility of filling in gaps in a contract, albeit that, in the case where an objective measure of interpretation has been agreed, this will not be possible through the applicability of the Haviltex Criterion but by applying reasonableness and fairness. The additional effect of reasonableness and fairness only comes into play if the contract contains voids [19]. This is different from the application of the Haviltex Criterion where the starting point is that all circumstances are relevant when interpreting a contract. Thus, the court will not be able to give a different meaning to a provision in a contract on the basis of the supplementary effect of reasonableness and fairness than its linguistic meaning, as long as the provisions in the contract are conclusively worded. This may entail legal certainty for the contracting parties.

Are there any drawbacks to choosing a grammatical standard of interpretation?

A disadvantage of applying an objective measure of interpretation is that the court may give meaning to a provision that does not correspond to the meaning that the parties intended it to have. In addition, language is, by definition, open to multiple interpretations and this may result in the linguistic meaning of the contract not being fully clear and other circumstances having to be taken into account in the interpretation. When drafting contracts, it is therefore of extra great importance that, and certainly those cases where the parties explicitly choose an objective standard of interpretation, great care is taken in their wording. This is also in keeping with the way professional parties contract – they can be expected to make changes to the wording of the contract during the negotiations on the formation of the contract if they believe it does not accurately reflect the parties’ intentions [20].

Does the Decision affect corporate M&A practice?

Corporate M&A practice generally involves lengthy consideration – and negotiation – of how the provisions in a contract are worded. Lawyers strive to include the parties’ intentions in the contract as fully and in no uncertain terms. This prevents a dispute about the meaning of the contract at a later date. Litigation is costly and the outcome of such a dispute is generally uncertain. Uncertainty, and therefore risk, should be avoided as much as possible. In respect of such complex contracts, it is therefore desirable that their interpretation should follow the literal wording of the contract as closely as possible. Our expectation is therefore that the Decision will potentially result in an increase in the use of an interpretation clause in corporate practice.

For further information, please contact:

Laurens Linnewiel, Bird & Bird

[email protected]

• HR 25 August 2023, ECLI:NL:HR:2023:1131.  
• HR 13 March 1981, ECLI:NL:HR:1981:AG4158 (Ermes/Haviltex).  
• See, for example, HR 1 December 2000, ECLI:NL:HR:2000:AA8721 (Brown/NVC), para 3.4.  
• HR 17 September 1993, ECLI:NL:HR:1993:ZC1059 (Gerritse/Hydro Agri Sluiski), para 3.3.  
• HR 20 February 2004, ECLI:NL:HR:2004:AO1427 (DSM/Fox), para 4.4.  
• HR 20 February 2004, ECLI:NL:HR:2004:AO1427 (DSM/Fox), para 4.5.  
• An entire-agreement-clause is a common provision in a commercial contract in which the parties agree that the agreement in question contains all the agreements that apply between the parties involved.  
• HR 19 January 2007, ECLI:NL:HR:2007:AZ3178 (Meyer Europe/PontMeyer), para 3.4.3.  
• HR 29 June 2007, ECLI:NL:HR:2007:BA4909 (Deksen/Homburg), para 4.1.3.  
• HR 5 April 2013, ECLI:NL:HR:2013:BY8101 (Lundiform/Mexx), para 3.4.3.  
• HR 25 August 2023, ECLI:NL:HR:2023:1131, para 2.1; please note that the provision has been translated to English but originally, the provision was in the Dutch language.  
• HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.2.2.  
• Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, to HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.4.  
• An interesting legal question that remains undiscussed in the Decision is the question by which standard of interpretation an interpretation clause should be interpreted. For the sake of the scope of this article, we will not discuss this further.  
• R.P.J.L. Tjittes, Commercieel Contractenrecht, Den Haag: Boom Juridisch 2022, p. 452 and footnote 571 there; M. Wallart, ‘Drafting tips & skills: het contractueel regelen van de uitleg’, ORP oktober 2018, p. 28; Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, at HR 25 Aug 2023, ECLI:NL:HR:2023:1131, para 3.4; H.N. Schelhaas, ‘Het Haviltex-criterium en de uitleg van commerciële contracten. Het Mexx/Lundiform-arrest nader beschouwd’ ORP oktober 2013, p. 40.  
• There is debate in the legal literature as to whether Section 6:248 of the Civil Code is of mandatory law. We concur with the view of Advocate General Valk as expressed in the opinion accompanying the Decision, namely that Section 6:248 of the Dutch Civil Code is mandatory law and cannot be excluded by contract: Concl. A-G W.L. Valk, ECLI:NL:PHR:2023:481, to HR 25 August 2023, ECLI:NL:HR:2023:1131, para 3.6.  
• H.N. Schelhaas, ‘Het Haviltex-criterium en de uitleg van commerciële contracten. Het Mexx/Lundiform-arrest nader beschouwd’ ORP 1 oktober 2013, p. 40.  
• R.P.J.L. Tjittes, Commercieel Contractenrecht, Den Haag: Boom Juridisch 2022, p. 327.  

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Contract law in the Netherlands

Contents of a contract, performance, breach, remedies, types of contract under dutch law.

• Employment law in the Netherlands

Employment termination

Dismissal of an employee, employment law - miscellaneous.

• About the Dutch Law Institute

Employment law - in the Netherlands

Navigating dutch employment law: a guide for employers and employees.

Dutch employment law centers around strong worker protections. It covers work contracts, termination rights, work hours, and leave entitlements, accommodating both fixed-term and permanent contracts. The distinct 'polder model' involves all parties—employers, employees, and the government—in labor negotiations. Understanding its intricacies is critical due to its comprehensive scope.

This comprehensive guide aims to shed light on the key aspects of Dutch employment law, providing valuable insights for both parties involved in the employment process. Topics covered include contracts, working hours, minimum wage, employee benefits, dismissal procedures, and more. By delving into the intricacies of the Dutch employment landscape, this article will serve as an indispensable resource for navigating the ever-evolving legal framework that shapes the world of work in the Netherlands.

The first section details the most important aspects of employment law in the Netherlands, including topics such as minimum wages and working hours, collective labour agreements, discrimination prevention measures and health & safety considerations. It also outlines other facets of employee rights that must be taken into account when hiring new staff or negotiating changes to existing contracts under Dutch employment law. Furthermore, this article covers some key points about dismissal procedures under Dutch employment law and explains why employers need to take special care when carrying out dismissals lawfully.

Finally, the last section looks at various ways in which employers can ensure they remain compliant with current legal requirements concerning employment relationships. By understanding the complexities of Dutch employment law and taking steps towards compliance accordingly, both employers and employees can create mutually beneficial work environments that adhere to all applicable legal provisions.

Overview of employment regulations in the Netherlands

Dutch employment law governs the rights and obligations of employers, employees, temporary workers and other categories of persons employed in the Netherlands. As an example, consider a case study involving an employer who hired a foreigner to work for them on a short-term contract without providing any further information about Dutch labour laws or protections. This is against the law in the Netherlands, as anyone working in the country must be informed of their rights under Dutch legislation.

Employment law in the Netherlands covers areas such as worker health and safety, discrimination protection, minimum wage requirements and benefits entitlements. Employers are required to comply with all relevant regulations regarding employee rights; failure to do so can result in significant penalties. Employees have certain legal protections that they must be aware of, including workplace discrimination provisions, holiday entitlements and termination notice periods. Temporary workers also have specific rights that are protected by Dutch employment laws.

Overall, knowledge of both employer obligations and employee rights is essential in order to ensure compliance with Dutch employment law. Understanding these regulations helps to create a safe working environment for all involved parties while ensuring that everyone’s interests are respected according to applicable rules and procedures. From there we will now turn our attention towards understanding minimum wage and benefits requirements in the Netherlands.

Minimum wage and benefits in the Netherlands

The Netherlands has established a minimum wage to ensure that all employees are paid fairly for their work. In addition to wages, employers must also provide certain benefits to their staff. These include sick pay and holiday allowance which can equate to 8% of an employee’s salary each month or 1/12th of the annual leave entitlement.

Employees may be entitled to additional benefits such as a bonus at Christmas or on national holidays, company cars and reimbursements for travel expenses. It is important for both employers and employees to understand exactly what entitlements they are due so that any discrepancies can be rectified quickly and amicably.

In terms of working hours, Dutch employment law states that full-time employees should not exceed 40 hours per week while part-time workers should not exceed 24 hours weekly. Overtime compensation is required if these limits are exceeded; however, there are many other factors that need to be taken into account when it comes to calculating overtime payments including collective agreements and union regulations. To sum up, understanding Dutch minimum wage requirements as well as employee benefits in the Netherlands is essential for creating a transparent system where everyone's interests are respected according to thereto applicable rules and procedures. This will help pave the way towards correctly navigating working hours & overtime regulations in this country moving forward.

Working hours & overtime under employment law in the Netherlands

To ensure a fair and equitable workplace, the Netherlands has established certain employment standards that must be met by employers. These include working conditions such as hours of work, payment for overtime and rest periods. They also provide information on social security benefits available to employees who are injured or become ill while in service. It is important to understand these regulations so that they can be adhered to accordingly.

Dutch law requires all employers to provide their staff with adequate breaks throughout the day and weekly rest periods. This ensures workers have sufficient time off from work to rest and recuperate before returning to their duties refreshed and ready for action once more.

Employers also need to pay attention to statutory entitlements related to illness and injury sick leave payments, rehabilitation funds and disability benefits when applicable. Adhering strictly to Dutch employment standards helps create a safe environment where both employers & employees benefit equally according thereto applicable laws & regulations set out by the government thus providing stability for businesses operating within this country moving forward.

Vacation time & leave under Dutch labour law

The Netherlands has established certain vacation time and leave entitlements for employees that must be respected by employers. In particular, labour law in the Netherlands requires that all workers receive a minimum of four weeks paid annual holiday each year. Additionally, maternity and paternity leave are also provided for and allowances can be claimed in this regard. Sickness benefits may also apply to those unfortunate enough to suffer from an illness or injury while working during their contractual period.

Employees should be aware of their rights under Dutch dismissal law which governs unfair dismissals as well as providing protection against discrimination when it comes to hiring or promotion decisions. This legislation is designed to ensure fairness in the workplace and upholds employee’s right to seek compensation through legal action if necessary. Employment disputes are best resolved out-of-court but there are strict rules outlined in Dutch labour laws governing these situations - such as maximum notice periods & procedures required prior to termination etcetera - which need to be taken into account first before taking any further action accordingly.

Temporary employment contracts lasting no longer than two years are increasingly common across various industries in the Netherlands; especially within technology sectors where demand often fluctuates unpredictably throughout the calendar year thus requiring flexible staffing solutions on occasion thereby allowing businesses some flexibility without being tied down long term whilst still respecting applicable national labor regulations relating thereto accordingly.

Employee termination process under Dutch employment law

As employment lawyer in the Netherlands , I advise that employee termination is a sensitive and potentially legally complex issue for employers in the Netherlands. In accordance with Dutch employment law, if an employee’s employment contract is terminated by their employer or they are made redundant then they can be eligible for the so called 'transition fee', roughly 1/3 month per worked year. Additionally, redundancy laws protect workers against unjustified dismissal and discrimination on grounds such as age, gender or ethnicity - meaning those affected can challenge unfair dismissals through legal action accordingly.

When negotiating terminations under Dutch labor law it is important to bear in mind rules regarding notice periods which vary depending on how long the individual has been employed.

These procedures serve both parties interests ensuring fair treatment across all cases of potential separation between employers & employees whilst upholding applicable national regulations relating thereto respectively.

Employment contracts under Dutch law

Employment contracts are a vital part of the employment relationship between employers and employees in the Netherlands. The Dutch Civil Code requires that all permanent or fixed-term contracts must be written down, with details such as job title, duties and salary specified in order to ensure legal compliance. Furthermore, minimum wage is mandatory for all positions within the country - setting an important baseline for employee rights & protections which cannot be circumvented by any contract agreement. Additionally, particular attention should also be paid if hiring foreign workers; since additional regulations apply for those coming from outside of Holland including obtaining work permits before commencement of service respectively.

Equal opportunities should always be upheld regardless of race, gender or age when carrying out recruitment processes as set forth through national legislation accordingly – meaning qualified applicants cannot be passed over unfairly due to their personal characteristics. In addition to this it is essential to create policies aimed at preventing discrimination and harassment given its damaging effects on workplace culture & morale overall. Therefore clear communication regarding expectations surrounding acceptable behavior should be outlined both internally & externally so everyone involved understands what is expected of them moving forward.

Discrimination & harassment policies under Dutch employment law

Discrimination & harassment policies are essential for creating a respectful and positive workplace environment. In the Netherlands, employers have an obligation to protect their employees from any form of discrimination or prejudice under Dutch employment law – meaning that all workers should be treated equally regardless of age, gender or race. Additionally, expats who come to work in Holland must also adhere to these standards.

When it comes to preventing discrimination and harassment in the workspace, there are several steps which need to be taken. Clear rules should be established regarding acceptable behavior. This includes setting out expectations both internally & externally so everyone involved knows what is expected of them moving forward. Such guidelines should also include information on how grievances can be reported if necessary.

In addition to this, employers must adhere to health & safety regulations when employing people in the Netherlands as set forth by national legislation – including providing proper protective equipment (PPE) during certain activities such as welding or operating heavy machinery etcetera. Furthermore, workplaces must meet certain criteria regarding lighting conditions, ventilation systems & temperature levels according to local ordinances respectively - making sure all employees remain safe while performing their duties throughout each shift accordingly.

Health and safety requirements under Dutch employment law

When it comes to the safety of employees in the Netherlands, employers have a duty of care that must be taken seriously. The Dutch labor market is highly regulated and carries stringent health & safety requirements for business operations within the country – meaning both employers and workers alike are responsible for ensuring conditions remain safe at all times. From providing adequate workplace insurance coverage to making sure pension plans are updated regularly; there are numerous obligations which need to be met in order for companies to operate legally within Holland's jurisdiction.

To begin with, employers should take special precautions when dealing with hazardous materials or equipment as these can result in serious injury if mishandled incorrectly. Additionally, they should ensure their company is up-to-date on current legislation regarding data protection regulations so no employee information is ever exposed without consent from either party involved respectively.

Finally, any changes made to existing internal policies should always be communicated clearly amongst colleagues and enforced accordingly; failure to do so could result in legal action against those who neglect their duties moving forward. Employers must maintain proper records pertaining to personnel management including hiring/firing documents, annual performance reviews etcetera – taking into account every detail necessary when running a successful operation throughout the Netherlands successfully.

Data protection regulations and employment law in the Netherlands

Data protection is an important aspect of Dutch employment law. Companies have the responsibility to ensure that their employees’ personal information and data remains secure. This includes not only physical documents, but also digital files such as emails or other records stored in a computer system. The General Data Protection Regulation (GDPR) provides specific guidelines for employers regarding how best to handle employee data responsibly. Furthermore, those wishing to employ foreign workers must obtain a valid Dutch employment visa from the Netherlands Immigration Office prior to any labor migration taking place within the country itself.

Employees themselves are also subject to certain tax requirements while working in Holland; they must pay income taxes on earnings derived through work-related activities, along with health insurance contributions which will be deducted directly from net wages each month. Additionally, individuals should make sure that all necessary paperwork relating to these matters has been completed correctly – failure to do so can lead to severe penalties being imposed upon offenders by the relevant authorities over time.

Finally, businesses are obligated under Dutch tax law for employees to provide social security contributions which go towards funding unemployment benefits and pensions amongst others - thus allowing people access financial support during times of hardship if needed further down life's path. It is essential that companies remain compliant when dealing with this specific area of legislation moving forward; otherwise serious consequences may arise depending on situation presented accordingly.

Social security contributions in the Netherlands

As a result of the social security contributions employers are required to make in accordance with Dutch law, employees benefit from collective labor agreements which regulate such matters as minimum wages and working conditions. Furthermore, businesses may also choose to enlist the services of an employment agency in order to find suitable candidates for job vacancies; this can be especially helpful when recruiting foreign workers or those on temporary contracts.

In addition to collective labor agreements and agencies, there is a range of other legislative provisions which companies must comply with when dealing with their employees collectively – including dismissal law. This encompasses any situation where several individuals are made redundant at once due to business restructuring or insolvency; firms need to ensure that adequate notice periods and severance payments are provided if applicable before proceeding further. Finally, it is essential that employers stay up-to-date regarding changes in legislation surrounding Dutch employment so as not to face potential legal issues down the line associated with compliance failure moving forward.

Company restructuring & insolvency in the Netherlands

The labor regulations in the Netherlands are designed to protect employees' rights, and companies must adhere to them when restructuring or facing insolvency. Dismissal law is particularly pertinent in these scenarios; any proposed changes that would affect a large number of staff should be raised with the relevant trade unions prior to implementation. Furthermore, employers must also provide adequate notice periods and severance payments as applicable before proceeding further.

It is essential that businesses remain up-to-date on all new legislation related to Dutch employment law so they can adequately prepare for potential legal issues down the line associated with noncompliance. This includes staying abreast of collective agreements which may be renegotiated by trade unions at certain intervals – often including provisions regarding minimum wages and working conditions. It is within an employer’s best interests to ensure compliance with such rules from the outset as this helps avoid costly disputes later on.

Unions & collective bargaining in the Netherlands

Employment relations in the Netherlands are heavily regulated by trade unions and collective bargaining agreements. It is important for businesses to understand their legal obligations under these arrangements, as failure to do so can result in increased costs or penalties down the line. Here are some key points to consider when navigating union-related issues:

• Union recognition & representation : unions represent certain groups of workers within a company, negotiating on behalf of them with employers. Companies should be aware of which employees fall into this category, as well as any regulations regarding recognition and representation rights that must be adhered to;
• Collective Bargaining Agreements : these agreements often include provisions related to minimum wages and working conditions, amongst other areas. As such, it is essential that companies stay up-to-date on current CBAs negotiated between their respective unions - making sure they remain compliant at all times;
• Union membership : whilst not obligatory in the Netherlands, many firms still encourage staff members to join trade unions due to the benefits associated with doing so. This includes access to advice about labor law compliance matters along with assistance during disputes – both of which can help protect employers from potential litigation risks later on.

Enforcement & penalties under employment law in the Netherlands

With a clear understanding of unionization and collective bargaining requirements in place, what happens when employers or employees fail to meet their legal obligations?

What enforcement measures are available for ensuring compliance with Dutch employment law?

Any employee who believes they have been treated unfairly may choose to file a complaint with the local court system. This could involve bringing forward claims related to unpaid wages or unlawful dismissal, as well as other matters involving employer negligence or abuse of power. However, it is important to note that before taking this step, workers should inform their employer about any issues and seek advice from trade unions or other professional bodies if necessary – aiming towards a mutual agreement rather than escalating matters further into litigation proceedings wherever possible.

Ultimately, ignorance is no excuse under Dutch employment law – particularly when faced with steep financial penalties down the line. Therefore, both employers and employees alike must take responsibility for staying informed about current regulatory frameworks in order to avoid unnecessary disputes later on.

Dispute resolution procedures under Dutch law

In the event of any disputes or disagreements between employers and employees, it is important for both parties to be aware of their rights and responsibilities under Dutch employment law. As such, there are a number of options available in terms of dispute resolution procedures that aim to resolve issues quickly and effectively.

For instance, one avenue open to those seeking redress is mediation – where an impartial third-party will act as an intermediary between the two sides involved. This process typically involves working together to identify areas of disagreement before negotiating a mutually beneficial outcome; allowing matters to be resolved without having to resort to legal action further down the line. Alternatively, workers may also choose to file a complaint with the local court system if they feel that their employer has violated labor laws or neglected their contractual obligations in some way. Such grievances can include claims related to unpaid wages or wrongful dismissal, among other workplace infringements.

Overall then, navigating Dutch employment law requires both employers and employees alike take responsibility for staying informed about current legislation - particularly when faced with potential financial penalties or expensive litigation proceedings later on. With this knowledge firmly in hand, businesses can better avoid unnecessary conflict while ensuring compliance with all relevant regulatory frameworks at all times.

Tax obligations & employment law in the Netherlands

At the heart of any employment relationship lies a number of tax obligations; as such, it is essential for employers and employees to be aware of their respective responsibilities when operating within the Dutch system. To this end, various channels exist through which taxes can be paid in accordance with current legislation - each of which are designed to ensure both parties remain compliant at all times.

As such, adhering to these regulations not only safeguards against costly disputes further down the line but serves as an important reminder that social responsibility should always take precedence where finances are concerned - no matter how complex or convoluted the bureaucratic processes involved might seem at first glance. Ultimately then, being mindful of one's legal requirements provides invaluable peace-of-mind for businesses and individuals alike throughout every stage of the employment process.

FAQs - about employment law in the Netherlands

1. What are the main types of employment contracts in the Netherlands?

The main types of employment contracts in the Netherlands are:

• fixed-term contracts
• indefinite (permanent) contracts, and
• temporary contracts (through employment agencies).

2. How is the minimum wage determined in the Netherlands?

Minimum wage determination in the Netherlands: The Dutch government sets the minimum wage, which is adjusted twice a year (January 1 and July 1). The minimum wage depends on the employee’s age and working hours.

3. What are the standard working hours and overtime regulations in the Netherlands?

Standard working hours and overtime regulations: Standard working hours are usually 36, 38, or 40 hours per week. Overtime pay is not regulated by law, but can be agreed upon in individual contracts or collective labor agreements.

4. How are vacation days and holiday pay calculated for employees in the Netherlands?

Vacation days and holiday pay calculation: Employees are entitled to a minimum of four times their weekly working hours as vacation days per year. Holiday pay is generally 8% of the gross annual salary and is typically paid in May.

5. What are the rules regarding maternity and paternity leave in the Netherlands?

Maternity and paternity leave rules: Maternity leave is 16 weeks (4-6 weeks before the due date and 10-12 weeks after). Paternity leave is up to 5 days fully paid leave after the birth, plus an additional 5 weeks at 70% of the employee’s salary.

6. How does the Dutch law regulate employee dismissal and termination procedures?

Employee dismissal and termination procedures: Employers must have a valid reason for dismissal and follow the correct procedures, which may include obtaining permission from the Employee Insurance Agency (UWV) or the court.

7. What is the role of trade unions and collective bargaining agreements in the Netherlands?

Trade unions and collective bargaining agreements: Trade unions negotiate collective bargaining agreements (CBAs) with employers, which set the terms and conditions for employment in various sectors. CBAs can cover matters such as wages, working hours, and dismissal procedures.

8. How does the Netherlands address workplace discrimination and equal treatment?

Workplace discrimination and equal treatment: Dutch law prohibits discrimination based on factors like race, sex, age, and disability. Employers must ensure equal treatment and provide a safe, inclusive work environment.

9. What are the rights and responsibilities of employers and employees in cases of illness and sick leave under Dutch law?

Rights and responsibilities during illness and sick leave: Employees are entitled to continued payment (usually 70% of their salary) during sick leave for up to two years. Employers must create a reintegration plan to help the employee return to work.

10. How do non-compete clauses work under Dutch employment law?

Non-compete clauses in Dutch employment law: Non-compete clauses restrict employees from working for competitors or starting a competing business for a certain period after leaving their job. These clauses must be reasonable and agreed upon in writing.

11. Under Dutch employment law, what is the maximum amount of overtime employees can work?

Working overtime is a common practice for many employers and employees in the Netherlands. The maximum amount of hours an employee can work overtime varies based on the type of job they are employed in, as well as their age.

According to Dutch legislation, full-time employees over 18 years of age may not be asked to work more than 12 hours per day or 60 hours per week. Overtime should also not exceed four hours per day or 24 hours per week. Employees under 18 years old must not be asked to work more than 8 hours per day or 40 hours a week, with no more than two hours’ overtime each day and a total of 10 extra hours weekly. These regulations apply only when working beyond normal contractual terms.

12. Are there specific laws in the Netherlands, protecting employees from discrimination based on gender?

Discrimination based on gender is a pervasive reality in many workplaces. In the Netherlands, there are specific laws that protect employees from this form of discrimination.

The Dutch Equal Treatment Act prohibits any forms of unequal treatment between men and women in work situations. It applies to recruitment, hiring, promotion, compensation, job assignment, training opportunities, termination of employment , or other terms and conditions of employment. The act also states that employers cannot use pre-employment tests or questions which could lead to discriminatory practices related to gender identity or sexual orientation.

Employers must ensure they comply with all applicable anti-discrimination laws when making decisions about employee rights and responsibilities within the workplace. Employers who violate such laws may be held liable for damages caused by their actions. Additionally, an organization's reputation may suffer if it is found guilty of engaging in unlawful discrimination against its employees or prospective hires. Employees have access to remedies through judicial proceedings and administrative enforcement authorities if they feel their rights under the law were violated due to gender-based discrimination.

13. Under Dutch law, are there any tax breaks available for employers?

Employers in the Netherlands may be eligible for tax incentives when they hire new employees. These breaks can help employers to reduce their financial burden and also benefit entrepreneurs who are just starting out.

Tax deductions are available on certain expenses incurred for hiring personnel, such as training costs and recruitment fees. Furthermore, there are certain contributions made by employers which qualify for tax relief including pension premiums, social security payments and accident insurance premiums. Employers should familiarize themselves with these laws before making any decisions regarding taxation and benefits provided to their employees so as to ensure compliance with Dutch employment law regulations.

In addition, various grants and subsidies may be accessible depending on particular industry type or number of hired employees; thus it would be beneficial for employers to research further into what types of allowances could potentially be claimed from governmental bodies in order to optimize cost savings over time.

14. What are the penalties for non-compliance with Dutch labor laws?

Non-compliance with labor laws can have serious consequences in the Netherlands. Employers must ensure they are aware of the various regulations and understand the penalties for failing to comply. The Dutch authorities take a strong stance on non-compliance, providing both criminal and civil sanctions depending on the severity of any violations.

The most common penalty is an administrative fine imposed by the Inspectorate SZW (Inspectorate Social Affairs & Employment). These fines can range from €500 up to a maximum of €82,000 per violation or incident and may be increased if there are numerous violations present. In addition to these fines, employers may also face additional financial liabilities such as back pay due to failure to adhere to minimum wage requirements. Furthermore, companies may suffer reputational damage that could result in lost business opportunities or lawsuits from employees whose rights were violated.

Any individuals found guilty of violating labor laws within their organization may also face individual charges related to their actions. It is therefore essential all employers familiarize themselves with applicable law and remain compliant with it at all times. Failure to do so could result in significant repercussions both financially and legally.

15. Are there any restrictions on the types of employment contracts that can be used?

• Are there any restrictions on the types of employment contracts that can be used?
• What are the penalties for non-compliance with labor laws?

Ad 1. When considering a type of contract, there are several factors to take into account such as:

• education level
• length of agreement
• level or nature of work allowed
• obligations which could include contributions to social security funds, taxes, benefits etc.

In addition, some forms of temporary contracts may have limitations regarding how long they can remain active before renewal or termination.

It is also worth noting that certain sectors might have specific regulations governing the terms of their employment contracts due to collective agreements negotiated by trade unions. Similarly, many industries require jobseekers to complete vocational training courses prior to being employed in a particular position so make sure you are aware of any additional qualifications needed when recruiting staff.

Ad 2. Any organizations failing to comply with relevant legislation risk substantial fines or other sanctions imposed by regulatory authorities including criminal prosecution in more serious cases. Therefore it is essential that employers ensure all new hires meet legal obligations and contractual provisions, while offering support and guidance where necessary to help protect all parties involved during their period of engagement.

My conclusion with regard to employment law in the Netherlands

In conclusion, the Netherlands’ intricate employment law framework plays a crucial role in safeguarding the rights and interests of both employers and employees. A thorough understanding of these regulations helps to foster a harmonious and productive work environment, ensuring that all parties comply with their respective obligations.

By adhering to Dutch employment law, employers can create a supportive workplace that values equal treatment and respects the rights of each individual. In turn, employees can contribute to a thriving economy with increased job satisfaction, knowing that they are protected by a robust legal system.

As a result, a comprehensive grasp of the Netherlands’ employment law not only contributes to the well-being of those directly involved in the workplace but also promotes economic stability and growth across the nation. This underscores the importance of staying informed about the latest developments in Dutch employment law and working diligently to uphold its principles in everyday business practices in the Netherlands.

As an experienced employment lawyer in the Netherlands , I am able to advise clients on all aspects of labor law in the Netherlands. I would be happy to discuss further details regarding this.

About the author

Eva Jongepier is an acclaimed employment lawyer in the Netherlands with more than 22 years of experience.

With specializations in employment termination and litigation under Dutch employment law, Eva stands out as employment attorney for her keen analytical abilities and sound legal advice she provides to clients. Eva's clients range from individuals and small/medium-sized enterprises to large corporations.

As Dutch employment attorney , she is highly regarded for her professionalism and efficiency when resolving complex employment disputes. With an in-depth knowledge of Dutch employment law, Eva stays current on legal developments and changes within this field.

Contact Eva

Please feel free to contact Eva if you have any question regarding employment law in Holland .

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Breach of Contract In Dutch Law

Category: contract law.

Depending on the specifics of the Dutch contract, a breach can occur when a party fails to perform on time, does not perform in accordance with the terms of the agreement, or does not perform at all. Accordingly, a breach of contract will usually be categorized as either “material” or “immaterial” for purposes of determining the appropriate legal solution or “remedy” for the breach. One or both of the parties tot the contract may wish to have the contract enforced on its terms, or may try to recover for any financial harm caused by the alleged breach.

Late performance under Dutch Contract

Contracts generally specify a time for performance; late performance is usually not a breach of contract that would allow the other party to be excused from performance. However if time is of the essence late performance will be considered a material breach of contract that can give rise to damages or cause the cancellation of the contract. A typical remedy   if performance is late and useless is not of any value is Cancellation and Restitution; the other party should be brought in a position it was prior to the breach of contract.

Anticipatory breach of contract in the Netherlands

When your contract partner communicates that they will not perform the contract, the contract can be considered breached under Dutch law. The aggrieved party may take remedial action to mitigate damages and bring a lawsuit to recover damages for a breach. A Dutch Court my grant an injunction or other remedial relief in case of urgency and threat of serious damage to a company. In case there is doubt on the ability for the other party to perform under the contract. In this situations where a breach of the contract is anticipated the other party may request adequate assurances that the other party will perform it’s contractual duties adequately. For example, in case of a contract for the delivery of equipment, if the manufacturer finds out that the buyer’s company has lost significant money through bad transactions it may give reasonable cause to doubt the buyer’s ability to pay. The manufacturer would have the right to demand adequate assurances that payment under the contract will be given at the time of delivery of the equipment. If the buyer fails to respond in a specific time frame the manufacturer could treat the contract as breached.

Remedies Netherlands Law in case of Breach of Contract

If money cannot fix the performance problem under the Dutch Contract other remedies are available under Dutch law. Instead of asking for damages, you can also seek actual performance or modification of performance of the original contract. Performance remedies for breach of contract are for example: Specific Performance : a Dutch Court order requiring performance exactly as specified in the contract Rescission of the contract: the contract is cancelled and both sides are excused from further performance and any money advanced is returned. Reformation of the contract: the terms of the contract are changed to reflect what the parties actually intended. Cancellation and Restitution: the non-breaching party may cancel the contract and sue for restitution if the non-breaching party has given a benefit to the breaching party.

Time Limits on Enforcing Dutch Contract

Any claim for breach of contract in the Netherlands must be brought before the Dutch court within a certain period of time. This is called a limitation period and is set in a statute of limitations incorporated in the Dutch Civil Code. Every jurisdiction has its own deadlines. For example in the case of contract, the standard limitation is five years from the date the party would have first been entitled to bring action (i.e. the date of breach). However, for specific situation such as building contracts, consumer sle contracts and in case of absence of consensus (error) shorter time limits exist. Always contact a Dutch contract lawyer to check to time limits under Dutch law.

Mark van Weeren

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Buying a boat in the Netherlands

Termination of agreement in the netherlands, remedies and conseqeunces when changing a dutch contract.

Securitisation Laws and Regulations Netherlands 2023-2024

ICLG - Securitisation Laws and Regulations - Netherlands Chapter covers common issues in securitisation laws and regulations – including receivables contracts, receivables purchase agreements, asset sales, security issues, insolvency laws, special rules, regulatory issues and taxation.

Chapter Content Free Access

1. receivables contracts, 2. choice of law – receivables contracts, 3. choice of law – receivables purchase agreement, 4. asset sales, 5. security issues, 6. insolvency laws, 7. special rules, 8. regulatory issues, 9. taxation.

1.1        Formalities. In order to create an enforceable debt obligation of the obligor to the seller: (a) is it necessary that the sales of goods or services are evidenced by a formal receivables contract; (b) are invoices alone sufficient; and (c) can a binding contract arise as a result of the behaviour of the parties?

An enforceable debt obligation of an obligor to a seller does not need to be evidenced by a formal receivables contract.  An enforceable debt obligation can be evidenced from other documentary sources such as an invoice issued by a seller for the supply of goods and/or services to an obligor, but without the need for a formal contract of sale and/or supply. 

A binding receivables “contract” may exist solely as a result of the behaviour of the parties.  A written contract is not necessary.  However, in practice, the vast majority of debt obligations governed by Dutch law are recorded in documents since the underlying receivables need to be “sufficiently identifiable” (see question 4.8 below) in order to transfer or create security over them.  In addition, for evidentiary purposes a written record of the contract constituting the receivable is desirable for all parties.

1.2        Consumer Protections. Do your jurisdiction’s laws: (a) limit rates of interest on consumer credit, loans or other kinds of receivables; (b) provide a statutory right to interest on late payments; (c) permit consumers to cancel receivables for a specified period of time; or (d) provide other noteworthy rights to consumers with respect to receivables owing by them?

Dutch law restricts the maximum rate of interest chargeable to consumers.  For general consumer loans, these rules are laid down in the Dutch Civil Code ( Burgerlijk Wetboek ) (Section 7:57 to 7:83) and the Decree on Credit Compensation ( Besluit Kredietvergoeding ), which regulate the offering of the most common types of consumer credit to consumers.  These rules, however, do not apply to mortgage loans under which there are, in principle, no limits on the rate of interest that may be charged to consumers.  However, in practice there are a number of rules and regulations, as a result of which limitations do exist (please see below). 

As a general proposition, interest rates that are judged to be unreasonably high may contravene Dutch law principles of “fairness” and “morality”.  If an interest rate is judged to be in breach of these principles, the interest rate will not be enforceable against a consumer.  In addition, unreasonably high rates imposed on a consumer may contravene the Dutch law principle of “reasonableness and fairness”.  This is especially the case if there is insufficient clarity on the basis of which a rate is calculated or subsequently reset.

Pursuant to case law of the Financial Services Complaints Tribunal ( Kifid: Klachtinstituut Financiële Dienstverle-ning ), a floating interest rate may contravene the principle of “reasonableness and fairness” if: (i) it does not move with the market interest rate; and (ii) and the consumer has not been informed before entering into the loan agreement that, and under which circumstances, the interest rate may not follow the market interest rate.  It should be noted that, subject to the above, compound interest charged under consumer loans is permitted under Dutch law. 

The principle of “reasonableness and fairness” mentioned above is a Dutch legal concept applicable to many aspects of Dutch law.  In some respects, it can create a degree of uncertainty in transactions, as the principle has the effect of giving a Dutch court the ability to clarify the effect of any right or obligation in favour of any party to a contract.  However, it is expressed on the basis that it must be exercised in a way that is reasonable and fair.  A Dutch court will take into account the facts and circumstances of the contract, and wider transaction, when seeking to invoke the doctrine.  These include the nature and content of the contract and the relationship between the parties.  In respect of the latter, where the relationship is between a professional party (such as a financial institution) and a consumer, a court may be more likely to construe a provision in favour of the consumer on the basis of any unbalanced bargaining position.  However, again, the application of the doctrine is fact-specific. 

As to interest rate rules applicable to mortgage loans, which constitute an important product in the context of Dutch securitisation transactions, the Code of Conduct Mortgage Loans ( Gedragscode Hypothecaire Financieringen ) issued by the Dutch Bankers Association ( Nederlandse vereniging van banken ) provides rules to calculate the “effective rate of interest”.  In addition, the Dutch Central Bank ( De Nederlandsche Bank ) publishes the average interest rates for various mortgage loan products on its website on a quarterly basis.  These disclosures provide Dutch mortgage originators with guidance on the interest rate that could be used for their mortgage loan products.  Although not determinative, such disclosures will influence whether an interest rate is “reasonable and fair”.  Dutch courts have also held that borrowers are entitled to expect that the interest rate that a lender charges should be consistent with the general rates of interest being used by other participants for comparable products.  Furthermore, Dutch regulations provide that, if an originator offers a mortgage loan with a floating interest rate, it must inform the consumer about the component (or components) of such interest rate, state whether the components are fixed or floating and provide information on the financial risks involved (e.g., if a rate switches from a fixed to a floating rate).  Finally, Dutch regulations provide that, if a mortgage loan has been granted with a floating interest rate, the originator must inform the consumer of any change in the interest rate (and any resets) during the term of the mortgage loan.  At the same time, the originator must inform the consumer about any consequential change to the annual percentage rate ( jaarlijks kostenpercentage ) and the component or components (e.g., rate and/or margin) that have changed the interest rate. 

On 4 February 2014, the European Parliament and Council adopted Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property, which also amends Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (the Directive ).  The Directive provides a comprehensive framework for advising on and the originating of mortgage loans to consumers.  The main topics included in the Directive can be categorised as follows: (i) prudential rules; (ii) information obligations (including pre-contractual information); (iii) mortgage loan products and characteristics; (iv) advising on mortgage loans; and (v) mortgage loan origination.  The Netherlands implemented the Directive into national legislation on 14 July 2016 by effecting changes to both the Dutch Civil Code ( Burgerlijk Wetboek ) and the Dutch Financial Supervision Act ( Wet op het financieel toezicht ).  It should be noted that the Directive (and the corresponding legislation in the Netherlands) only aims to cover mortgage loans that are originated after 21 March 2016. 

The impact of the Directive on the Dutch legal system is, however, not substantial, since the Dutch mortgage market is already heavily regulated with a number of rules and regulations, as well as self-regulating procedures.  In addition, in practice, many requirements of the Directive are already complied with by Dutch mortgage originators due to their compliance with the Code of Conduct Mortgage Loans ( Gedragscode Hypothecaire Financieringen ).  The Code of Conduct Mortgage Loans is still applicable and has not been abolished as a result of the implementation of the Directive into national legislation. 

The implementation of the Directive into national legislation has also not led to a repeal of the Temporary Regulation Mortgage Credit ( Tijdelijke regeling hypothecair krediet ), which, amongst others, purports to limit loan-to-value ratios.  The maximum loan-to-value ratio is currently set at 100 per cent. 

Section 6:119 or, as applicable, Section 6:119a of the Dutch Civil Code ( Burgerlijk Wetboek ), provides that statutory interest is payable on the unpaid part of a debt that is due and payable.  Section 6:119a of the Dutch Civil Code ( Burgerlijk Wetboek ) applies to agreements between companies and/or persons acting in the course of their profession or business, and which relate to commercial agreements.  The statutory rate of interest is determined by a Dutch governmental decree.  A creditor is entitled to the statutory interest, unless the parties agree on a higher interest rate.  Note, however, the comment above regarding the potential non-enforceability of unreasonably high rates of interest. 

As a general proposition, the Dutch Civil Code ( Burgerlijk Wetboek ) provides that a consumer has the right to cancel a contract without penalty or giving any reasons, during a period of 14 calendar days following entering into such contract.  This period starts on: (i) the day on which the contract was made or the goods were received; or (ii) the day on which the consumer received the information that the lender was required to supply the consumer. 

Note that if a consumer has a credit contract for an indefinite period of time, they have the right to terminate the contract free of charge and repay the outstanding amounts at any time.  If, however, a notice period has been included, this notice period may not be longer than one month. 

In addition, Dutch law provides a broad range of provisions protecting the interests of consumers.  The provisions of the Dutch Consumer Credit Act ( Wet op het consumentenkrediet ) have, as of 1 January 2017, largely been transposed to the Dutch Civil Code ( Burgerlijk Wetboek ) and have also been modernised.  The Dutch Civil Code ( Burgerlijk Wetboek ) now provides for an extensive framework on consumer credit, and extensive rules on the information lenders must provide to consumers before entering into the contract and the specific contents of the contract.  It also provides for a “black and grey” list of provisions that, if included in the general conditions applicable to a consumer credit contract, are considered (or deemed) unreasonably onerous towards a consumer and which will be void against such consumer.  Each list contains specific contractual terms, including contractual provisions that purport to exclude a consumer’s right to set off any amount it owes to the lender against any amount such consumer is owed by such lender.

1.3        Government Receivables. Where the receivables contract has been entered into with the government or a government agency, are there different requirements and laws that apply to the sale or collection of those receivables?

In principle, there are no different requirements applicable in a situation where an obligor has entered into a receivables contract with the government or a government agency. 

The government and government agencies are, however, subject to restrictions through the operation of Dutch public law and this may apply in relation to activities concerning the sale and purchase of receivables.  A key principle is the requirement that the government or government agencies need to act in accordance with the Dutch law principle of “good management” ( algemene beginselen van behoorlijk bestuur ).  In addition, a government entity or agency may not exercise any right it has under a private law arrangement to serve a public interest, if and to the extent that sufficient powers are available under public law to serve such interest.  If public law does not provide for the government or government agency a particular right, then such right may be exercised under private law but only to the extent it does not conflict or otherwise seek to circumvent public law in a manner contrary to public policy.

2.1        No Law Specified. If the seller and the obligor do not specify a choice of law in their receivables contract, what are the main principles in your jurisdiction that will determine the governing law of the contract?

Section 4 of the EC Regulation on the law applicable to contractual obligations of 17 June 2008 (the Rome I Regulation ) determines the governing law of an agreement absent any express choice of law by the parties.  Dutch law follows Section 4 of the Rome I Regulation.  Specifically, a receivables contract will be governed by the law of the country where the party having to effect the “characteristic performance” of the contract has its habitual residence, unless it is clear from all the relevant circumstances of the matter that the receivables contract has a closer connection with another country, in which case the law of such other country applies.  Sections 5 to 8 of the Rome I Regulation contain exceptions to the rule of Section 4, which includes consumer, insurance and individual employment contracts.

2.2        Base Case. If the seller and the obligor are both resident in your jurisdiction, and the transactions giving rise to the receivables and the payment of the receivables take place in your jurisdiction, and the seller and the obligor choose the law of your jurisdiction to govern the receivables contract, is there any reason why a court in your jurisdiction would not give effect to their choice of law?

Dutch law will follow the general principle laid down in Section 3 of the Rome I Regulation in that the contract shall be governed by the law chosen by the parties.  If the parties choose Dutch law as the law governing the contract, and all other elements of the matter are linked to the Netherlands, then other things being equal, there is no reason why the choice of Dutch law by the parties would not be upheld by a Dutch court.

2.3        Freedom to Choose Foreign Law of Non-Resident Seller or Obligor. If the seller is resident in your jurisdiction but the obligor is not, or if the obligor is resident in your jurisdiction but the seller is not, and the seller and the obligor choose the foreign law of the obligor/seller to govern their receivables contract, will a court in your jurisdiction give effect to the choice of foreign law? Are there any limitations to the recognition of foreign law (such as public policy or mandatory principles of law) that would typically apply in commercial relationships such as that between the seller and the obligor under the receivables contract?

In principle, yes.  A Dutch court will in such a scenario give effect to the choice of foreign law.  However, following the Rome I Regulation, Dutch courts: (i) may give effect to overriding mandatory provisions of the law of the country where the obligations arising out of the contract must be or have been performed, insofar as those overriding mandatory provisions render the performance of the contract unlawful; (ii) shall have regard to the law of the country in which the performance takes place in relation to the manner of performance and the steps to be taken in event of defective performance; and (iii) may refuse the application of a provision of the law of any country otherwise applicable to the contract, if such application is manifestly incompatible with the public policy ( ordre public ) of the Netherlands.  Furthermore, where all the other elements relevant to the situation at the time of the choice of the laws of the foreign jurisdiction (as the governing law of the contract) are located in a country other than the foreign jurisdiction, the choice of the parties shall not prejudice the application of provisions of the law of that other country that cannot be derogated from by agreement.

3.1        Base Case. Does your jurisdiction’s law generally require the sale of receivables to be governed by the same law as the law governing the receivables themselves? If so, does that general rule apply irrespective of which law governs the receivables (i.e., your jurisdiction’s laws or foreign laws)?

Dutch law permits the choice of foreign law as the governing law for transactions with a foreign element, e.g., a transaction involving foreign parties or assets located outside the Netherlands.  However, such choice of law is subject to limitations relating to public policy and certain mandatory rules as set out in the Rome I Regulation.  With respect to the question of which law governs the proprietary aspects of the assignment of receivables (such as the requirements for a valid and effective assignment, and issues relating to collection and enforcement), the Dutch Supreme Court has ruled that Article 12(1) of the (then) Rome Convention (now Article 14(1) of the Rome I Regulation) not only applies to the obligatory aspects but also to the proprietary aspects of the transfer.  This is now set out in title 10, book 10 of the Dutch Civil Code ( Burgerlijk Wetboek ).  This means that the parties are free to choose the governing law in respect of the proprietary aspects of an assignment subject to the limitations set out in the Rome I Regulation.

3.2        Example 1: If (a) the seller and the obligor are located in your jurisdiction, (b) the receivable is governed by the law of your jurisdiction, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of your jurisdiction to govern the receivables purchase agreement, and (e) the sale complies with the requirements of your jurisdiction, will a court in your jurisdiction recognise that sale as being effective against the seller, the obligor and other third parties (such as creditors or insolvency administrators of the seller and the obligor)?

A Dutch court would recognise the sale and assignment of the receivable under the Dutch law-governed receivables purchase agreement.  The sale and assignment will be effective against the seller, the obligor and other third parties (such as creditors and bankruptcy trustees of the seller and the obligor).  However, the efficacy of the sale and assignment is subject to the following limitations, which, if applicable, may render such sale and assignment ineffective or otherwise void, in whole or in part, against such seller, obligor or other such third parties.  Firstly, any applicable bankruptcy, insolvency, moratorium, suspension of payments, emergency and other similar rules and laws of general application relating to or affecting generally the enforcement of creditors’ rights and remedies from time to time in effect.  Secondly, any legal act ( rechtshandeling ) by any party and the validity of a transaction is subject to and limited by the protection afforded by Dutch law to creditors whose interests have been adversely affected.  These rules relate to: (i) unlawful acts ( onrechtmatige daden ) based on Section 6:162 et seq. of the Dutch Civil Code ( Burgerlijk Wetboek ); and (ii) fraudulent conveyances or preferences ( actio pauliana ) within the meaning of Section 3:45 of the Dutch Civil Code ( Burgerlijk Wetboek ) and/or Section 42 et seq. of the Dutch Bankruptcy Act ( Faillissementswet ).

3.3        Example 2: Assuming that the facts are the same as Example 1, but either the obligor or the purchaser or both are located outside your jurisdiction, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller), or must the foreign law requirements of the obligor’s country or the purchaser’s country (or both) be taken into account?

A Dutch court would recognise the sale and assignment of the receivable under the Dutch law-governed receivables purchase agreement.  The sale and assignment will be effective against the seller and other third parties (such as creditors and bankruptcy trustees of the seller).  This is the case even if the requirements for an effective sale and assignment under the laws of the obligor or purchaser’s country have not been complied with.  However, the efficacy of such sale and assignment is subject to the limitations described in question 3.1 above.

3.4        Example 3: If (a) the seller is located in your jurisdiction but the obligor is located in another country, (b) the receivable is governed by the law of the obligor’s country, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the obligor’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the obligor’s country, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller) without the need to comply with your jurisdiction’s own sale requirements?

A Dutch court would recognise the sale and assignment of the receivable under the law governing the receivables purchase agreement.  The sale and assignment will be effective against the seller and other third parties (such as creditors and bankruptcy trustees of the seller).  This is the case even if the requirements for an effective sale and assignment under Dutch law have not been complied with.  However, under Dutch law, the efficacy of such sale and assignment is subject to the limitations described in question 3.1 above.

3.5        Example 4: If (a) the obligor is located in your jurisdiction but the seller is located in another country, (b) the receivable is governed by the law of the seller’s country, (c) the seller and the purchaser choose the law of the seller’s country to govern the receivables purchase agreement, and (d) the sale complies with the requirements of the seller’s country, will a court in your jurisdiction recognise that sale as being effective against the obligor and other third parties (such as creditors or insolvency administrators of the obligor) without the need to comply with your jurisdiction’s own sale requirements?

A Dutch court would recognise the sale and assignment of the receivable under the law governing the receivables purchase agreement.  The sale and assignment will be effective against the obligor and other third parties (such as creditors and bankruptcy trustees of the obligor).  This is the case even if the requirements for an effective sale and assignment under Dutch law have not been complied with.  However, under Dutch law, the efficacy of such sale and assignment is subject to the limitations described in question 3.1 above.

3.6        Example 5: If (a) the seller is located in your jurisdiction (irrespective of the obligor’s location), (b) the receivable is governed by the law of your jurisdiction, (c) the seller sells the receivable to a purchaser located in a third country, (d) the seller and the purchaser choose the law of the purchaser’s country to govern the receivables purchase agreement, and (e) the sale complies with the requirements of the purchaser’s country, will a court in your jurisdiction recognise that sale as being effective against the seller and other third parties (such as creditors or insolvency administrators of the seller, any obligor located in your jurisdiction and any third party creditor or insolvency administrator of any such obligor)?

A Dutch court would recognise the sale and assignment of the receivable under the law governing the receivables purchase agreement.  The sale and assignment will be effective against the seller, an obligor located in the Netherlands and other third parties (such as creditors and bankruptcy trustees of the seller and such obligor).  However, under Dutch law the efficacy of such sale and assignment is subject to the limitations described in question 3.1 above.

4.1        Sale Methods Generally. In your jurisdiction what are the customary methods for a seller to sell receivables to a purchaser? What is the customary terminology – is it called a sale, transfer, assignment or something else?

In the Netherlands, the customary method of transferring receivables from a seller to a purchaser is by way of a sale ( verkoop ) and assignment ( cessie ).  Notwithstanding this, the terms “sale”, “assignment” and “transfer” are used interchangeably. 

The sale is usually recorded in a written contract, namely, a receivables sale and purchase agreement (or just a “receivables purchase agreement”).  The contract of sale and purchase creates an acceptable “legal title” ( titel ), which is required under Dutch law for an effective transfer of a receivable.  “Title” in this context means the method by which an asset is conveyed and not the strength of the interest of the seller in the receivable.  In order to perfect the transfer and make the purchaser the legal owner of the receivables, valid delivery ( levering ) of the receivable is required.  This is customarily achieved by the parties entering into a deed of assignment.

Such a transfer can either be structured as a disclosed assignment, meaning, a receivables transfer with notification to the underlying obligor ( openbare cessie ) or, in respect of receivables that exist or are arising from an existing legal relationship at the time of the transfer, as an undisclosed assignment ( stille cessie ), meaning a receivables transfer without notification to the underlying obligor.  Any perfection requirements applicable to both forms of assignment are further described under question 4.2 below.

4.2        Perfection Generally. What formalities are required generally for perfecting a sale of receivables? Are there any additional or other formalities required for the sale of receivables to be perfected against any subsequent good faith purchasers for value of the same receivables from the seller?

For a valid transfer of receivables, Dutch law requires: (i) a seller that has all the required power to dispose of the receivables ( beschikkingsbevoegdheid ); (ii) a valid title for the transfer of the receivables ( geldige titel ), which is customarily recorded in the receivables purchase agreement; and (iii) a valid delivery ( levering ) of the receivables.  As set out under question 4.1 above, the delivery can be a disclosed assignment ( openbare cessie ) or, in respect of receivables that exist or are arising from an existing legal relationship at the time of the transfer, as an undisclosed assignment ( stille cessie ). 

In order to perfect a disclosed assignment, notification of the sale and assignment to the underlying obligors is required at the time of the transfer. 

For an undisclosed assignment to be effective, the underlying transfer deed ( cessie-akte ) should either be registered with the Dutch Tax Authorities or drawn up in a notarial format and executed in front of a Dutch civil law notary.  In the case of an undisclosed assignment, in order to prevent a valid discharge ( bevrijdende betaling ) of the debt obligation under the receivable by the underlying obligor to the seller (as opposed to the purchaser), notification of the sale and assignment is required.  Following such notification, the obligor can only validly discharge its payment obligations by making the relevant payment to the purchaser.  This is particularly important in the case of an actual or potential insolvency of the seller where notification of the sale to the obligor would avoid payments being made by the obligor into the insolvent estate of the seller, to the detriment of the purchaser.  See question 4.4 below. 

There are no other formalities required for the perfection of the sale of receivables by a seller to a purchaser so as to bind any subsequent good faith purchasers for the value of the same receivables from the seller. 

In the case of multiple sales of a receivable by the same seller, a subsequent purchaser of such a receivable will not be protected against any prior assignment so long as such prior assignment was perfected.  This is irrespective of any good faith on the part of the subsequent assignee.  A potential mitigant for the subsequent assignee is to invoke Section 3:36 of the Dutch Civil Code ( Burgerlijk Wetboek ), which provides certain protection to a third-party purchaser.  However, the likelihood of success for the subsequent assignee may be small as it is not easy to comply with the requirements of this provision in the Dutch Civil Code ( Burgerlijk Wetboek ), in part due to the burden of proof on the purchaser.  Instead, a subsequent assignee’s main cause of action would be a damages claim against the seller, say, for breach of asset and title warranties.

4.3        Perfection for Promissory Notes, etc. What additional or different requirements for sale and perfection apply to sales of promissory notes, mortgage loans, consumer loans or marketable debt securities?

The law on negotiable instruments, such as a promissory note, is set out in the Dutch Commercial Code ( Wetboek van Koophandel ).  The relevant provisions of the Dutch Commercial Code reflect, for the most part, the terms of the 1930 and 1931 Geneva Conventions to which the Netherlands is a party.  However, these provisions of the Dutch Commercial Code only apply to a promissory note payable to order and so long as the instrument qualifies as a negotiable instrument under the Dutch Commercial Code. 

A promissory note payable to order must state the name of the person to whom or to whose order the relevant payment must be made.  Under Dutch law, a promissory note payable to order is transferred by means of physical delivery of the instrument to the endorsee ( geëndosseerde ) and an endorsement to be written on (the back of) the promissory note itself or on a slip affixed thereto ( verlengstuk ).  Such delivery must be effected by a person under a valid title and with the requisite power to dispose of the instrument.  

A promissory note payable to a bearer of the note is governed by Dutch law applicable to bearer instruments.  A transfer of ownership of a bearer instrument requires delivery through the transfer of possession ( bezitsverschaffing ) of the instrument to the purchaser, by a person under a valid title and with the requisite power to dispose of the instrument. 

Under Dutch law, the proprietary aspects (such as the transfer of ownership) of book entry securities ( girale effecten ) held in a securities account with an applicable bank or other entity, are governed by the laws of the state in whose territory the relevant bank maintains the securities account in which such securities are held.  Under Dutch law, the laws of such state will determine: (i) which proprietary rights can be vested in the securities, as well as the nature and contents of such rights; (ii) the perfection requirements for a transfer of the securities or for the vesting of a proprietary right in such securities; (iii) which party is entitled to exercise any rights attached to the securities; (iv) the manner in which the contents of any proprietary rights in the securities can vary, the manner in which any proprietary rights in such securities may pass by operation of law ( overgaan ), the manner in which any proprietary rights in the securities terminate and the nature of the relationship between the various proprietary rights in such securities; and (v) the method of foreclosure in respect of any applicable proprietary rights in the securities. 

Under Dutch law, securities held through and registered with Euroclear Netherlands will be transferred in accordance with the Securities Giro Act ( Wet Giraal Effectenverkeer or Wge ).  The Wge provides for a transfer of the relevant securities by means of a book entry in the name of the purchaser at the bank where the securities are held.

4.4        Obligor Notification or Consent. Must the seller or the purchaser notify obligors of the sale of receivables in order for the sale to be effective against the obligors and/or creditors of the seller? Must the seller or the purchaser obtain the obligors’ consent to the sale of receivables in order for the sale to be an effective sale against the obligors? Whether or not notice is required to perfect a sale, are there any benefits to giving notice – such as cutting off obligor set-off rights and other obligor defences?

As set out under question 4.2 above, a valid transfer of receivables can be achieved by a silent assignment or a disclosed assignment. 

With respect to the enforceability of the assignment against the obligors under a disclosed and undisclosed assignment, notification of the assignment to the obligors is required in order to require the obligors to validly discharge their payment obligations under the receivables to the purchaser.  Prior to such notification, obligors can only validly discharge their payment obligations under the receivables by paying the seller. 

In the case of an undisclosed assignment, payments made by obligors to the seller prior to notification of the assignment to the purchaser, but after bankruptcy, (preliminary) suspension of payments or emergency regulations in respect of the seller having been declared, will form part of the seller’s estate.  In respect of such payments, the purchaser will become a creditor of the estate ( boedelschuldeiser ) and be entitled to receive payment from the seller’s estate in priority to the seller’s unsecured creditors, but after any preferred creditors.  In addition, the purchaser will have to share in the general bankruptcy costs of the seller meaning that any enforcement proceeds will potentially be reduced as a result of such costs.  After notification of the assignment is made to the obligors, such obligors can only validly discharge their payment obligations under the receivables by paying the purchaser. 

Under Dutch law, the obligor’s consent is not required for any sale and assignment of receivables, unless the contract or arrangement constituting or otherwise affecting the receivables contains a restriction or prohibition on any sale and assignment of such receivables.  This is discussed under question 4.7 below. 

In addition, note that under Section 7:69(2) of the Dutch Civil Code ( Burgerlijk Wetboek ), consumers under consumer credit agreements (but not mortgage loans) should be informed of any sale and assignment of the credit arrangement.  There is an exception to this rule if the seller (as originator of the loan) continues to manage and service the credit relationship with the consumer following such sale and assignment. 

In respect of set-off, under Dutch law, an obligor has a right of set-off against a counterparty if it has a counterclaim that corresponds to its debt to the same counterparty, and the debtor is entitled to pay its debt to the counterparty as well as being entitled to enforce its payment claim against such counterparty.  If these requirements are met, an obligor is entitled to set off any amounts due by the seller to the obligor against the obligor’s payment obligations to the seller under the receivable, but only prior to notification to the obligor of the sale and assignment of the receivables by the seller to the purchaser.  As a result of the operation of the set-off, the amount payable by the obligor to the seller under a receivable will be in whole or in part extinguished ( gaat teniet ). 

After notification of the sale and assignment, an obligor will have a similar right of set-off against the purchaser provided that the legal requirements for set-off described above have been met.  In addition, the following must also be satisfied: either (i) the counterclaim of the obligor against the seller results from the same legal relationship as between the obligor and seller under the transferred receivable; or (ii) the counterclaim of the obligor against the seller was originated and became due and payable prior to the sale and assignment and subsequent notification of such sale and assignment to the obligor. 

The question as to whether a Dutch court will conclude that the receivable and the counterclaim of the obligor against the seller results from the same legal relationship will depend on the relevant facts and circumstances.  However, even if a Dutch court came to the conclusion that the claim and counterclaim originated from a different set of legal relationships between the obligor and seller, the obligor may still be able to invoke a right of set-off against the seller or purchaser, as applicable, if the counterclaim of the obligor against the seller originated ( opgekomen ) and became due and payable prior to notification of the sale and assignment of the receivable to the purchaser.  This is on the grounds of the Dutch law principle of “reasonableness and fairness”, under which a Dutch court may conclude that it would not in such circumstances be appropriate to deny an obligor a right of set-off, even if the claim and counterclaim objectively originate from different legal relationships. 

Finally, a seller may purport to limit by contract, or otherwise, the right of an obligor to invoke a right of set-off.  If the obligor is a consumer, such limitation would in principle contravene certain Dutch consumer protection law and, accordingly, is capable of being declared null and void by the relevant consumer.

4.5        Notice Mechanics. If notice is to be delivered to obligors, whether at the time of sale or later, are there any requirements regarding the form the notice must take or how it must be delivered? Is there any time limit beyond which notice is ineffective – for example, can a notice of sale be delivered after the sale, and can notice be delivered after insolvency proceedings have commenced against the obligor or the seller? Does the notice apply only to specific receivables or can it apply to any and all (including future) receivables? Are there any other limitations or considerations?

There are no formal requirements on the form or method of delivering a notice to an obligor.  Oral notification is possible but not recommended, as notification may be disputed due to a lack of evidence.  Under Section 3:37 of the Dutch Civil Code ( Burgerlijk Wetboek ), a notice will only be duly delivered upon receipt by the counterparty, except if non-receipt of such notification is deemed to be a risk borne by such counterparty.  This could be the case if the address details of a Dutch company do not correspond with the information set out in the public registers or contract. 

It is possible to notify an obligor by using a single notice of assignment in respect of a number of receivables.  The notice should specify that any and all receivables that the seller has, or that may originate in the future, under which that obligor has (or will have, as applicable) a payment obligation, have been (or will be, as applicable) assigned to the purchaser. 

Notification to an obligor after any insolvency of the seller (e.g., bankruptcy or a suspension of payments) is possible.  There may, however, be consequences on the ability of the purchaser to recover the payments made by an obligor to the seller in respect of the relevant receivables. 

In the case of an undisclosed assignment, and as discussed under question 4.2 above, payments made by an obligor to a seller prior to notification of the assignment to the purchaser, but after bankruptcy, (preliminary) suspension of payments or emergency regulations in respect of the seller having been declared, will form part of the seller’s estate.  In respect of these payments, the purchaser will be a creditor of the estate ( boedelschuldeiser ).  However, notification to the obligors after the insolvency of the seller is still possible and will be effective. 

The situation is different in the case of a disclosed assignment.  In order to be valid, a disclosed assignment requires notification to the obligor.  If such notification has not occurred prior to any insolvency of the seller, such sale and assignment will not be effective and legal title to the receivables will not have passed from the seller to the purchaser.

4.6        Restrictions on Assignment – General Interpretation. Will a restriction in a receivables contract to the effect that “None of the [seller’s] rights or obligations under this Agreement may be transferred or assigned without the consent of the [obligor]” be interpreted as prohibiting a transfer of receivables by the seller to the purchaser? Is the result the same if the restriction says “This Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” (i.e., the restriction does not refer to rights or obligations)? Is the result the same if the restriction says “The obligations of the [seller] under this Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” (i.e., the restriction does not refer to rights)?

In answering this question, we have assumed that the relevant receivables contract is governed by Dutch law.  Based on Dutch private international law and the relevant provisions of the Rome I Regulation, the interpretation of any contractual restriction will be in accordance with Dutch law. 

When interpreting contracts, a Dutch court will not only look at the literal meaning of the clause, but also take into account all relevant facts and circumstances of the matter.  It will also consider the meaning that the parties to the contract would have reasonably given to the specific clause, and what each party could have reasonably expected from each other, again in the particular circumstances. 

A restriction stating that “None of the [seller’s] rights or obligations under this Agreement may be transferred or assigned without the consent of the [obligor]” will likely be interpreted by a Dutch court as prohibiting a transfer of receivables by the seller.  This assumes that there are no additional facts or circumstances that would affect this conclusion; for example, a subsequent written or oral variation of the restriction. 

A restriction stating that “this Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” (i.e., the restriction does not refer to rights or obligations), will likely be interpreted by a Dutch court in the same way as described above. 

A restriction stating that “the obligations of the [seller] under this Agreement may not be transferred or assigned by the [seller] without the consent of the [obligor]” will likely not have a similar effect as the provisions described above.  This is because the restriction does not restrict the transferability of rights (such as receivables) of the seller under the contract, rather the obligations of a seller.  As mentioned above, this assumes that there are no additional facts or circumstances that would affect this conclusion.  For example, there must be no subsequent written or oral variation of the restriction, or factors that suggest the parties intended to also prohibit an assignment of receivables and not merely obligations.

4.7        Restrictions on Assignment; Liability to Obligor. If any of the restrictions in question 4.6 are binding, or if the receivables contract explicitly prohibits an assignment of receivables or “seller’s rights” under the receivables contract, are such restrictions generally enforceable in your jurisdiction? Are there exceptions to this rule (e.g., for contracts between commercial entities)? If your jurisdiction recognises restrictions on sale or assignment of receivables and the seller nevertheless sells receivables to the purchaser, will either the seller or the purchaser be liable to the obligor for breach of contract or tort, or on any other basis?

Under Dutch law, the general principle is that a party may assign its rights under a contract unless such assignment is restricted by law or contract.  This is on the basis that the right is a proprietary right (so-called right in rem ) rather than a personal right (so-called right in personam ) that is not capable of being assigned to another party. 

Parties can agree to restrict the assignment of receivables arising under a contract, e.g., making such a transfer or assignment subject to prior consent, written or otherwise.  Depending on the wording of a contract, such a restriction can even have a proprietary effect ( goederenrechtelijk effect ).  Whether or not a restriction has a proprietary effect will be a question of fact and dependent on the wording of the restriction.  It should be clear from the face of the provision that the parties expressly intended to create a restriction on the transfer of the receivables. 

Any assignment by a seller in contravention of a restriction that has a proprietary effect would be invalid.  Furthermore, it would not be enforceable against the obligor under the receivable purported to be assigned.

4.8        Identification. Must the sale document specifically identify each of the receivables to be sold? If so, what specific information is required (e.g., obligor name, invoice number, invoice date, payment date, etc.)? Do the receivables being sold have to share objective characteristics? Alternatively, if the seller sells all of its receivables to the purchaser, is this sufficient identification of receivables? Finally, if the seller sells all of its receivables other than receivables owing by one or more specifically identified obligors, is this sufficient identification of receivables?

The receivables purported to be assigned under a deed of assignment should be sufficiently identifiable ( omschrijft met voldoende bepaaldheid ) within the meaning of Section 3:84(2) of the Dutch Civil Code ( Burgerlijk Wetboek ).  Under Dutch law, a receivable is “sufficiently identifiable” if the deed of assignment contains such details of the receivables purported to be assigned, such that it can be determined which receivables the parties have intended to assign.  The deed of assignment does not need to contain all the details of the assigned receivables.  However, there needs to be sufficient data to enable it to be established which receivables were the subject of the assignment (e.g., details of the contract (e.g., an invoice or obligor number and corresponding principal amount outstanding on the applicable date of assignment) under which the relevant assigned receivables have been originated).  It is also possible to use more generic wording, which is often used by banks and professional market parties.  This method is used when the intention is to capture all relevant receivables in the books of the seller on the date of the assignment.  To ensure that future originated receivables are also effectively assigned using such method, periodic updates of the list of receivables specified in the deed of assignment is desirable (and customary, for example, by using supplemental deeds of assignment) to satisfy the requirement that the assigned receivables are sufficiently identifiable so as to be effectively assigned.  Please also see our answer to question 4.11 below.

4.9        Recharacterisation Risk. If the parties describe their transaction in the relevant documents as an outright sale and explicitly state their intention that it be treated as an outright sale, will this description and statement of intent automatically be respected or is there a risk that the transaction could be characterised by a court as a loan with (or without) security? If recharacterisation risk exists, what characteristics of the transaction might prevent the transfer from being treated as an outright sale? Among other things, to what extent may the seller retain any of the following without jeopardising treatment as an outright sale: (a) credit risk; (b) interest rate risk; (c) control of collections of receivables; (d) a right of repurchase/redemption; (e) a right to the residual profits within the purchaser; or (f) any other term?

Dutch law does not expressly provide for the recharacterisation of a transaction structured as an outright transfer as a secured loan.  There is, however, academic debate as to whether or not this is possible. 

The most important factor in the characterisation of the transaction is the intention of the parties.  The parties must intend that the sale of the receivables is by way of an outright transfer and that the seller intends to sell, and the purchaser intends to purchase, the receivable, in both cases in a way that there is no residual ownership interest retained by the seller. 

Without any express provisions or authority under Dutch law, jurisprudence of other jurisdictions may, in our view, be helpful (although it should be emphasised, it is not necessarily relevant or determinative) to support or discredit any recharacterisation analysis under Dutch law.  For example, it is important that the purchaser is free to deal with the acquired receivables and capable of onselling them to a third party without any obligation to account for any profit to, or recover any loss from, the seller.  Accordingly, any retention of credit risk in relation to a receivable by a seller (such that the seller remains exposed to the credit risk on the relevant receivable) is not itself necessarily helpful to the true-sale analysis.  The same would apply in relation to any control the seller retains in relation to determining the interest rate payable under a receivable.  It is often the case that a seller may only amend an interest rate with the consent of the purchaser, and that if the seller does retain a right to amend an interest rate, that the seller acts in its capacity as a servicer appointed by the purchase (see further below).  Finally, (i) the existence of a repurchase obligation of the seller for receivables sold to the purchaser in breach of representations and warranties, or (ii) the existence of a repurchase option by the seller of the receivables sold to the purchaser, provided the repurchase is conducted on arm’s-length terms, including the repurchase price or the division of the purchase price payable by a purchaser to a seller into an initial and deferred purchase price, will not in itself be considered inconsistent with the existence of a true sale.  The same applies to the seller retaining control of the collections, provided the seller acts for and on behalf of the purchaser (i.e., as a servicer), again, on arm’s-length terms. 

Note that if there is any recharacterisation of a sale into a security interest, the sale would automatically be void under Section 3:84(3) of the Dutch Civil Code ( Burgerlijk Wetboek ), which provides that any agreement that purports to transfer an asset by way of security or which does not purport to transfer an asset, in such a way that it does not become part of the assets of a purchaser, is not a valid title.  See question 4.1 above on the requirement of a valid title. 

Sellers often have a repurchase obligation in certain circumstances under Dutch RMBS transactions.  Sellers also have the right to excess spread generated by the transaction in the form of deferred purchase price payable by the special purpose vehicle ( SPV ) to a seller.  Both features do not in general adversely affect the true-sale analysis as a matter of Dutch law.

4.10      Continuous Sales of Receivables. Can the seller agree in an enforceable manner to continuous sales of receivables (i.e., sales of receivables as and when they arise)? Would such an agreement survive and continue to transfer receivables to the purchaser following the seller’s insolvency?

Yes, this is possible.  A seller may agree to a sale of all of its current and future receivables.  The efficacy of the sale will be subject to the limitations described in question 3.1 above.

4.11      Future Receivables. Can the seller commit in an enforceable manner to sell receivables to the purchaser that come into existence after the date of the receivables purchase agreement (e.g., “future flow” securitisation)? If so, how must the sale of future receivables be structured to be valid and enforceable? Is there a distinction between future receivables that arise prior to versus after the seller’s insolvency?

Under Dutch law, it is possible to sell and assign receivables before they have come into existence ( bij voorbaat ), so that the purchaser automatically becomes the owner of such receivables when they do.  If the assignment is undisclosed (as opposed to disclosed), only future receivables that arise under an existing legal relationship can be validly transferred.  Future receivables that do not arise under an existing legal relationship can only be transferred pursuant to a disclosed assignment.

The assignment of future receivables is perfected at the time the future receivable is acquired by the seller. 

Any receivables acquired by the seller after the date of its insolvency would form part of its estate and would not be validly assigned.

4.12      Related Security. Must any additional formalities be fulfilled in order for the related security to be transferred concurrently with the sale of receivables? If not all related security can be enforceably transferred, what methods are customarily adopted to provide the purchaser the benefits of such related security?

Under Dutch law, security rights, such as mortgage rights and pledges ( pandrechten ), are considered both accessory rights ( afhankelijke rechten ) and ancillary rights ( nevenrechten ).  These rights transfer automatically by operation of law, together with the receivables to which they are connected.  So, upon assigning a receivable, the purchaser in principle also has the benefit of any security rights that are connected to it. 

However, financial institutions or professional market parties often use security rights, which do not only secure a specific loan granted to an obligor under its secured financing arrangement, but also other liabilities and monies that such an obligor, now or in the future, may owe to the seller (so-called “all-monies security” rights) ( bankzekerheidsrechten ). 

The prevailing view amongst Dutch legal academics is that an all-monies security right (partially) follows the receivable as an accessory right upon assignment.  Whether an all-monies security right remains with the original seller or (partially) transfers to the purchaser will be a matter of interpreting the relevant deed creating such security right. 

If an all-monies security right has (partially) transferred to the purchaser, it will be jointly held by the relevant seller and purchaser and the rules applicable to a joint estate ( gemeenschap ) apply.  On the basis of Section 3:166(2) of the Dutch Civil Code ( Burgerlijk Wetboek ), the shares of the co-owners are equal, unless their legal relationship provides otherwise.  To mitigate against the potential for disputes as a result of jointly-held interests, the relevant receivables purchase agreement will often contain contractual arrangements between the seller and the purchaser in respect of the management, administration and foreclosure procedures in respect of any jointly held rights. 

It is noted that such a contractual agreement may not be effective as against the underlying obligors and may not be enforceable to the extent that such arrangement is inconsistent with Dutch legislation applying to jointly held interests.

4.13      Set-Off; Liability to Obligor. Assuming that a receivables contract does not contain a provision whereby the obligor waives its right to set-off against amounts it owes to the seller, do the obligor’s set-off rights terminate upon its receipt of notice of a sale? At any other time? If a receivables contract does not waive set-off but the obligor’s set-off rights are terminated due to notice or some other action, will either the seller or the purchaser be liable to the obligor for damages caused by such termination?

Under Dutch law, an obligor will be entitled to set off amounts it owes to the seller against amounts owed to it by the seller, provided that the legal requirements for set-off, such as mutuality, are met.  After an assignment of the receivable to the purchaser, and notification of such assignment to the obligor, the obligor will also be entitled to such set-off rights vis-à-vis the purchaser, provided that the legal requirements for set-off are met (but except for mutuality).  The key requirements are that: (i) the counterclaim of the obligor results from the same legal relationship as the assigned receivable; or (ii) the counterclaim of the obligor came into existence and became due and payable prior to the assignment of the receivable and the notification of such assignment to the debtor. 

Whether a court comes to the conclusion that the receivable and the claim of the obligor against the seller result from the same legal relationship will depend on all relevant facts and circumstances involved.  However, even if these would be held to be different legal relationships, it cannot be ruled out, depending on the circumstances, that set-off will be possible if the counterclaim of the obligor came into existence and became due and payable prior to notification of the assignment, provided that all other requirements for set-off have been met. 

This limitation of the obligor’s set-off right does not lead to liability for either the seller or purchaser. 

In the bankruptcy of a seller, an obligor will have broader set-off rights afforded to him pursuant to the Dutch Bankruptcy Act ( Faillissementswet ).  Under the Dutch Bankruptcy Act ( Faillissementswet ), a person who is both an obligor and creditor of the bankrupt counterparty can set off his debt against his claim, if such claim (a) came into existence prior to the moment at which the bankruptcy has become effective, or (b) resulted from transactions with the bankrupt counterparty, which concluded prior to the bankruptcy being declared.  Also, the new Dutch scheme legislation, which entered into force on 1 January 2021 and provides for a pre-insolvency procedure to restructure a company’s business through a scheme between the company and its creditors and/or shareholders, permits set-off under certain conditions if such set-off takes place as part of a financing arrangement that remains available during the restructuring process.

In relation to consumer loans (but excluding mortgages), consumers are entitled to invoke the same defences and rights (including set-off) against the purchaser as they would have had against the originator.

4.14      Profit Extraction. What methods are typically used in your jurisdiction to extract residual profits from the purchaser?

The principal method is excess spread payable to the seller as the holder of the most junior class of notes issued by the note issuing SPV.  The excess spread is often attributable to the contingent deferred purchase price payable by the SPV to the seller for the receivables.  In addition, under Dutch RMBS transactions involving a financial institution as the seller, the interest rate swap can be used by the seller to extract income from the securitised cashflows.  This is done by the seller entering into a back-to-back interest rate swap with the swap counterparty that provides the interest rate hedging to the note issuing SPV.

5.1        Back-up Security. Is it customary in your jurisdiction to take a “back-up” security interest over the seller’s ownership interest in the receivables and the related security, in the event that an outright sale is deemed by a court (for whatever reason) not to have occurred and have been perfected (see question 4.9 above)?

To avoid recharacterisation risks, it is customary in the Netherlands not to take back-up security when selling and assigning receivables.  To take such security is generally not advisable.

5.2        Seller Security. If it is customary to take back-up security, what are the formalities for the seller granting a security interest in receivables and related security under the laws of your jurisdiction, and for such security interest to be perfected?

As provided for under question 5.1 above, it is not customary in the Netherlands to take back-up security.

5.3        Purchaser Security. If the purchaser grants security over all of its assets (including purchased receivables) in favour of the providers of its funding, what formalities must the purchaser comply with in your jurisdiction to grant and perfect a security interest in purchased receivables governed by the laws of your jurisdiction and the related security?

5.4        Recognition. If the purchaser grants a security interest in receivables governed by the laws of your jurisdiction, and that security interest is valid and perfected under the laws of the purchaser’s jurisdiction, will the security be treated as valid and perfected in your jurisdiction or must additional steps be taken in your jurisdiction?

The law used to determine whether the grant of a security interest over receivables is valid, is the applicable law under the contract purporting to grant such security. 

The governing law of the receivables contract itself will determine: (i) whether the receivable is capable of being pledged; (ii) the legal relationship between the pledgor and the obligor; (iii) the conditions under which the granting of a security right over the receivable is enforceable against the obligor; and (iv) whether the obligations of the obligor have been paid in full and are validly discharged. 

Subject to similar exceptions to the validity of the choice of law of the purchaser’s country or any third country (other than the Netherlands) as set out under both question 2.3 above and the above paragraph, a foreign security right will be recognised in the Netherlands, without any additional steps in relation to recognition being required. 

Note that there is no conclusive case law in the Netherlands regarding the enforcement of security rights created under foreign law.  The general view is that, if a foreign security right is recognised, such foreign security right will be enforced and will have the ranking that an equivalent security right under Dutch law would have.  This means that a security holder will not have any more rights than it would have had if its security right would have been governed by Dutch law.

5.5        Additional Formalities. What additional or different requirements apply to security interests in or connected to insurance policies, promissory notes, mortgage loans, consumer loans or marketable debt securities?

Under Dutch law, a right of pledge over a promissory note payable to the bearer is created by: (i) the pledgor and the pledgee entering into a pledge agreement, and by the physical delivery of the instrument to the pledgee or a third party agreed upon by the pledgor and the pledgee; or (ii) a notarial or registered deed without physical delivery.  A right of pledge over a promissory note payable to order is created in the manner mentioned under (i), provided that in addition to that, an endorsement is written on (the back of) the promissory note itself or on a slip affixed thereto ( verlengstuk ). 

If the marketable debt securities held by the seller are cleared through and registered with Euroclear Netherlands pursuant to the Wge, then a pledge over these securities are effectuated by means of a simple book entry in the name of the pledgee in the relevant bank’s records. 

We note, however, that pursuant to Dutch private international law, the law governing the creation of a security interest in securities held in a securities account with a bank or other entity is the law of the state in which the relevant bank maintains the account. 

There are no additional or different requirements for the creation and perfection of a right of pledge over receivables resulting from consumer loans and mortgage loans.

5.6        Trusts. Does your jurisdiction recognise trusts? If not, is there a mechanism whereby collections received by the seller in respect of sold receivables can be held or be deemed to be held separate and apart from the seller’s own assets (so that they are not part of the seller’s insolvency estate) until turned over to the purchaser?

Dutch law does not have a concept equivalent to a trust. 

Under the Hague Convention of the Law Applicable to Trusts and on their Recognition ( Haags Trustverdrag ), a trust created in accordance with the chosen law will be recognised by Dutch courts, provided that the chosen law allows for the creation of a trust.  Pursuant to Section 13 of the Trust Convention, Dutch courts will not be bound to recognise a trust where the significant elements of the matter are closely connected with jurisdictions that do not allow for the creation of a trust. 

To mitigate against commingling risk, under Dutch securitisation, security is usually granted to an SPV (in the form of a bankruptcy remote foundation ( stichting ) or private limited liability company ( besloten vennootschap met beperkte aansprakelijkheid )).  The vehicle has independent directors and no other assets or business, meaning that a high degree of asset isolation and separation is achieved. 

In addition, the use of “collection foundations”, again set up as bankruptcy remote SPVs, into which seller collections are paid, mitigates against cash commingling risk in any insolvency of the seller.  Obligors are directed to pay collections into the collection foundation and not into an account of the seller.  Collections are then periodically transferred from the collection foundation to the purchaser.  This feature achieves a high degree of cash flow isolation from the risk of seller insolvency (and so analogous to the effect of a trust) and is a model accepted by ratings agencies.

5.7        Bank Accounts. Does your jurisdiction recognise escrow accounts? Can security be taken over a bank account located in your jurisdiction? If so, what is the typical method? Would courts in your jurisdiction recognise a foreign law grant of security taken over a bank account located in your jurisdiction?

Dutch law does not have a concept identical to escrow accounts because Dutch law has no concept of trust.  However, standard bank accounts can be used for specific purposes with the practical effect of an escrow arrangement.  For example, if a bank account is maintained by a notary, and it qualifies as a designated account ( kwaliteitsrekening ), it will be separate from the notary’s own estate.  For this reason, it is customary in the Netherlands to use such types of notarial accounts when escrow arrangements are required. 

Security over a bank account is usually taken by way of a disclosed pledge ( openbaar pandrecht ) and we refer to the answer to question 5.3 above.  An important qualification in relation to security over bank accounts is that pursuant to the general banking conditions ( algemene bankvoorwaarden ) in the Netherlands, the account bank retains a first ranking right of pledge in respect of the account, which it may waive if so requested by the beneficiary. 

As to the recognition of a foreign law security right, in respect of a bank account located in the Netherlands, we refer to the answer to question 5.4 above.

5.8        Enforcement over Bank Accounts. If security over a bank account is possible and the secured party enforces that security, does the secured party control all cash flowing into the bank account from enforcement forward until the secured party is repaid in full, or are there limitations? If there are limitations, what are they?

Whether the secured party controls all cash flowing into the bank account depends on the nature of the security right.  If it is a disclosed right of pledge ( openbaar pandrecht ), all present and future account receivables are subject to the right of pledge, and the pledgee is entitled to collect payments and collect the account receivables without leave of the court. 

If an undisclosed right of pledge is created (i.e., the account bank is not notified of the right of pledge), the right to demand payment and to collect the account receivables stays with the account owner until such notification. 

A pledge over a bank account will not attach to any payments that are made into the bank account after bankruptcy ( faillissement ) or suspension of payments ( surseance van betaling ) of the account owner (i.e., the pledgor).

5.9        Use of Cash Bank Accounts. If security over a bank account is possible, can the owner of the account have access to the funds in the account prior to enforcement without affecting the security?

A distinction is made between a disclosed right of pledge and an undisclosed right of pledge.  Whilst under a disclosed right of pledge the pledgee has control over the funds, the pledgee usually authorises the pledgor to collect payments and access the funds until an enforcement event (as described under the pledge arrangement) occurs. 

In the case of an undisclosed pledge, the pledgor will have control of the funds in the account until the account bank is notified of the right of pledge.  This does not affect the effectiveness of the security interest.

6.1        Stay of Action. If, after a sale of receivables that is otherwise perfected, the seller becomes subject to an insolvency proceeding, will your jurisdiction’s insolvency laws automatically prohibit the purchaser from collecting, transferring or otherwise exercising ownership rights over the purchased receivables (a “stay of action”)? If so, what generally is the length of that stay of action? Does the insolvency official have the ability to stay collection and enforcement actions until he determines that the sale is perfected? Would the answer be different if the purchaser is deemed to only be a secured party rather than the owner of the receivables?

Dutch law does not have a concept of an “automatic stay” following the insolvency of a seller of receivables.  There is therefore no risk that the courts will prevent the purchaser from freely exercising its ownership right over the purchased receivables.  

In the case of the assignment of future receivables, receivables created by the seller after it became insolvent would not be sold and assigned to the purchaser and so would remain part of the seller’s estate. 

If the assignment is undisclosed, notification of the assignment to the debtor is required to prevent a valid discharge ( bevrijdende betaling ) occurring upon payment by the debtor to the seller.  Once notification is made, the debtor can only discharge its payment obligations under the receivable by paying the purchaser. 

If no notification is made, payments made by debtors to an insolvent seller will form part of the seller’s estate.  In respect of these payments, the purchaser will be a creditor of the estate ( boedelschuldeiser ) and will receive payment prior to unsecured creditors, but after preferred ones.  It will also have to contribute to the seller’s bankruptcy costs. 

If a security right is created over the receivables, a pledgee may exercise its rights as if there was no bankruptcy and foreclose the right of pledge.  Foreclosure can be effected either by collection of the receivables or by otherwise selling them in compliance with the Dutch laws on enforcement. 

If the security right is not created as a financial collateral agreement, a court can order a statutory stay of execution period of up to two months, extendable by another period of up to two months pursuant to Sections 63(a) and 241(a) of the Dutch Bankruptcy Act ( Faillissementswet ).  Under the new Dutch scheme, which entered into force on 1 January 2021, there is in principle no automatic stay.  However, the debtor has the option to request the court to allow a stay for a maximum of four months, with the possibility of an extension up to a maximum of eight months in total.  The stay, when granted upon request, prevents all parties from claiming or taking recourse against the debtor’s assets, unless they have court consent.

Finally, pursuant to Section 58(1) of the Dutch Bankruptcy Act ( Faillissementswet ), a bankruptcy trustee ( curator ) can force a secured party to foreclose its security interest within a reasonable time (as determined by the bankruptcy trustee), failing which the bankruptcy trustee will be entitled to sell the relevant rights or assets and distribute the proceeds to the relevant secured party.

6.2        Insolvency Official’s Powers. If there is no stay of action, under what circumstances, if any, does the insolvency official have the power to prohibit the purchaser’s exercise of its ownership rights over the receivables (by means of injunction, stay order or other action)?

Whilst there is no automatic stay under Dutch law, a bankruptcy trustee could seek to prohibit the purchaser from exercising its (ownership) rights if it is of the view that a fraudulent conveyance or preference ( actio pauliana ) has occurred (see also question 6.3 below).  In addition, general defences under Dutch law can be invoked, such as transaction avoidance on the grounds of duress ( bedreiging ), deceit ( bedrog ), undue influence ( misbruik van omstandigheden ), or mistake ( dwaling ).

6.3        Suspect Period (Clawback). Under what facts or circumstances could the insolvency official rescind or reverse transactions that took place during a “suspect” or “preference” period before the commencement of the seller’s insolvency proceedings? What are the lengths of the “suspect” or “preference” periods in your jurisdiction for (a) transactions between unrelated parties, and (b) transactions between related parties? If the purchaser is majority-owned or controlled by the seller or an affiliate of the seller, does that render sales by the seller to the purchaser “related party transactions” for purposes of determining the length of the suspect period? If a parent company of the seller guarantee’s the performance by the seller of its obligations under contracts with the purchaser, does that render sales by the seller to the purchaser “related party transactions” for purposes of determining the length of the suspect period?

Under Dutch law, any legal act ( rechtshandeling ) and the validity of a transaction itself can be challenged by creditors whose interests have been adversely affected.  This challenge is made under the laws relating to (i) fraudulent conveyance, or (ii) preferences ( actio pauliana ) within the meaning of Section 42 et seq. of the Dutch Bankruptcy Act ( Faillissementswet ).  In respect of the latter, a distinction is made between a fraudulent preference risk as a result of voluntary legal acts ( onverplichte rechtshandeling ) and involuntary legal acts ( verplichte rechtshandelingen ). 

A bankruptcy trustee can challenge a debtor’s voluntary legal acts (defined as acts carried out without a prior legal obligation ( onverplichte rechtshandeling )), by invoking the doctrine of the “ actio pauliana ”.  This is possible in the following circumstances:

• the legal act must be voluntary.  For example, carrying out a pre-existing contractual obligation to grant security would not be voluntary;
• the legal act must adversely affect one or more of the creditors and such adverse effect must have occurred at the time the challenge is made;
• the debtor must know (or ought to have known) that the legal act would adversely affect the possibility of recourse of one or more of its creditors (this is generally believed to be the case when the insolvency of the debtor was probable at the time of the legal act); and
• if the legal act was for consideration, the party must have known (or ought to have known) that the legal act would have such an adverse effect on the creditor(s) in question. 

If a legal act occurs within one year of the seller becoming bankrupt, there is, in certain circumstances, a rebuttable presumption that the pledgor knew or ought to have known that the creditors would be adversely affected as a result.  The circumstances are that:

• the consideration of the transaction was at a significant undervalue;
• the transaction was entered into with members of the seller’s management board or (if the seller is an individual) with relatives;
• the transaction was to provide security for a claim not yet due; and/or
• the transaction was between intra-group corporate members. 

The threshold for challenging involuntary legal acts ( verplichte rechtshandelingen ), i.e., legal acts for which there is a pre-existing legal obligation, is much higher. 

The bankruptcy trustee can successfully challenge involuntary legal acts if the bankruptcy trustee can show that: (i) the debtor’s counterparty knew that a petition for bankruptcy had already been filed at the time the act was performed and the seller is subsequently declared bankrupt; or (ii) the debtor and its counterparty colluded with the intention of advancing the counterparty’s interests over other creditors.

6.4        Substantive Consolidation. Under what facts or circumstances, if any, could the insolvency official consolidate the assets and liabilities of the purchaser with those of the seller or its affiliates in the insolvency proceeding? If the purchaser is owned by the seller or by an affiliate of the seller, does that affect the consolidation analysis?

There is no doctrine of substantive consolidation under Dutch law.  In a receivables purchase transaction, if the sale and transfer has been perfected prior to the seller becoming insolvent, the purchaser will obtain full legal title to the receivables and they will not form part of an insolvent seller’s estate. 

If the purchaser is owned by the seller or by an affiliate of the seller, other considerations may be relevant.  For example, if the seller, pursuant to rules of Dutch corporate law (e.g., 403 declarations), has become jointly and severally liable for any financial obligations of the purchaser, this may impact the “true-sale analysis” and may in practice lead to a substantive consolidation.

6.5        Effect of Insolvency on Receivables Sales. If insolvency proceedings are commenced against the seller in your jurisdiction, what effect do those proceedings have on (a) sales of receivables that would otherwise occur after the commencement of such proceedings, or (b) on sales of receivables that only come into existence after the commencement of such proceedings?

Future receivables can be assigned in advance ( bij voorbaat ), even if the assignment is undisclosed, provided that such receivables directly result from a legal relationship existing at that time.  In the case of a disclosed assignment, future receivables can only be assigned to the extent that notification to the relevant obligor can take place. 

However, the assignment cannot be invoked against the estate of a bankrupt seller if the future receivables came into existence after the seller was declared bankrupt or was granted a suspension of payments.  In such circumstances, the receivables fall within the estate of the seller.

6.6        Effect of Limited Recourse Provisions. If a debtor’s contract contains a limited recourse provision (see question 7.4 below), can the debtor nevertheless be declared insolvent on the grounds that it cannot pay its debts as they become due?

If a creditor has a claim against the debtor that is due and payable and remains unpaid, such creditor can file for the insolvency of the debtor and the debtor can be declared insolvent, provided that the other requirements for a successful bankruptcy filing have been met.  If, on the other hand, such a claim from a creditor is extinguished on the basis of any applicable limited recourse provisions, the claim no longer exists and the creditor cannot petition for the debtor’s bankruptcy on the basis of such claim.  The validity of limited recourse provisions under Dutch law is further described under question 7.3 below.

7.1        Securitisation Law. Is there a special securitisation law (and/or special provisions in other laws) in your jurisdiction establishing a legal framework for securitisation transactions? If so, what are the basics? Is there a regulatory authority responsible for regulating securitisation transactions in your jurisdiction? Does your jurisdiction define what type of transaction constitutes a securitisation?

In general, the Netherlands has not adopted any specific laws that are applicable to securitisations.  There are no specific Dutch law legal limitations on how a securitisation transaction should be structured and there is also no regulator responsible for regulating securitisation transactions.  As a result, securitisation transactions are effected under the general laws of the Netherlands, with the most important sources being the Dutch Civil Code ( Burgerlijk Wetboek ) and the Dutch Financial Supervision Act ( Wet op het financieel toezicht ). 

However, with the introduction of the Securitisation Regulation, the Dutch Financial Markets Authority ( Autoriteit Financiële Markten ) or the Dutch Central Bank ( De Nederlandsche Bank ) are designated as the competent national supervising authorities (depending on the regulatory status of the originator, SPV or sponsor) to monitor compliance with the Securitisation Regulation.  The relevant documentation required to be disclosed under the Securitisation Regulation (which, among other things, is dependent on whether the securitisation transaction constitutes a private or public securitisation) should be made available to the relevant authority.

7.2        Securitisation Entities. Does your jurisdiction have laws specifically providing for establishment of special purpose entities for securitisation? If so, what does the law provide as to: (a) requirements for establishment and management of such an entity; (b) legal attributes and benefits of the entity; and (c) any specific requirements as to the status of directors or shareholders?

There are no such laws in the Netherlands.  The legal form of an SPV tends to be a private company with limited liability ( besloten vennootschap ) and the shares of such an entity are customarily held by a foundation ( stichting ) whose sole purpose is to hold the shares in the SPV.  A Dutch notary is required to incorporate both the SPV and the foundation and both have to be registered with the Dutch Chamber of Commerce ( Kamer van Koophandel ). 

The companies are usually managed by an independent corporate services provider and, to protect the insolvency remoteness of the entities, various structural protections are used, including but not limited to: (i) restrictions on employees; (ii) restrictions on the companies’ objects (as set out in the articles of association) to the specific securitisation transaction for which they are incorporated; (iii) ensuring any contracts they conclude contain limited recourse and non-petition provisions; and (iv) restrictions on financial indebtedness and creation of security, other than in relation to the specific securitisation transaction.

7.3        Location and form of Securitisation Entities. Is it typical to establish the special purpose entity in your jurisdiction or offshore? If in your jurisdiction, what are the advantages to locating the special purpose entity in your jurisdiction? If offshore, where are special purpose entities typically located for securitisations in your jurisdiction? What are the forms that the special purpose entity would normally take in your jurisdiction and how would such entity usually be owned?

Participants establish Securitisation Entities both in the Netherlands and offshore. 

The advantage of using the Netherlands is the relatively quick and cost-effective way to establish and maintain a Securitisation Entity.  The Netherlands also has a favourable corporate law environment and a well-understood, efficient tax regime. 

Offshore alternatives are typically Luxembourg and Ireland. 

The vast majority of special purpose entities used in the Netherlands are private limited companies ( besloten vennootschap met beperkte aansprakelijkheid ) – a so-called Dutch “B.V.”.  Such entities are usually owned exclusively by an orphan entity in the form of a foundation ( stichting ), which is a corporate entity with no members or share capital but incorporated for a specific purpose.  A foundation will typically hold all the issued share capital in the Dutch B.V. that is the Securitisation Entity.

7.4        Limited-Recourse Clause. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) limiting the recourse of parties to that agreement to the available assets of the relevant debtor, and providing that to the extent of any shortfall the debt of the relevant debtor is extinguished?

In general, limited recourse provisions are valid and enforceable under Dutch law.  Section 3:276 of the Dutch Civil Code ( Burgerlijk Wetboek ) states that a creditor has recourse to all assets of an obligor, unless otherwise provided by law or contract. 

If the contract is governed by foreign law, a Dutch court would give effect to such contractual provisions in accordance with the rules of the chosen law.

7.5        Non-Petition Clause. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) prohibiting the parties from: (a) taking legal action against the purchaser or another person; or (b) commencing an insolvency proceeding against the purchaser or another person?

Non-petition clauses are in principle valid and enforceable in the Netherlands.  However, under Dutch law, the fact that a party has contractually agreed not to commence, or not to join any person in commencing, insolvency proceedings against another party will not result in such party having no legal standing to commence or join such proceedings.  It is therefore possible that a Dutch court would deal with a petition for bankruptcy ( faillissement ) or suspension of payments ( surseance van betaling ) or preliminary suspension of payments in respect of a company, notwithstanding that such petition has been presented in breach of a non-petition clause.  When dealing with such a petition, the court may conclude that a company has ceased to pay its debts as they fall due and declare the company bankrupt. 

7.6        Priority of Payments “Waterfall”. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) distributing payments to parties in a certain order specified in the contract?

A contractual provision setting out a payment “waterfall” is valid in the Netherlands and enforceable as between the parties to that contract. 

7.7        Independent Director. Will a court in your jurisdiction give effect to a contractual provision in an agreement (even if that agreement’s governing law is the law of another country) or a provision in a party’s organisational documents prohibiting the directors from taking specified actions (including commencing an insolvency proceeding) without the affirmative vote of an independent director?

Under Dutch law, such a limitation on the powers of the directors would, in principle, be enforceable.  If the directors take any action without the vote of the independent director, it could (but will not necessarily) lead to a damages claim from the company against them, notwithstanding that they acted in accordance with their duty to act in the best interests of the company.

7.8        Location of Purchaser. Is it typical to establish the purchaser in your jurisdiction or offshore? If in your jurisdiction, what are the advantages to locating the purchaser in your jurisdiction? If offshore, where are purchasers typically located for securitisations in your jurisdiction?

It is not typical for the purchaser to be located outside the Netherlands, although Ireland and Luxembourg are also sometimes chosen primarily for tax reasons.  The reasons why purchasers are established onshore in the Netherlands is: (i) ease of incorporation in terms of costs and speed; (ii) a benign tax environment; and (iii) the strength and depth of expertise of Dutch-based corporate service providers that are selected to manage a purchaser (and purchaser shareholders and the relevant security trustee).

8.1        Required Authorisations, etc. Assuming that the purchaser does no other business in your jurisdiction, will its purchase and ownership or its collection and enforcement of receivables result in its being required to qualify to do business or to obtain any licence or its being subject to regulation as a financial institution in your jurisdiction? Does the answer to the preceding question change if the purchaser does business with more than one seller in your jurisdiction?

The Dutch Financial Supervision Act ( Wet op het financieel toezicht ) requires financial service providers, such as offerors and brokers of financial products including consumer loans, mortgage loans and any form of credit (together, Regulated Activities ), to obtain a licence from the Dutch Financial Markets Authority ( Autoriteit Financiële Markten ), which supervises licensed entities. 

By acquiring consumer receivables that qualify as financial products, a purchaser is deemed to provide consumer credit, which is a Regulated Activity.  If the purchaser is not a licensed credit institution, it can rely on an exemption from the licence requirement if it outsources the servicing and administration of the receivables to an entity that is adequately licensed under the Dutch Financial Supervision Act ( Wet op het financieel toezicht ).  A legislative change to this exemption regulation is anticipated (which should, however, have limited impact on an SPV), although the exact scope thereof remains unclear at this stage.

A servicing contract is usually entered into by the purchaser (if it is an SPV) with the originator (or any other party to which the originator had already outsourced the servicing and administration of the consumer receivables) pursuant to which the purchaser outsources the servicing and administration of such receivables to such party. 

The answer above is not different if the purchaser does business with other sellers in the Netherlands.

8.2        Servicing. Does the seller require any licences, etc., in order to continue to enforce and collect receivables following their sale to the purchaser, including to appear before a court? Does a third-party replacement servicer require any licences, etc., in order to enforce and collect sold receivables?

See the answer to question 8.1 above.  No additional or separate licence is required in order to enforce receivables or to appear before a Dutch court.

8.3        Data Protection. Does your jurisdiction have laws restricting the use or dissemination of data about or provided by obligors? If so, do these laws apply only to consumer obligors or also to enterprises?

As of 25 May 2018, the General Data Protection Regulation ( Algemene verordening gegevensbescherming ) ( GDPR ) has entered into force, which regulation has been implemented through the GDPR Implementation Act ( Uitvoeringswet AVG ) (which replaced the Dutch Data Protection Act ( Wet bescherming persoonsgegevens )).  As of that date, generally, the same privacy regulations are effective across Europe.

8.4        Consumer Protection. If the obligors are consumers, will the purchaser (including a bank acting as purchaser) be required to comply with any consumer protection law of your jurisdiction? Briefly, what is required?

To protect the interests of consumers, there are certain limitations and restrictions in relation to loans advanced to consumers and the terms of the underlying contracts.  The regulatory requirements set out in our answer to question 8.1 above are examples of the regulators imposing requirements on lenders to enhance consumer protection. 

There are also more general consumer protection laws.  For example, there are rules setting the maximum interest rate that can be charged to consumers, as well as rules allowing borrowers to make prepayments on their loan (and if such prepayments are subject to penalty fees, such fees are also regulated).  For general consumer loans these rules are contained in the Decree on Credit Compensation ( Besluit Kredietvergoeding ).  See also question 1.2 above.

8.5        Currency Restrictions. Does your jurisdiction have laws restricting the exchange of your jurisdiction’s currency for other currencies or the making of payments in your jurisdiction’s currency to persons outside the country?

Under the Dutch Financial Supervision Act, entities performing exchange transactions in the course of their business qualify as an exchange office ( wisselinstelling ) and must be licensed. 

In addition, under the External Financial Relations Act 1994 ( Wet financiële betrekkingen buitenland 1994 ) and the Balance of Payments Reporting Instructions 2003 ( Rapportagevoorschriften betalingsbelansrapportages 2003 ), the Dutch Central Bank may require certain entities to report to it in order to allow it to compile the national balance of payments, to ensure that monetary transactions between the Netherlands and other countries are recorded.

8.6        Risk Retention. Does your jurisdiction have laws or regulations relating to “risk retention”? How are securitisation transactions in your jurisdiction usually structured to satisfy those risk retention requirements?

There are no specific Dutch laws in relation to risk retention.  The rules and regulations of the Securitisation Regulation (and related technical standards, and implementing guidelines) apply to Dutch securitisation transactions where the risk retention rules prescribed by the Securitisation Regulation apply.  Less common in the Netherlands are the US risk retention rules prescribed by the US Dodd-Frank Act that (like the Securitisation Regulation) apply to Dutch securitisation transactions in the circumstances prescribed by the relevant legislation.  In certain circumstances, both EU and US risk retention rules may apply. 

The most common method of satisfying the EU risk retention rules is for the risk retaining entity (usually the “originator”) to hold the first loss/most junior notes or debt issued by the Securitisation Entity of the required level.  Retaining risk through random exposures and vertical slices have also been seen in the Dutch market.

8.7        Regulatory Developments. Have there been any regulatory developments in your jurisdiction which are likely to have a material impact on securitisation transactions in your jurisdiction?

There are various European legislative initiatives that impact on securitisation generally, but no specific Dutch law initiatives.

9.1        Withholding Taxes. Will any part of payments on receivables by the obligors to the seller or the purchaser be subject to withholding taxes in your jurisdiction? Does the answer depend on the nature of the receivables, whether they bear interest, their term to maturity, or where the seller or the purchaser is located? In the case of a sale of trade receivables at a discount, is there a risk that the discount will be recharacterised in whole or in part as interest? In the case of a sale of trade receivables where a portion of the purchase price is payable upon collection of the receivable, is there a risk that the deferred purchase price will be recharacterised in whole or in part as interest? If withholding taxes might apply, what are the typical methods for eliminating or reducing withholding taxes?

Payments on receivables by the obligors to the seller or the purchaser are not subject to withholding taxes in the Netherlands (exceptions may apply if the receivables have equity-like characteristics, which is unlikely in cases of trade or mortgage receivables). 

The Netherlands has introduced a withholding tax on interest payments as of 1 January 2021.  The withholding tax only applies to interest payments made to related entities that are tax resident in a low-tax jurisdiction or a jurisdiction included on the EU list of non-cooperative jurisdictions (as well as in certain situations involving related entities using hybrid and/or abusive structures).  Consequently, (deemed) interest payments received by the seller or purchaser in respect of receivables from third-party obligors and interest (deemed to be) paid by the purchaser to third-party creditors are not subject to this withholding tax.

9.2        Seller Tax Accounting. Does your jurisdiction require that a specific accounting policy is adopted for tax purposes by the seller or purchaser in the context of a securitisation?

No specific tax accounting policy is required.  Depending on the structuring of the securitisation, the seller may treat the securitisation vehicle as an agent for corporate income tax (and VAT) purposes to avoid gain recognition (rather than being considered to act as principal counterparty under the receivables).

9.3        Stamp Duty, etc. Does your jurisdiction impose stamp duty or other transfer or documentary taxes on sales of receivables?

No stamp duty or other documentary taxes apply on sales of receivables.

9.4        Value Added Taxes. Does your jurisdiction impose value added tax, sales tax or other similar taxes on sales of goods or services, on sales of receivables or on fees for collection agent services?

Collection agent services are normally not subject to VAT.  Where collection agent services (are deemed to) relate to non-performing receivables, such services may be subject to VAT.  If the purchaser were to be considered to provide factoring services to the seller (which is normally not the case with securitisations), such factoring services would be subject to VAT. 

It is noted that if the securitisation vehicle is considered an agent of the originator for VAT purposes, it should not be considered to receive any supply of (collection agent or other) services.

9.5        Purchaser Liability. If the seller is required to pay value-added tax, stamp duty or other taxes upon the sale of receivables (or on the sale of goods or services that give rise to the receivables) and the seller does not pay, then will the taxing authority be able to make claims for the unpaid tax against the purchaser or against the sold receivables or collections?

The purchaser cannot be held liable for any VAT due by the seller (exceptions apply in fraudulent situations). 

The right to claim any bad debt relief for VAT purposes transfers to the purchaser upon transfer of the receivables. 

The transfer of receivables from the seller to the purchaser should not normally affect the seller’s rights to deduct input VAT.

9.6        Doing Business. Assuming that the purchaser conducts no other business in your jurisdiction, would the purchaser’s purchase of the receivables, its appointment of the seller as its servicer and collection agent, or its enforcement of the receivables against the obligors, make it liable to tax in your jurisdiction?

If the purchaser is not a Netherlands tax resident entity and does not otherwise have a permanent establishment in the Netherlands, the aforementioned activities would not make it liable to tax in the Netherlands.  Netherlands tax resident purchasers will generally not become liable to tax, other than corporate income tax over a nominal fee.

9.7        Taxable Income. If a purchaser located in your jurisdiction receives debt relief as the result of a limited recourse clause (see question 7.4 above), is that debt relief liable to tax in your jurisdiction?

Any reduction of the purchaser’s debt, including debt relief as set out in question 7.4 above, is, in principle, a taxable event for Netherlands’ corporate income tax purposes.  As the purchaser normally suffers an equivalent (deductible) loss on its assets (triggering the debt relief under the limited recourse clause), the gain on the debt relief generally does not lead to a net tax liability for the purchaser. 

Depending on the structuring of the securitisation, the seller may keep the underlying assets, and the notes, on its own tax balance sheet (in other words, treat the securitisation vehicle as an agent for corporate income tax purposes).  Any debt relief as set out in question 7.4 above should in such case not have any corporate income tax consequences for the purchaser at all. 

The possibility to deduct interest payable under the notes is not restricted under the Netherlands implementation of the EU Anti-Tax Avoidance Directive’s earnings stripping rule.

Acknowledgments

With thanks to tax partner Eelco van der Stok (Email: [email protected]) and tax associate Daan van Schaik (Email: [email protected]), both at Freshfields Bruckhaus Deringer in Amsterdam, for providing answers to the tax sections of this chapter.

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Contributors

Mandeep Lotay Freshfields Bruckhaus Deringer

Damaris Engelschman Freshfields Bruckhaus Deringer

Freshfields Bruckhaus Deringer

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• 4th Jun 2024 Global ABS 2024

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Employment contract

On this page, fixed-term and permanent contracts, when should an employee receive a permanent contract, written statement of employment details, ancillary activities, changing the employment agreement, equal treatment and pay.

An employment contract (arbeidscontract) is an agreement between an employee and an employer. It contains the agreements between the employer and employee which form the conditions of employment (arbeidsvoorwaarden).

You can offer an employee a:

• fixed-term contract (a temporary contract), or a
• contract for an indefinite period (a permanent contract)

Contracts can be agreed on in writing or verbally.

You cannot extend temporary contracts indefinitely. An employee must receive a permanent contract after 3 consecutive temporary contracts or after 3 years of temporary contracts. This applies unless other arrangements have been made in the CAO. Find out what consecutive contracts are (in Dutch) and what conditions apply.

As an employer, you must give your employees clear information on the most important employment conditions. The information in the employment contract must include:

• the name and place of residence of the employer and the employee
• the location(s) at which the work is carried out. If you have multiple locations, you must state whether the employee has multiple workplaces, or if they may decide their place of work.
• the employee's job or the nature of the work
• the usual working hours (per day or per week)
• the arrangements on working overtime
• the arrangements on swapping shifts
• the salary amount (starting salary and the components of the salary), and how and when salary is paid
• the fixed and variable hours and the salary on working overtime (in case of irregular working times)
• the days and hours an employee can be required to work (in case of unpredictable working time)
• date when the employee joined the company
• term of the contract (if it is for a fixed term)
• the type of employment contract (such as a temporary employment, payroll agreement, or permanent contract)
• (if applicable) duration and conditions of the trial period
• (if applicable) the training entitlement as offered by the employer
• holiday allowance
• holiday entitlement
• other forms of paid leave and how you calculate it
• procedural requirements and the notice period if the employment agreement ends
• (if applicable) pension
• (if applicable) non-compete or non-solicitation clause
• (if applicable) when an objective justification exists for a ban on ancillary activities
• the Collective Labour Agreement (CAO), if applicable for your company

If the Collective Labour Agreement for your company states that your employees are entitled to education, you are required to fund their training. The employee must be allowed to receive training during working hours. You also need to fund your employee’s education (regardless of the CAO) if it:

• is necessary to be able to do their job (such as a mandatory certificate, or to keep up to date with technological advancements)
• enables the employee to continue the employment agreement if their position is terminated

You cannot add a refund scheme in the employment contract for education you are required (by law or CAO) to provide.

You cannot prohibit your employee from simultaneously working somewhere else (ancillary activities, ‘nevenwerkzaamheden’ in Dutch). You can only do so if an objective justification exists, such as:

• there is a risk to health and safety
• you need to protect confidential company information
• there is a risk to the integrity of government services
• the employee is in violation of a legal regulation
• you want to prevent conflicts of interests

Your employee may put in a request for:

• working more or less hours
• a change in working hours
• a change in workplace
• a more dependable employment agreement (such as a permanent contract)

Your employee must put in a written request. You have to respond to the request within 1 month. Small employers (with up to 10 employees) are must respond within 3 months. If you fail to respond in time, you must agree to the request and change the employment contract.

You must treat and pay your employees equally . Working conditions must be the same for all your employees. Discrimination based on religion, beliefs, political opinions, race, gender, age, disabilities, or any other grounds is unlawful.

Payroll employees have at least the same legal rights and working conditions as other employees in your company. If you hire employees from a temping agency or payroll company, you must inform them about your working conditions.

This article is related to:

Related articles.

• CAO (Collective Labour Agreement)
• Working hours and rest times
• Holiday entitlement
• Statutory minimum wage
• Rules for payslips
• Employment of minors and young adults
• Leave schemes
• Dismissal procedures and protections
• Work-related costs scheme: staff allowances
• Social plan
• Joining a pension fund
• Non-compete clause
• Trial period
• Checklist for employing staff
• Agreements and contracts: all you need to know
• Employers must provide clear working conditions

Questions relating to this article?

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• Dutch contract attorneys
• Dutch corporate attorneys
• Dutch debt collection attorneys
• Product liability attorneys
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Terminating an agreement under Dutch law

• 15 March 2023 22 January 2024
• by Contract Lawyer In The Netherlands

Table of Contents

Are you facing the daunting task of terminating an agreement under Dutch law? Terminating a contract can be a complex and delicate process, but understanding the legal requirements and your rights and obligations is crucial. In this article, we’ll provide you with a comprehensive guide on how to terminate an agreement following Dutch law.

As a starting point, it should be noted that both parties must either agree on the termination of the contract for it to be valid, or a notice period must be taken into account. Next to that, it might be the case that damages should be compensated. Furthermore, depending on the type of agreement and its terms, different laws may apply, such as those relating to purchase agreements, commercial agency contracts, or distribution agreements. We’ll discuss these considerations in more detail later in this article.

Finally, all contractual terminations must comply with relevant statutory regulations, so if you are unsure about how best to proceed then seeking professional advice is essential. In summary, by following the guidelines outlined here, readers will have all they need to know about terminating an agreement under Dutch law.

Termination Of Contract under Dutch law: Overview

Terminating an agreement is like slamming the door shut on a relationship. It marks the end of a business partnership, and requires careful consideration as to ensure that all legal obligations are fulfilled. Termination of contract is used in cases where one or both parties have breached the terms of their agreement, parties do not longer want to collaborate, when payment has not been received due to insolvency, or for other reasons such as incompatibility between the two parties. In any scenario, the termination of contract should be done with care and attention to detail; this article will discuss what must be taken into account when terminating an agreement under Dutch law.

When terminating an agreement, either party may seek compensation for damages caused by breach of contract if applicable. They may also look at notice periods – these refer to how far in advance notification needs to be given before termination takes effect. And there may also be prohibitions on terminations which can only take place upon certain conditions being met. All of these factors need to be taken into account while considering whether it is appropriate to terminate an agreement under Dutch Law.

It’s essential that sufficient evidence is gathered prior to taking action – the burden of proof rests upon those initiating termination proceedings and they must demonstrate why it would be necessary under specific circumstances. With this knowledge in mind, we now move onto discussing termination agreements and Dutch Law specifically.

Termination Agreement And Dutch Law

Under Dutch law, the termination of a contract is regulated by Book 6 or 7 of the Civil Code and/or in case law. Termination can be undertaken in several ways and may depend on the cause for terminating the agreement. A termination notice must generally be sent to terminate an agreement legally. This notice should contain details about when, how and why the agreement is being terminated. It should also specify any necessary steps that need to be taken following its issuance.

When it comes to non- or poor performance or abuse of circumstances, the commercial contract might allow for immediate termination (in Dutch: “opzegging”) without requiring a prior notice period. When such cases are present, a party wishing to terminate an agreement does not need to send out a termination notice before doing so as long as there is clear evidence for their claims. In other words, no prior warning needs to be given if one party has been proven guilty of either non-performance or abuse of circumstances within the terms of the contract.

For contracts with longer durations, however, sending out a valid termination notice and/or paying for the damages is required according to some landmark cases (for example: SMQ / Goglio ). The length of time needed before this kind of legal action can take effect depends on both parties’ individual business relation. Once these criteria have been met, only then will a proper request for ending such contractual arrangement via legal means become available under Dutch Law.

The legal requirements for ending any type of contract in the Netherlands vary depending upon many factors but ultimately require some form preparation and consideration beforehand; regardless if immediate termination due to circumstance applies or more prolonged process from standard expectations proves necessary instead

Legally Ending A Contract In The Netherlands

Terminating a contract in the Netherlands is like navigating a minefield: it requires careful consideration of all options, their associated risks and potential consequences. As such, it’s critical to know the various termination options available under Dutch law and any prohibitions on termination that may apply to your situation.

In general, contracts in the Netherlands are terminated either through mutual agreement or unilateral notice given by one party. If there is no fixed duration specified in the contract then either party can terminate with a proper notice period. However, if a contract has been made for a specific term than there will be restrictions as to when termination can take place before its expiration date. All parties must comply with these terms until the end of the agreed upon contract duration unless they receive written permission from another party beforehand.

When considering unilateral termination without consent from other parties, it’s important to note that the burden of proof lies with those who initiated the termination request. This means that you have to provide substantial evidence supporting your decision in order for it to be considered valid within legal proceedings. Therefore understanding both your rights and obligations throughout this process is key when terminating an agreement under Dutch law.

Understanding The Termination Notice Process

In Dutch law, there are a few ways to terminate an agreement. Termination notices must be provided in writing and include relevant details that outline the reasons for termination. The notice must also specify when the termination will take effect. It is important to note that certain agreements may require additional steps for termination or renewal of the contract.

Force Majeure clauses allow parties involved to suspend their obligations if unforeseen circumstances arise, such as natural disasters, prices increases, pandamics, or economic crises. If a Force Majeure clause is included in the agreement, it should be consulted prior to terminating any contractual relationship. Alternatively, Unlawful Acts by either party can lead to immediate termination without further action from either side. Additionally, Third Party Clauses enable one of the parties to terminate an agreement due to non-performance by a third party. Finally, there may be Lapse Clauses which provide predetermined time frames within which contracts should be renewed; otherwise they become invalid after expiry.

These various scenarios offer insight into how contracts can be terminated under Dutch law depending on individual circumstances and specific contractual needs. Carefully considering all applicable laws and provisions ensures compliance with local regulations while providing adequate protection against potential legal liabilities resulting from ineffective terminations of agreements.

Cancellation Under Dutch Law

According to the Netherlands Bar Association, over 55% of legal disputes in Dutch courts are related to contract termination. Terminating an agreement under Dutch law involves a complex process that requires knowledge and expertise of applicable statutes. This section will discuss the various grounds for legally terminating an agreement as well as dispute resolution procedures when necessary.

When evaluating whether or not an agreement can be terminated under Dutch law, there are several key elements which must be taken into consideration:

• Law in the Netherlands: It is important to understand how laws governing contractual agreements work within the Netherlands so that any potential risk associated with termination can be managed effectively.
• Legal Grounds for Termination: There are certain criteria such as breach by one party or expiration of time limits which may provide valid grounds for cancellation of contracts.
• Statute of Limitations: Depending on the type of contract, different limitations may apply when it comes to initiating proceedings against another party involved in the transaction.
• Dispute Resolution Procedures: If a dispute arises between two parties regarding termination of their contract, they should consider resolving it through alternative methods such as arbitration before resorting to litigation.
• Cancellation Under Dutch Law: When cancelling a contract due to non-performance or other issues identified above, both parties should take steps to ensure compliance with all requirements set forth by relevant legislation.

These key considerations form the basis for understanding how best to terminate an agreement under Dutch law. As each situation is unique, it is important to seek professional advice from qualified experts who can provide guidance on how best proceed based upon individual circumstances. With this information in hand, parties will be better informed about their rights and obligations when negotiating and executing their contracts – thus helping them avoid costly disputes down the line.

Grounds For Legal Termination in Holland

Under Dutch law, several grounds exist to legally terminate an agreement. The first is when the agreement has been fulfilled and all obligations have been completed by both parties. This type of termination does not require notification or special provisions; either party can simply end the agreement once it has been satisfied.

The second ground for legal termination in Holland law is if a court declares that one side has violated its contractual obligations. In such cases, the other party may seek to immediately terminate the contract without notice. Additionally, a breach of contract clause contained within an agreement gives either side the right to terminate in case of violation by the other party.

Finally, legal termination also occurs if one party fails to meet their required performance under the terms of the contract. In this situation, neither prior nor subsequent notification is necessary and any damages resulting from this failure must be compensated according to applicable Netherlands law.

In certain circumstances, default, breach of contract and compensation are relevant considerations when terminating an agreement under Dutch law. In the event of a non- or poor performance the agreement can in most of the cases only be terminated (in Dutch: “ontbinden”) after a letter of demand and when there’s a status of default (in Dutch: “verzuim”).

Default, Breach Of Contract And Compensation

Under Dutch law, parties to a contract may terminate an agreement in Holland under certain circumstances. In order for the termination of a contract to be valid and enforceable, it must be done in accordance with the terms of the agreement or applicable law. This section will discuss how default, breach of contract, and compensation can lead to termination of an agreement.

Firstly, when one party fails to fulfill their contractual obligations as outlined in the agreement, they are said to have committed a ‘default’. If this occurs, both parties may agree on a resolution that causes the other party to cease any further performance related to the agreement. Alternatively, either party may elect to seek damages resulting from such breach by way of legal action.

Secondly, if either party breaches any term or condition contained within the written contract without providing sufficient justification or excuse then they are deemed to have breached the contract. In such cases, affected parties may initiate proceedings against each other seeking various remedies including specific performance and/or monetary damages depending upon the severity and nature of such breach.

Finally, should a dispute regarding liability arise between two contracting parties due to alleged wrongful conduct then those affected may claim compensation for any losses incurred as a result thereof. Such claims could include requests for restitutionary payments made from one party to another which were not justified by prior contractual obligations or agreements between them.

This allows for disputes relating matters such as non-payment of fees or services rendered etc., to be resolved fairly and equitably according to what is legally prescribed under Dutch law concerning contracts and agreements entered into by all involved parties

How To Make A Formal Request For Termination

Having discussed the circumstances in which an agreement in Holland may be terminated, it is necessary to determine how a formal request for termination should be made. In Dutch law, there are two primary ways of terminating an agreement: by mutual consent or unilaterally.

When seeking to terminate by mutual consent both parties must agree on termination and sign a statement confirming their agreement. The statement should include details about when the contract was signed, why it is being terminated and what rights remain with each party once the contract has been terminated. It should also state that both parties have read and understood all terms of the termination.

To terminate unilaterally one must provide written notice to the other party detailing their intention to end the agreement. This notice should outline reasons for termination as well as any relevant legal provisions authorizing its use. Once this notification has been provided, either party can choose to accept or reject the proposed termination without further negotiation or consultation between them.

In either case, it is important that those requesting termination act in good faith and provide clear evidence of their intentions so as not to create any unnecessary confusion or dispute over whether or not they intend to fulfill their obligations under the agreement. By doing so, parties can ensure a smooth transition from contractual relations into non-contractual ones while avoiding potential disputes down the line due to unclear communication regarding intent. With these steps taken, parties can then move forward with nofifying the other party of their intenions for terminating an agreement according to Dutch Law.

Notifying The Other Party Of Termination Intentions

Have you been thinking about terminating an agreement under Dutch law? If so, it’s important to understand the legal requirements for notifying the other party of your intentions. The first step is to ensure that both parties are legally allowed to end their contract as outlined in the agreement. It must be determined if termination requires written notice and what timeframe this notice should follow. Once these steps have been taken, the next step is to provide clear notification to the other party of your intention to terminate the agreement. This can be done via letter or email; however, it must include all relevant details such as a final date when the contract will no longer be valid. Finally, if applicable, confirm any payment obligations due at the time of termination and remind them of any restrictions on how long they may take before replying with acceptance or rejection of your intent to terminate. In doing so, you’ll help avoid any potential disputes down the line regarding either party’s understanding of what was agreed upon prior to ending the arrangement. Understanding notice period restrictions is essential for successful termination under Dutch law.

Understanding Notice Period Restrictions

Under Dutch law, agreements may be terminated upon giving notice. This requires the stipulated period of notice to be respected and adhered to by both parties. The amount of time required can vary depending on the type of agreement and its duration. Generally speaking, a longer-term contract may require more advanced notification than a short-term one. It is important for all parties involved in an agreement to be aware of the terms and conditions surrounding termination so they can plan ahead accordingly.

The notice period is often set out explicitly in the text of the agreement itself or referenced in any relevant legislation that applies to it. If there are no specific provisions regarding termination within the agreement, then legal regulations will apply instead. In certain cases, contractual restrictions may also limit when either party can terminate without penalty, such as requiring payments towards compensation if done prematurely or before expiration date of the contract has been reached. Therefore, understanding these prohibitions on prematurely ending an agreement is key in order to ensure proper compliance with Dutch law.

Prohibitions On Prematurely Ending An Agreement

Under Dutch law, an agreement may not be terminated prematurely unless the parties have agreed otherwise. In many cases, a party wishing to end an agreement must provide reasonable notice in order to do so. This is particularly true of longer-term agreements such as leases or employment contracts. As with other areas of contract law, there are certain circumstances where termination without prior warning is permissible – for example if one of the parties has committed a material breach of the contract.

In addition to this, there are several legal prohibitions on terminating an agreement too soon that stem from centuries-old case law and should be taken into consideration when reviewing any potential contractual disputes. Firstly, it would constitute unlawful discrimination if a party were to terminate an agreement on account of race, religion or gender; secondly, termination must not contravene public policy nor cause financial harm to either party; and thirdly, termination cannot take place solely for the purpose of avoiding payment obligations due under the contract.

The court will also consider whether non performance, mistake, deception or abuse of circumstances played a role in determining why one party sought to end the agreement early. It is therefore important that both sides retain all relevant evidence pertaining to these issues which can later help prove their respective positions before a judge.

Reasons For Non Performance, Mistake, Deception Or Abuse Of Circumstances

Under Dutch law, an agreement may be terminated due to non-performance, mistake, deception or abuse of circumstances. When a party fails to fulfill its obligations under the contract, this is considered a breach of contract and can result in termination of the agreement by either party. If one party makes a mistake regarding essential elements of the agreement such as price or quantity, then the other party has grounds for termination. Additionally, if one party has misled or deceived another with regards to any matter related to performance of the agreement then again it could be seen as sufficient reason for terminating the contract. Lastly, when one side takes advantage of another’s position through coercion or pressure into entering an agreement that would not have been entered absent such tactics then similarly there are grounds for nullifying the arrangement. In all these cases effective legal counsel should be sought in order to protect both parties’ interests and ensure compliance with relevant laws and regulations.

Force Majeure And Unforeseen Circumstances

Just as a ship can be tossed around by the waves before it reaches its destination, agreements between parties in Dutch law can sometimes be derailed or changed due to unforeseen events. Force Majeure and Unforeseen Circumstances are two such occurrences that may have an effect on termination of an agreement.

Force Majeure is defined under Article 6:75 of the Dutch Civil Code (DCC)as any event beyond the reasonable control of either party which makes performance impossible, temporarily or permanently. This could include natural disasters such as floods or earthquakes, war or terrorism, strikes or lock-outs, governmental acts, or changes in legislation. If one of these events renders performance impossible for either party then they shall not be held liable to perform their contractual obligations until such time that they become able to do so again.

Unforeseen circumstances are similar to force majeure but differ slightly in how they affect the conclusion of an agreement. Whereas force majeure typically affects both parties equally, unforeseen circumstance tend to only hinder one side’s ability to fulfill their obligation without fault from either side. In this case article 6:258 DCC allows for a renegotiation of terms and conditions which must take into account any losses incurred by either party during the period where performance was impossible. It also gives permission for either party to terminate the contract if mutually agreed upon following negotiations over new terms and conditions.

The implication of Force Majeure and Unforeseen Circumstance clauses vary depending on whether you’re dealing with a fixed term agreement or a continuous service provision contract; though overall they allow flexibility when unexpected events occur outside of each party’s control and prevent them from being held liable should something change drastically enough that continued performance becomes unrealistic:

• Fixed Term Contracts: Termination rights will remain unchanged unless otherwise stated in the original agreement
• Continuous Service Provision Contracts: Allows for renegotiations taking into consideration economic losses suffered by each side

By allowing some leeway when extreme external factors alter the course of an agreement, Force Majeure and Unforeseen Circumstances provide much needed stability against legal action should something happen unexpectedly outwith each parties control making successful completion difficult or impossible without fault from either side moving forward. With this knowledge we now turn our attention towards unlawful acts, damages and third party clauses

Unlawful Acts, Damages And Third Party Clauses

Under Dutch law, an agreement may be terminated if it is found to contain unlawful acts. This could include a breach of contract or any other illegal activity that has occurred during the course of the agreement. In such cases, affected parties are entitled to seek damages from each other in order to compensate for losses incurred due to the unlawful act(s). Additionally, third party clauses can also be used to terminate agreements where one party is liable for a debt owed by another party who is not directly involved in the agreement. The clause allows the non-liable party to take action against the liable party and thereby terminate the agreement without legal repercussions.

In this context, assessing contract duration and determining whether it has been voided or subject to statute of limitations must also be considered when terminating an agreement under Dutch law.

Assessing Contract Duration, Voidability And Statute Of Limitations

It is like a chessboard game. A contract between two parties can be terminated by either party for any reason, or even no reason at all, provided the respective statutory rights of each party are respected. For example, under Dutch law, both parties must abide by the duration stated in the agreement and any voidability requirements such as consent from both sides before termination. In addition, there is also a Statute of Limitations that applies to contracts made under Dutch law which limits how long one has to take action on breach of agreement before it becomes barred by statute. All these factors need to be taken into consideration when assessing whether an agreement can be ended according to the laws governing them. Furthermore, if there have been changes to the contract’s terms during its existence then those changes must also be taken into account when deciding whether it can be successfully terminated. It is important to remember that proper assessment of duration, voidability and Statute of Limitations will help ensure that any termination of an agreement under Dutch Law is legally sound and valid.

Frequently Asked Questions

What is the difference between termination and cancellation in holland.

Termination and cancellation are two terms that have similar meanings but different implications in the legal context. Termination typically involves ending a contract by mutual agreement between both parties, while cancellation is usually unilateral in nature and signifies an immediate termination of rights or obligations under a contract.

The distinction between these two concepts lies mainly in their respective processes for execution and effect on contractual relationships. In the case of termination, it requires the consent of all parties involved to be legally valid, as opposed to cancellation which does not require any input from other entities. Termination also generally provides more flexibility with regards to how long it takes to come into effect and may allow for certain clauses within the contract to remain intact even after its conclusion; whereas, cancellation terminates all rights and obligations without exception immediately upon operationalization.

In contrast, when terminating an agreement under Dutch law there are specific conditions that must be met regardless of whether or not either party has given prior notice or expressed intent to terminate the contract. Firstly, in order for such a termination to be effective, at least one party must have failed to fulfill its obligations according to the agreed-upon terms outlined in the contract; secondly, if either side wishes to cancel the agreement unilaterally this will likely result in damages being awarded against them due to breach of contract laws; finally, depending on the type of agreement being terminated there may be additional requirements required before dissolution can take place (e.g., payment of outstanding fees). All said, it is important for those entering into agreements governed by Dutch law understand what constitutes a lawful termination so as to avoid potential repercussions related thereto.

What Is The Effect Of Force Majeure On A Contract under Dutch law?

Force majeure is a legal concept that applies to contractual agreements, enabling parties to be released from their obligations when certain unforeseeable events occur. Such events may include natural disasters, war, civil unrest or pandemics. In the Netherlands, force majeure provisions are typically found in article 6:75 DCC and following of the Dutch Civil Code.

When it comes to contracts affected by force majeure, there are three primary effects which should be considered:

1) Suspension – One party’s obligation to perform under the contract will be temporarily suspended until the event causing force majeure has been resolved. 2) Cancellation – If an event causing force majeure lasts for an extended period of time, either party can cancel the agreement without further liability. 3) Modification – Parties could also agree to modify their contractual obligations due to changes caused by force majeure; however, if one party does not agree on any proposed modifications then the other cannot enforce them unilaterally.

In view of these considerations, it is clear that understanding how force majeure affects a contract is essential in order to protect oneself should unforeseeable circumstances arise during its duration. It is therefore important for all parties involved in such agreements to read through and clearly understand every provision relating to this concept before signing off on any document.

How Do I Know If My Contract Is Voidable Or Not?

When negotiating a contract, it’s important to understand when and how you may be able to terminate the agreement. This is especially true in Dutch law, which can be complex and confusing for those who are not familiar with it. In order to know if your contract is voidable or not, there are certain criteria that must be met.

To start off, contracts can become voidable due to misrepresentation of facts or wrong information from one party. It could also be due to an error on the part of both parties or a mistake concerning the terms of the contract. Additionally, any element of duress present during negotiations can render a contract invalid as well.

There are other factors that play into making a contact voidable under Dutch law; here is a list:

• Misrepresentation of facts
• Errors made by either side
• Any presence of duress
• Lack of consent from one party
• Unconscionability (when one party has much more bargaining power than another)
• Mental incapacity at time of signing

It’s important to remember that these conditions vary depending on each individual case, so always consult with legal counsel before entering into any agreement with another party. Overall, determining whether or not your contract is valid in accordance with Dutch law depends largely on the unique circumstances surrounding its formation.

What Are The Consequences Of Terminating A Contract Prematurely?

Terminating a contract prematurely can have serious legal consequences. Both parties may be liable for damages, and the court may award punitive or exemplary damages to either party if they are found guilty of breach of contract. In addition, any costs associated with terminating the agreement early could be charged against one or both parties in certain cases.

The first step in determining these potential liabilities is to understand what type of contractual arrangement exists between the two parties. If it is an ongoing relationship such as a lease or service contract, then there may be more onerous obligations that need to be taken into account during termination proceedings. The terms of the agreement will generally dictate how much notice needs to be given by each party before moving forward with dissolution proceedings.

Furthermore, depending on the nature of the terminated agreement, there may also be restrictions placed upon other forms of dispute resolution such as arbitration or mediation which must also take place prior to commencing litigation. It is important for all involved parties to consult an attorney who specializes in Dutch law when considering premature termination so that they fully understand their rights and responsibilities under applicable laws and regulations.

What Are The Damages I May Be Liable For If I Breach A Contract?

When it comes to breach of contract, damages may be incurred. These refer to a monetary amount awarded for losses sustained due to the other party’s failure to fulfill their contractual obligations. Generally speaking, in order for someone to be held liable for breaching a contract, they must have acted intentionally and without good reason.

The types of damages which might be sought depend on the nature of the agreement. For instance, if there has been a breach of an employment contract then any unpaid wages or benefits may form part of the claim along with compensation for emotional distress or financial loss suffered as a result of being dismissed unfairly. In some cases punitive damages – i.e., those designed to punish rather than compensate – may also be applicable.

In addition, there are certain circumstances where one party is entitled to specific performance; that is, when an action is required from another person in order for them to fulfil their contractual obligation. If this is not forthcoming then legal redress can be sought by way of injunction against further non-compliance or even forfeiture of any security given as part of the agreement. It should however be noted that all claims related to breach of contract need to be brought within time limits set out by law and these vary depending upon jurisdiction and type of dispute involved so advice should always be taken before taking any steps.

Contact a Dutch contract lawyer

For any legal inquiries or support in the Netherlands, please feel free to contact our adept team at MAAK Advocaten . Committed to excellence, our Dutch lawyers provide superior legal services tailored to your distinct needs. You can reach our law firm in the Netherlands through our website, by email, or phone.

Our approachable and skilled staff at MAAK Attorneys will be delighted to assist you, arranging a meeting with one of our specialized attorneys in the Netherlands . Whether you need a Dutch litigation attorney or a Dutch contract lawyer in Amsterdam , we are eager to guide you through the legal intricacies and secure the most favorable results for your situation.

Contact details Remko Roosjen | attorney-at-law (‘advocaat’) +31 (0)20 – 210 31 38 [email protected]

The information on this legal blog serves purely for educational purposes and should not be taken as specific legal guidance. While we endeavor to maintain accurate and current information, we do not assert its absolute completeness or relevance to your particular situation. For advice tailored to your legal concerns, we urge you to engage with a licensed attorney. Please note that the blog’s content may change without notice, and we are not liable for any inaccuracies or missing information.

Remko Roosjen

Remko Roosjen is a Dutch contract attorney in the Netherlands and creates close working relationships with clients, providing pragmatic solutions across on all legal matters in the Netherlands. Remko is a partner of our Commercial law firm in Amsterdam, the Netherlands . His specialist areas include Dutch Contract Law , including Dutch Commercial Contracting and Legal Disputes , including civil litigation, arbitration and mediation. Remko is a sharp, creative Dutch attorney with extensive cross-border experience representing both foreign plaintiffs and defendants. Visit Remko's profile via the website or via his LinkedIn Profile .

• assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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March 2012 | Legal Briefing

A few highlights: distribution agreements under Dutch law

A distribution agreement is an important legal instrument in the 
cross-border sale and distribution of all sorts of products (and related services). This article gives an overview of some of the legal issues relating to distribution agreements under Dutch law. The subjects discussed are especially useful to take into account when doing business with suppliers/manufacturers and distributors within the jurisdiction of the Netherlands.

APPLICABILITY OF DUTCH LAW TO DISTRIBUTION AGREEMENTS

Dutch law will be applicable either when the parties concerned have opted for Dutch law (and this choice is considered legally valid by the competent court) or – in the absence of such explicit choice – when such competent court has reached the conclusion that, on the basis of the procedural laws of its own country, Dutch law governs the agreement concerned, or because of other rules of the procedural laws refer to Dutch law, for instance the applicable law is the law of the country where the defendant has (habitual) residence.

EU law causes an alignment of the legislation in member states. A regulation is even directly applicable in the member states. The primacy of EU law over national law was established on 15 July 1964 in the well-known Costa v ENEL [1964] case.

Therefore, the regulation (EC) No 
593/2008 of the European Parliament 
and the council of 17 June 2008 on 
the law applicable to contractual obligations (Rome I) is of most importance 
in the EU and replaces the former convention on the law applicable to contractual obligations of 1980. Rome I 
took effect on 24 July 2008 and applies 
EU-wide, with the exception of Denmark (the former convention of 1980 is still applicable there). Rome I applies to all agreements concluded after 17 December 2009 and views the freedom of parties to choose the applicable law as being of prime importance. In principle, this choice also sets aside mandatory law. Only in the absence of such a choice, according to Article 4(1)(f) of Rome I, is the agreement concerned governed by the law of the country where the distributor has habitual residence.

CONCEPT AND ELEMENTS OF A DISTRIBUTION AGREEMENT

If applicable, it is important to realise that Dutch law does not contain specific legislation concerning distribution contracts. However, mandatory competition laws should always be taken into account. For the rest, distribution agreements are governed by the general provisions concerning agreements of the Dutch Civil Code (DCC).

Distribution can also take place through commercial agents. In Dutch law, a commercial agency agreement needs to be distinguished from a distribution contract. A distributor (as opposed to an agent or intermediary) is an independent dealer that buys products and acts in its own name, own account and own risk in order to resell and distribute them. Commercial agency agreements are specifically regulated under Dutch law and have their own legal definition in Article 428(1) of Book 7 of the DCC. Such a contract is defined as an agreement in which one of the parties (the principal) instructs the other party (the agent) who, on payment of a commission, must provide intermediary services involving arranging contracts to be concluded by the principal with third persons. Where appropriate, such contracts must be concluded in the name and for account of the principal, but without being its subordinate.

The basis of the DCC is the principle of freedom of contract: suppliers and distributors are only bound by the rules they agreed to between themselves. To qualify an agreement as a distribution agreement, it must have the following essential elements:

• an agreement between supplier and distributor;
• the purpose of selling and distributing certain products;
• supplier has an obligation to sell the products to the distributor;
• distributor has the obligation to carry out the reselling and distribution; and
• distributor will act in its own name, for its own account and for its own risk.

Distribution agreements mostly contain clauses with respect to the following subjects:

• the territory of the distribution;
• exclusive or non-exclusive distribution;
• the minimum performance requirements that the distributor must achieve (minimum sales);
• products that are covered;
• non-conformity; complaints;
• price and payment (terms);
• shipping terms (risk of loss and insurance); applicability of an 
Incoterm; and
• term and termination.

A distribution agreement should, in most cases, be categorised under the (innominate) continuing performance agreement, because of the intended continuing co-operation between the supplier and the distributor. Case law relating to continuing performance agreements is therefore an important source to understand how to apply the general rules of (contract) law in relation 
to distribution contracts.

TERMINATION OF A DISTRIBUTION AGREEMENT

In most cases, a distribution agreement contains a clause that provides how and when the distribution agreement can be terminated by (one of) the parties. In the case of a serious failure in the performance of the distribution agreement by one of the parties, the other party may have the right to terminate immediately. The default must be serious enough to justify this immediate termination. Most distribution agreements also contain provisions that deal with, for instance, termination in case of bankruptcy or change in control of the other party.

It is important to understand that Dutch law distinguishes between agreements concluded for an indefinite period of time and for a fixed (limited) period of time. The case law is clear about termination of agreements for a definite period: if the agreement does not include a provision allowing for premature termination, such a termination is not allowed, unless there are unforeseen circumstances that justify such termination (see Mondia v Calanda [1988]).

If a distribution agreement is concluded 
for an indefinite period and does not 
provide for termination, the contract 
can be terminated in principle, as the Supreme Court of the Netherlands ruled on 28 October 2011 ( Gemeente De Ronde Venen v SNU en Stedin [2011]). The Supreme Court ruled that the principles in Dutch law of reasonableness and fairness may also mean in a specific case that such a termination is only possible if there is:

• a weighty reason; and/or
• a reasonable notice period; and/or
• additional compensation.

The necessity of a weighty reason could, for example, be valid if the other party is particularly dependent on the agreement for its business operations.

Other relevant questions that pop up in this context are: when is a reasonable notice period required and what constitutes a reasonable notice period? The answers depend on the circumstances of the case and, in particular, the interests of the parties involved. The relevant circumstances are not limited to a certain category of facts, although it is possible to sum up the following factors that a court will consider anyway (but without limitation):

• the duration of the agreement;
• whether or not the distributor has had a chance to earn back long-term and other investments;
• whether or not the distributor will have to dismiss employees;
• the extent to which the distributor’s business depends on the products purchased from the supplier in question;
• the possibility for the distributor to continue its business by finding (a) new supplier(s) that will sell and deliver competing products to the distributor;
• the reason for the termination;
• the history of the case, such as complaints, promises to improve, or justified reliance on continuation of the agreement;
• the nature of the agreement; and
• the results achieved.

Finally, it is possible that, based on the principles of reasonableness and fairness, additional compensation is necessary, although compensation is already implied in granting a proper notice period. The Supreme Court of the Netherlands ruled on 21 June 1991 ( Mattel v Borka [1991]) that, dependent on the circumstances of the case, compensation for specific investments (made by the distributor for the purpose of the continuation of the agreement) is awarded.

DISTRIBUTION AGREEMENT AND COMPETITION RULES

The rules on competition are mandatory rules and therefore prevail over the principle of contractual freedom of suppliers and distributors. The case law of the European Court of Justice (ECJ) and the Supreme Court of the Netherlands with regard to distribution agreements and competition rules is growing.

For example, on 13 October 2011, the ECJ stated in Pierre Fabre Dermo-Cosmétique [2011] that the block exemption for vertical (distribution) agreements is not applicable to clauses in a selective distribution agreement which, in fact, ban internet sales. The products concerned (cosmetic and personal care products) could only be sold in a physical space and in the presence of a qualified pharmacist. The ECJ considered that the nature of such a practice is equivalent to a ban on active and passive sales, which is considered as a restriction that removes the benefit of the block exemption. These clauses constitute an infringement of competition law. The only possible exemption is an individual exemption, but the ECJ ruled that it is for the Paris Court of Appeals to examine whether the conditions for this are met.

Recently, the Supreme Court of the Netherlands ruled ( Batavus v Vriend’s Tweewielercentrum [2011]) that the termination by Batavus (a producer of bicycles) of the distribution agreement with their dealer Vriend’s Tweewielercentrum was null and void, because of conflict with the competition rule of Article 6 of the Dutch Competition Act. Article 6 covers the prohibition of cartels (which is based upon Article 101 of the Treaty on the Functioning of the European Union). The reason for the termination was the online sale of the bicycles of Batavus at a low price. Batavus decided to terminate due to the great pressure from another dealer Euretco Tweewielers (which represented 10% of the sales of Batavus). The Supreme Court has qualified the behavior of Batavus and Euretco as concerted practices (with the object to impede competition) and, as a consequence, ruled that the termination was null and void. The Supreme Court considered the termination of Batavus as the tail of the concerted practices. Therefore, termination of a distribution agreement, when forced by other distributors, could be in conflict with the competition rules. Also the refusal to admit a distributor to a selective distribution system, when all the conditions of admission are met, could be in conflict with such rules.

By Lisette Bieleveld, partner and
Charlotte Pasteuning, lawyer,
Boekel De Nerée.