3 July 2018

A blog by Arne Grimme – Growing pains: Haviltex comes of age

As the father of five teenagers, I am subject to many negotiation tactics at home. This includes my children constantly deploying flexible and creative arguments to interpret agreements made by us. This is not so different from how parties and their lawyers sometimes behave when having a dispute over a contract.

Since the Dutch Supreme Court’s landmark 1981 Haviltex decision, Dutch courts have moved away from looking at literal meaning when interpreting a contract, towards “the meaning the parties could reasonably give to the contract and what they could reasonably expect from each other in the given circumstances“.

This “reasonable” standard has led to unintended consequences over the years, with parties raising anything and everything in the hope that one of their arguments may leave an indelible impression on courts…and allow them to win their case. Dutch courts have long tolerated lawyers’ loquacious Haviltexing, as the practice has come to be known, but over the past ten years their patience has been wearing thin.

In some instances, courts appear to be starting to move back towards a traditional approach of interpreting contracts by increasingly adopting a literal interpretation of heavily negotiated, comprehensive commercial agreements, between professional parties assisted by experts. The erstwhile pervasive power of Haviltexing seems to be waning. These days, the most obvious, literal interpretation of contracts seems to be gaining ground in courts throughout the country…and deciding the fates of parties.

Being critical when one of the parties is trying to Haviltex itself out of an awkward contractual position was seen in a recent post-M&A dispute involving Sandcape’s 2015 acquisition of an oil refinery in the Rotterdam port from Kuwait Petroleum (Q8). During the SPA negotiations in 2015, the parties went back and forth over planned capital expenditures. This bartering was “resolved” by a quick fix in the SPA – only to become the focal point in a post-M&A dispute.

In litigation before the Amsterdam District Court, Sandcape alleged that Q8’s commitment to “procure that the Company shall continue its business in the ordinary course of business and consistent with past practice (including performance of regular maintenance on a basis consistent with past practice)” should be read as a hard commitment of Q8 to invest on the basis of the USD 48 million capex budget in the refinery before closing. Sandcape’s interpretation was based on a range of Haviltexed facts and circumstances that, according to Sandcape, reflected the real intention of the parties behind this ambiguous wording – notably including a memo obtained by Sandcape only after closing.

In its ruling published a few weeks ago (in Dutch), the Amsterdam District Court lambasted Sandcape and its lawyers for attempting to Haviltex a commitment into the SPA that clearly wasn’t there. The court felt strongly that it had been purposely misled by Sandcape, with the latter presenting knowledge obtained after closing as being relevant in assessing the parties’ intention at the time of signing. Not only was Sandcape’s claim easily dismissed, but its misleading submissions led the court to award Q8 full compensation for its legal fees, something that Dutch courts very rarely do.

As teenagers sometimes experience when seeking ever-more favours or privileges from their parents, legal practitioners are discovering that there are limits to what you can get away with – even when Haviltexing...