Termination of an agreement: compelling grounds?

The Dutch Civil Code does not provide general rules on termination, but the Dutch Supreme Court has developed a body of case law on this subject. This blog will touch upon certain aspects of that case law and discuss the Dutch Supreme Court's latest ruling on the subject.

Rules for termination of an agreement

According to settled case law, the rules governing termination of an agreement vary depending on two factors: whether the agreement in question has been entered into for a definite or an indefinite period of time, and whether the agreement includes provisions on termination.

As a general rule, an agreement for an indefinite term can be terminated, even if it does not include provisions on termination. However, on the basis of the "supplementary standards of reasonableness and fairness" (art. 6:248.1 DCC), and depending on the nature of the agreement and the circumstances of the case, termination may only take place under certain conditions. These conditions may include, for example, termination only on compelling grounds, or after observing a certain termination period, or upon payment of damages (or a combination of these). The Dutch Supreme Court's decision of 28 October 2011 (ECLI:NL:HR:2011:BQ9854) Gemeente Ronde Venen/Stedin c.s. confirmed this general rule. In a decision of 2 February 2018 (ECLI:NL:HR:2018:141) the Supreme Court provided an overview of how supplementary and restrictive standards of reasonableness and fairness work with respect to terminating agreements.

Certain Dutch Supreme Court decisions discuss which specific circumstances can be decisive when considering whether compelling grounds are required; however, the case law is rather vague and casuistic. The terminated party's degree of dependence on the agreement may be a relevant circumstance (Gemeente Ronde Venen/Stedin c.s.), as well as the fact that the agreement represents a strong public interest (ECLI:NL:HR:1991:ZC0291, Mattel/Borka).

Case law is unclear as to what type of grounds qualify as 'compelling' i.e. when a ground is considered sufficiently serious to justify termination. The Dutch Supreme Court has not yet answered this question in any of the cases brought before it.

In the Supreme Court’s decision of 29 March 2019, the central question was whether the reason given for termination qualified as a compelling ground.

Background to the case

Between 1923 and 2004 the Municipality of Voorst concluded agreements under private law with Liander (or with its legal predecessors), a grid manager currently operating in several parts of the Netherlands. Precisely which group company was a party to these agreements – Liander or Liander Infra – was in dispute. Both Liander and Liander Infra were parties to the proceedings. Under the agreements, Liander was entitled to own and maintain municipal land, and to lay pipes and cables there. These agreements were concluded for an indefinite period of time and did not feature a termination clause.

On 1 January 2014, a by-law on the levy and collection of the municipal levy on encroachments in, on or above public land (Verordening op de heffing en de invordering van precariobelasting 2014) came into effect. Under this by-law, the Municipality of Voorst could levy tax on having pipes, cables or wires under, on or above public land. The aforementioned agreements precluded this tax. The Municipality of Voorst gave notice, in letters to Liander dated 25 April 2014 and 19 June 2014, that it would terminate the contracts as of 1 November 2014, ostensibly in order for it to be able to levy taxes in the future.

In these proceedings Liander et al. claimed continuation of the relevant agreements (gestanddoening van de overeenkomsten).

Ruling of the Court of Appeal

The Court of Appeal ruled that termination of the agreements was only legally valid if it was based on compelling grounds. The Court of Appeal took into account the purpose of the agreement – to establish long-term cooperation in which Liander did not pay tax - and the public interest, insofar as Liander would be obliged to pass on the tax to its customers if  the Municipality of Voorst would terminate the agreements.

The Court of Appeal ruled that the Municipality had no compelling ground for termination. The reason for the termination – the municipality’s interest in levying local taxes – did not justify the termination, in particular given that these taxes would also be paid by Liander customers outside of the Municipality of Voorst. The Court of Appeal ruled that under these circumstances the termination of the agreements was not legally valid.

Ruling of the Dutch Supreme Court

The central question before the Dutch Supreme Court was whether or not the reason given for termination could qualify as a compelling ground with the result that the agreements could be terminated.

The Municipality of Voorst complained that the Court of Appeal had not taken into account its submission that 'levying tax' was not decisive (i.e. was not the main reason) for termination. According to the Municipality, Liander Infra was a party to these agreements instead of Liander, and the agreements did not preclude levying tax on Liander. For this reason it was argued that the Court of Appeal’s considerations on the question if there were compelling grounds was incomprehensible.

In response to the Municipality of Voorst’s complaint, the Supreme Court took into consideration that the reason given for termination of the agreement was mainly to levy tax. The Supreme Court ruled that in answering the question of whether there are compelling grounds for termination, the issue of whether or not the Municipality of Voorst could levy tax without termination of the agreements with regard to another company (Liander) than the party to the agreements (Liander Infra) is not decisive

Opinion

Arguably, the Dutch Supreme Court's decision makes sense considering the Court of Appeal's considerations about whether the ground for termination was a compelling ground. The Court of Appeal had balanced the interests involved and had already ruled that the reason given for termination – the municipality's interest in levying taxes – did not justify the termination and did not qualify as a compelling ground. If being able to levy taxes is not a compelling ground for termination, it should not matter whether the taxes can be imposed through a different route.

Conclusion

This decision confirms the general rule that an agreement for an indefinite term that does not provide for termination can be terminated.

Under exceptional circumstances, termination is only legally valid if it is based on compelling grounds. The Court of Appeal's decision shows that the purpose of the agreement – to establish long-term cooperation – and the public interest are relevant circumstances for determining whether compelling grounds are required. This question was not discussed before the Supreme Court.

The Court of Appeal's decision shows that a balance of interests can be made when determining whether a ground is sufficiently compelling, and that public interest is an important circumstance to weigh. Unfortunately, the Dutch Supreme Court provided no further clarity on what type of grounds qualify as 'compelling' i.e. when a ground is considered sufficiently serious.

In short, the Supreme Court decision confirms existing case law. The Court of Appeal's decision however clarifies slightly which circumstances can be relevant for determining whether compelling grounds are required and how to determine whether a ground is sufficiently compelling.