On 7 February 2014 the Supreme Court handed down an interesting decision on the interpretation of written agreements. The case concerned a share transfer agreement in which all the shares in a group were sold. The seller provided a number of guarantees in the agreement. If one of the guarantees were breached, the seller would provide compensation up to a stipulated amount. It was also agreed that the buyer would notify the seller ‘as soon as possible’ if any of the guarantees given were breached. This wording deviates from the statutory provision which stipulates that a buyer must notify the seller ‘within a reasonable period of time’ with regard to products/services supplied that do not satisfy the agreement.

The Appeal Court stated first and foremost that in interpreting the agreement, in particular the provisions that pertain to breaches of the guarantees and notifications relating to these, it is relevant that the agreement has been concluded between two professional parties who have both sought the assistance of external (legal) advisers knowledgeable in this area. Partly taking into account this starting point, the Appeal Court said that the provisions in question must be interpreted in accordance with what the parties could reasonably expect of each other in this respect. The literal text of the agreement is not decisive, though certain value will be attached to it. The Supreme Court concurred with the Appeal Court in the above. The so-called ‘Haviltex criterion’, where the intention of the parties and what they can reasonably expect of each other is taken into account, serves as the guide in interpreting agreements. This also applies if a provision in an agreement has far-reaching consequences or if the agreement in question has been concluded between professional parties, as is the case here.

The Appeal Court also argued that, given the expediency desired and the consequences of not reporting the breach on time, the buyer is required to inform the seller as soon as possible. The fact that the agreement is complex and risky does not detract from this. In view of the complexity and risks, the seller needs time to determine its position. As such, the wording ‘as soon as possible’ implies more urgency than the statutory ‘within a reasonable period of time’, according to the Appeal Court. The buyer complained in this respect that the Appeal Court had not indicated to what extent the seller suffered damage.  If the seller did not encounter any disadvantage because of the late report and its interests were consequently not harmed, the buyer cannot be readily accused of failing to act expeditiously. The Supreme Court concurred with this complaint from the buyer. If failing to complain ‘as soon as possible’ results in forfeiture of the right to damage compensation, the question of whether timely notification was given of the breach of the guarantee cannot be answered without taking into account all the circumstances of the case. All the circumstances of the case must also be taken into account when assessing whether the statutory duty to complain has been satisfied.  In this case this means that the drastic legal consequences of reporting a breach of a guarantee too late as well as the seller’s interest that is harmed as a result of this report coming too late must both be taken into account. This consideration is in line with case law of the Supreme Court.

Parties who wish to contract agreements must have a good understanding of each other’s interests and considerations. Although a literal interpretation of a provision will not generally be decisive, clear and concrete agreements can prevent disputes from arising on the interpretation of an agreement.

By Anne-Douwe Tigchelaar