Master Opleiding Trust Officer 2022

Cyril Christiaans – Contract law highlights I

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Parties to an agreement?

• In principle, an agreement is binding on the parties only

• Only the parties may enforce obligations or invoke contractual defenses
• This applies also in the context of companies entering into agreements
on behalf of affiliates or where affiliates are involved in the performance.

• Subcontracting is always allowed

• Third-party beneficiaries may benefit from an agreement

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 Title 3.3 Dutch Civil Code: power of attorney
• Language and interpretation issues, often confusing:
• Representation (‘vertegenwoordiging’)
• Agency (‘agentuur’, ‘lastgeving’)
• Power of attorney, procuration (‘volmacht’)
• There are no provisions on “representation” in general in the DCC.
• Extensions of Title 3.3:
• 3:60 (2) DCC: acceptance of declarations
• 3:78 DCC: other forms of representation

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 What is procuration?
• ‘Procuration’ is a legal instrument, ‘granting authority’, not a contract
• May be granted separately or as a part of a wider context

• The authority to an attorney to act ‘in the name of’ the principal. Criteria?
• Statements and behaviour by attorney and counterparty

• Ground rule: only when acting ‘within the limits of his power’ the attorney
binds the principal (3:66 (2) DCC)

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 Requirements for a valid power of attorney?

• No specific form, may be granted expressly or tacitly

• Except specific statutory requirement: notarial deeds (real estate, corporate)
• Applies only to juridical acts, not to factual acts
• Not restricted to acts in the interest of the principal
• Written proof of the procuration (3:71 (1) DCC), only if requested

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 ‘General’ or ‘special’ power of attorney (3:62 DCC)
• General power of attorney: all affairs, all property of the principal (except excluded)
• No acts of disposition (‘beschikking’) allowed, unless provided expressly and in
writing

• Special power of attorney:

• Granted for a specific purpose, or granted ‘in general terms’
• If in general terms: no acts of disposition allowed, unless expressly provided
• If granted for a specific purpose: all acts are allowed if helpful for reaching the
purpose

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 The “yet to be disclosed” principal (3:67 DCC)
• Contract with an attorney acting on behalf of an unknown principal, to be disclosed later
• The principal must be disclosed ‘without reservations’
• If not disclosed in time: attorney becomes the party to contract!

• Risk for the other party: either an unknown counterparty or the attorney as contract party..
• Risk for the attorney: he may become bound to the contract himself
• Unless otherwise agreed!

• Particular risk: acting on behalf of companies that are in the process of being incorporated and
tbd group companies

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Duration and termination
• A power of attorney ends by operation of law (3:72 DCC):
• Death or bankruptcy of the principal (unless 3:74 (1) DCC applies)
• Death or bankruptcy of the attorney (unless otherwise provided)
• Revocation (‘intrekking’) by the principal
• Renunciation (‘opzegging’) by the attorney

• But also in the following events:

• End of framework agreement
• Goal of agreement is reached
• Expiration of contractual term
• Condition (precedent/consequent) has been fulfilled
• Annulment, avoidance
• Etc.
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 Irrevocable power of attorney (3:74 DCC)
• A power of attorney can only be made ‘irrevocable’ if the juridical act to be
performed is in the interest of the attorney himself or of a third party.

• An irrevocable power of attorney remains valid upon death or bankruptcy of

the principal (unless it is clear that was not intended).

• A counterparty may rely on validity of irrevocable procuration

• Difficult for the principal to get out of: only by court decision, for serious
reasons.
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 Unauthorized procuration
• If an attorney exceeds his authority or has no authority to represent the
principal at all, the principal is not bound.

• Exceptions:
• “Confirmation” by the principal (3:69 DCC)
• “Reliance” on confirmation by the principal (3:35/36 DCC)
• The appearance of adequate authority (3:61 (2) DCC)

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 The appearance of adequate power of attorney
• Starting point: an impression created by the principal or for which the principal is responsible
• Attribution of risk, “apparent authority”?

• Examples in case law:

• Principal has knowledge of missing authority of attorney, and did not interfere
• Circumstances after entering into an agreement
• Compliance with previous unauthorized agreements
• Very factual decisions, sometimes far-reaching consequences
• Appearances may override restrictions of the attorney as registered in the Trade Register
• Unusual restrictions may not be invoked (3:61 (3) DCC)

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 Liability ex 3:70 DCC
• Background: attorney must be (very!) sure about the authority granted to him, or runs the
risk of personal liability.
• In practice: principal may deny existence of power of attorney if the agreement appears
less profitable. Attorney is then stuck.

• Strict liability, very easy claim from the other party

• Liability for all damages pursuant to the contract (incl. lost profit)
• Limited defences for the procurator:
• Certain default of principal (HR 20 Feb. 2004)
• Condition that would be fulfilled (HR 8 Oct. 2004)
• Non existing principal (HR 29 Sept. 2006)

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 Private international law issues
• REGULATION (EC) No 593/2008 of 17 June 2008 on the law applicable
to contractual obligations (Rome I)

• Internally: choice of law

• Closest connection / characteristic performance: framework agreement /
independent procuration?
• Formal validity: place where the agent acts

• Externally: relationship principal - third parties is excluded

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 Convention on the Law Applicable to Agency
• Four countries, including the Netherlands!

• Extends beyond (commercial) agency and power of attorney (article 1):

• “Authority to act, acts, or purports to act”
• In the name of principal / in his own name
• Regularly or occasionally
• Chapter II: internal (principal – “agent”)
• Chapter III: external (“agent”/principal – third parties) – one difference:
• The law of the state where the agent has acted applies if the third party had his
business establishment there.
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 Part 2: Joint and several liability / suretyship
• Contractual security arrangements are frequently used:
• In national and international group companies (horizontal and vertical)
• In SME companies (vertical/shareholders, natural persons)
• Examples:
• Plurarity of debtors (‘hoofdelijkheid’);
• Parent/shareholder guarantee;
• Bank guarantee
• Keep well agreements
• Uncertainty:
• Applicability of specific statutory regime
• Differences between jurisdictions
• Interpretation issues

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Variations in statutory regimes?
• Articles 6:6 – 14 DCC: Plurality of obligors, ‘joint and several liability
(‘hoofdelijkheid’)
• Articles 7:850 – 856 DCC: Suretyship (‘borgtocht’)
• Articles 7:857 – 863 DCC: Personal suretyship (‘particuliere borgtocht’)
• Consequences:
• Different levels of protection for obligors
• Different levels of mandatory law

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 Joint and several liability - definition
• Multiple obligors, each bound towards the creditor for the whole obligation, but only if the
performance of one of the obligors has the effect that the other obligors are no longer bound

• Joint and several liability may be created as a result of (6:6 (1) DCC)
• An express statutory provision (about 40)
• Habit
• Legal act, agreement

• ‘Coincidental’ parallel obligations do not constitute joint and several liability

• Each obligor’s obligation may be different from the other’s

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 Suretyship - definition
• A joint and severally liable party, who commits himself towards the creditor for the payment
of the debt of a third party, but who is not ‘internally liable’ (niet draagplichtig’) for such debt
• The debt ‘does not concern him’, in the relationship between the joint and severally liable
parties. Only objective is providing security!

• If ‘someone is internally not liable, then external qualification is ‘suretyship’

• But only if this was reasonably known to the creditor

• Compare ‘counter-guarantee’ (‘contra’), commonly used by banks

• Compare ‘sub-surety’ (‘achterborg’, 7:870 DCC)

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 Compare: ‘abstract’ bank/parent guarantee
• Typical properties:
• Own payment obligation from the guarantor
• Elements and criteria must be included in the guarantee itself
• Legally completely independent from the underlying legal obligation
• No statutory right of recourse upon payment
• (Very) limited use for ‘reasonableness and fairness’

• Parent guarantee may be in the form of an abstract guarantee or in the form of

suretyship.
• Interpretation: in principle the wording is decisive

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 Compare: ‘Keep well agreements’
• Different type of obligation, not a security interest:
• Obligation to keep equity at a certain minimum level
• Maintain solvability ratio
• Obligation on a parent to ensure that the subsidiary will continue to be able
to meet its obligations towards a creditor/all creditors

• Sometimes difficult to recognise …

• Legal qualification is sometimes uncertain

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 Declaration of joint liability (2:403 DCC statement)
• Different instrument, different purpose …
• If a 2:403 DCC-statement is published by a parent the annual accounts may
be consolidated
• The statement works generic, not aimed at a specific creditor
• May be amended or withdrawn, no reliance for longer relationships
• There is no standard wording for the statement, it may need to be
interpreted …

• A 2:403 DCC statement is not a suretyship!

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 Relevance of qualification as ‘personal suretyship’
• Whenever a natural person enters into an agreement of suretyship, it can
be a ‘professional suretyship’ or a ‘personal suretyship’ (‘particuliere borg’)
• Mandatory law applies to personal suretyship
• Formal validity requirement for personal suretyship: the agreement must
contain ‘a maximum amount in money’ (7:858 DCC)
• In some cases it may be sufficient if the maximum amount ‘can be
determined’ (‘bepaalbaar’) at the time the agreement was entered into (HR
19 September 2008, NJ 2008, 508 (Creve Drinks/Fokker)
• Mandatory provisions apply mutatis mutandis to other forms of security to
be provided by a natural person (7:863 DCC).
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 Additional complications in case of personal suretyship
of directors/shareholders…
• Article 7:857: ‘The provisions of this Section apply to suretyship entered into by a natural person
acting neither in the conduct of a profession or business, nor for the benefit of the normal
exploitation of the business of a company limited by shares or a private company with limited
liability of which he is a director and in which, alone or with his co-directors, he holds a majority of
the shares.’
• Criterium is identical to the one applied in article 1:88 (5) DCC, regarding the question when a
spouse or registered partner must co-sign the agreement

• Supreme court: criteria must be applied identically

HR 26 January 2007, ECLI:NL:HR:2007:AY9678 (Steins/ING)
• Immense amount of case law on 1:88 DCC, not on 7:857 DCC

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 Relevance of risk of insolvency?
• HR 18 December 2015, ECLI:NL:HR:2015:3606 (Nooij/ING)
• ‘The fact that the agreed bridge financing was granted in order to ensure that the
company could continue its normal operations during the period to be bridged, does
not remove the exceptional character of this agreement, in the context of the
immediate threat of insolvency of the company.’

• Unpredictable outcome, but: risk of insolvency is a common aspect in situations

where a director is asked to provide personal security. In those cases:
• 1:88 DCC requires consent of spouse
• 7:857 DCC requires compliance with ‘personal suretyship’ provisions

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 Recourse
• In essence there are three mechanisms for seeking recourse in case of joint
and several liability:
• Recourse (‘regres’), 6:10 DCC
• Subrogation (‘subrogatie’), 6:12 DCC
• Agreement, counter-guarantee

• [Assignment]

• Note: ‘release’ from joint and several liability

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 Recourse on the basis of 6:10 DCC
• Art. 6:10 DCC is the main instrument for seeking recourse for a joint and several liable party
who has paid the creditor, but beware:
• No right of recourse until more has been paid than the amount for which such party is
internally liable
• After payment by the first debtor, the remaining debts are no longer joint and several
• No benefit of additional rights (‘nevenrechten’), such as security interests
• New statute of limitations starts
• Costs incurred may be recovered from the other debtors
• Recourse by a surety (7:866 DCC): other debtors remain joint and severally bound towards the
surety seeking recourse
• Recourse rules may also apply between sureties

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 Subrogation on the basis of 6:12 DCC
• Right of subrogation is ‘in addition to’ right of recourse
• Main characteristics:
• Paying debtor ‘steps into’ the position of the original creditor
• Additional rights may be invoked, also against third parties
• Paying debtor is subrogated only to the extent that the claim concerns
each other debtor

• Additional possibilities with a subrogation agreement (6:150 DCC)

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 Regime in case of insolvency of one or more joint and
several debtors (6:13 DCC)
• Guiding principle: three phases of recourse:
• Phase 1: the paid amount must be shared between all of the parties that are internally liable,
in accordance with their share
• Phase 2: if one of the internally liable parties cannot pay, his share will be divided among the
other internally liable debtors
• Phase 3: if none of the internally liable parties can pay, the whole amount must be paid by
(or divided between) the not-internally liable parties, i.e. the surety or sureties

• Applicable in case a debtor is unknown, cannot easily be found or is insolvent

• Regime kicks in whenever recourse is not possible within a reasonable period or without
incurring costs

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 Suretyship issues in group financing
• HR 13 juli 2012, ECLI:NL:HR:2012:BW4206 (Janssen q.q./JVS Beheer)
• Supreme Court ‘wishes to make the following comments’ (in 6.2):
‘If within an group of companies, or between the group companies involved, no
agreements have been entered into relating to the attribution of loans and credit
facilities that have been granted jointly to two or more companies that belong to the
group, the question regarding their internal liability is decided on the basis of the
question who the debt concerns.
In answering this question the court needs to take into account who used the loan
or the credit facility or to whom the loan or the credit was made available, and all
other relevant circumstances of the particular situation.’
• Always make sure an internal agreement regarding internal liability is entered into

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 Conflicts of laws complications!
• Always distinguish:

• Rules that apply to the external relationship (debtors – creditor)

• Multiple debtors in one / more jurisdictions
• Multiple debtors and multiple creditors
• Relationships are usually governed by a choice of law clause, but not always! Careful with later addition of
joint and several debtors by separate statements

• Rules that apply to the internal relationships (debtor – debtor)

• Generally not covered by an internal agreement – it should!
• Problems with qualification of obligations …

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 Conclusions
• Although guarantees and suretyship documents are used on a daily basis,
both in SME and in large multinational organisations, there is still a lot of
uncertainty …
• Uncertainty results from differences in legal systems and from
misunderstandings
• A lot can be solved with agreements, but this is still not often done
• Special care is necessary if natural persons are involved, not only in the
Netherlands but everywhere!

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