Exporting in the twilight zone: hop, step and jump to an invalid contract?
A contract in violation of a statutory provision may be valid or void. In the case of Esmilo and Mediq the Dutch Supreme Court regrettably complicates the required test even further.
The violation of a statutory provision normally warrants criminal prosecution or administrative sanctions. The consequences of such a violation in private law are less clear. Is a contract in violation of a statutory provision valid or void? The Romans, it is told, already distinguished between leges perfectae, making a contract-in-violation void, and leges minus quam perfectae, which did not. Unfortunately, in Dutch private law things are more complicated.
Esmilo and Mediq agree to join forces in the export of medicines. Pharmacies operated by Mediq will pass on medicines to Medimilo, the parties’ common wholesale business, from which the actual export will take place. Lower legislation under the Medicines Supply Act, however, forbids a wholesale business from obtaining medicines from pharmacies. Parties are aware of that. Eventually Mediq withdraws. As Esmilo takes legal action for default, the question of the validity of the contract comes before the court.
To determine the validity of a contract in a case like this, the Dutch Civil Code requires a rather odd test. In fact, it mostly resembles a triple jump. If a contract is not only in violation of a statutory provision (hop), but for that reason also in violation of public order (step), then the contract is void (jump). What’s new about the decision by the Dutch Supreme Court in the case of Esmilo and Mediq is that it openly rejects the doctrine that a contract, which is in violation of a statutory provision, is for that reason automatically to be deemed also in violation of public order. In setting the ‘step’ it comes to an assessment by the court. The Supreme Court formulates four factors to be taken into account: the interests protected by the statutory provision, whether fundamental principles are also violated, whether parties were aware of the violation and whether the statutory provision provides for a sanction.
This decision may be welcomed for definitively making clear that there is room for an assessment on a case to case basis in determining the validity of a contract in violation of a statutory provision. Regrettably, though, the Supreme Court fails to provide guidance on how the compulsory factors are to be applied and even on what exactly these actually mean. The Court of Appeal will have to think of something in the course of further adjudication.
What is also regrettable is that the Supreme Court did not seize the opportunity to abandon the confusing public order test and the triple jump altogether, but instead further complicated the test by adding four compulsory factors. It could have done so by aligning cases in which a statutory provision forbids either the obligations parties have expressly agreed upon, or additional actions that are necessary to perform (as in Esmilo/Mediq), with cases in which the conclusion of the contract as a legal act is forbidden. The validity of the contract is then to be determined in relation to the purpose and scope of the statutory provision concerned. Much like the Romans did.
For a more extensive commentary, see the January 2013 Issue of the Nederlands Tijdschrift voor Burgerlijk Recht.