Supreme Court’s lectures on the Entire Agreement Clause
How to interpret a contract? According to Dutch law an open standard of reasonableness and fairness applies. This is cause for legal uncertainty. Would an Entire Agreement Clause help? The Dutch Supreme Court decided: “(Un)certainly not”.
Contract law is about legal certainty. Wise parties don’t agree to a price until they have assessed all the risks they expect to face. The contract itself should not be a source of new risks, at least none that have any consequences with regard to the price. To be certain, they agree that their written agreement is all there is. There are no other obligations than those stated in the contract.
So did Mexx and Lundiform. Mexx included an Entire Agreement Clause in the contract and Lundiform did not object. The clause read: “ This Agreement constitutes the entire agreement between the parties and supersedes any earlier written or oral arrangements and agreements made between the parties.” And: “No variation of this agreement shall be valid unless it is in writing and signed by or on behalf of each of the parties.” After a while the contract expired. Did Mexx owe anything? According to Lundiform, referring to a certain paragraph in the contract, Mexx had guaranteed to purchase certain stock from Lundiform that was ordered on the basis of Mexx's confirmed forecast. But in fact, Mexx’s forecasts had not been given in the form of a confirmation as defined in the previous paragraph of the contract. Thus, no single part of the entire agreement supported Lundiform’s claim. Literally speaking.
Dutch lawyers are not satisfied by a textual interpretation of a contractual term. Supported by the Supreme Court they search for facts and circumstances outside the contract, in order to discover the true intentions of the parties or to test a certain interpretation with a view, for example, to the nature and purpose of the contract. In some cases it is accepted that the text should be taken quite literally, for example if the contract is concluded in an Anglo-American context, by professional parties supported by lawyers. But in the end, a court should be free to give weight to the particular circumstances of the case, assessed according to standards of reasonableness and fairness. Mark Wissink wrote about this last year in his Legal certainty and the construction of contracts in Dutch Law.
The Court of Appeal in the Lundiform case took into account the Entire Agreement Clause while it was assessing Lundiform’s interpretation of the contract. It decided in favour of Mexx. On 5 April 2013 the Supreme Court held that the Court of Appeal should have taken into account the fact that Mexx and Lundiform did not negotiate the Entire Agreement Clause. Mexx’s legal department put it in the contract, while Lundiform was not supported by a lawyer. It was decided that, in this case, a textual interpretation – inspired by the Entire Agreement Clause – did not suffice.
The Court of Appeal found that the purpose of this contract was to define the obligations of the parties precisely, thus stressing the importance of a textual interpretation. This line of reasoning seemed to imply that the chosen method of interpretation was connected with the Entire Agreement Clause. Yet, the Supreme Court noted that an Entire Agreement Clause does not in itself regard the interpretation of the contract. Apparently it meant to say that such a clause does not prescribe a certain method of interpretation. A general remark like this has limited value, because it is up to the lower courts to assess the meaning of a specific clause in every single case.
What then is the meaning of Entire Agreement Clauses in Dutch practice? The Supreme Court felt the need to answer this question, in what seems to have become a new tradition in explaining the law outside the scope of the conflict of the parties. We learn from this that (1) an Entire Agreement Clause has a specific origin and function in the Anglo-American legal sphere, while it has no specific meaning under Dutch law. (2) It is generally supposed to prevent parties being bound to previous agreements that contradict the agreement at stake, unless these have been included in the agreement. (3) The clause does not preclude to take into account the behaviour and statements of parties previous to the conclusion of the contract. (4) Depending on the text of the clause, the nature, content and purpose of the contract of which it is a part, and the level of detail of this contract and the way the clause has been discussed during the negotiations, it could be a relevant factor in interpreting a contract.
The Supreme Court’s lecture seems to contradict its message. While we are made to believe that the Entire Agreement Clause has no specific origin and function, let alone a specific meaning under Dutch law, it apparently has one general meaning: not to erase the Dutch way of incorporating legal uncertainty in a contract in the name of reasonableness and fairness. So, parties, unite, to prove the Supreme Court was wrong. Make clear to the other party, and thus to the courts, that you want to promote legal certainty by limiting the court’s freedom of interpretation. Is this a guarantee for success? (Un)certainly not.