Dutch Supreme Court elaborates on the validity of a settlement agreement that is contrary to mandatory law

On 6 January 2017, the Dutch Supreme Court delivered its decision (ECLI:NL:HR:2017:19) on the validity of a contract of settlement (vaststellingsovereenkomst) (article 7:900 et seq. of the Dutch Commercial Code (DCC) that is contrary to mandatory law, thereby explaining article 7:902 DCC.

According to the Supreme Court, a settlement agreement that is in breach of mandatory law is only valid if the settlement aims to terminate existing disputes as well as existing uncertainties but not if it aims to prevent (future) uncertainties or disputes. If, however, the parties have concluded the settlement agreement with the aim of circumventing mandatory law, such a settlement may be invalid or the whole agreement may be void for breaching good morals and public policy.

Facts of the case

The subject of the dispute concerned the payment of salary to taxi drivers by Blue Taxi, a small taxi company. Blue Taxi had been summoned by the foundation Sociaal Fond Taxi (SFT), which aims to promote good employment relationships in the taxi industry. SFT argued that the salary payment from Blue Taxi to its employees was in breach of break arrangements in the mandatory collective labour agreement, which applies to the taxi industry. SFT therefore claimed before the District Court that Blue Taxi had to comply with the mandatory collective labour agreement and pay damages to SFT for the losses it had suffered as a result of the breach of the agreement. Blue Taxi defended itself by arguing that a contract of settlement had been concluded between Blue Taxi and its taxi drivers. In this contract of settlement, the parties recognised that there was uncertainty between them concerning whether the drivers would be able to claim more salary from Blue Taxi, as has been argued by SFT. The parties agreed a settlement on the condition that the taxi drivers would not pursue any claims related to the possible (incorrect) application of the break arrangements in the mandatory collective labour agreement.

District Court and Court of Appeal judgment

The District Court dismissed SFT’s claim on the basis that even if Blue Taxi had breached the break arrangements, SFT’s claim was superseded by the settlement agreement between the drivers and Blue Taxi. The Court of Appeal, however, set aside the judgment of the District Court. It argued that the settlement agreement was not intended to terminate an already existing dispute between Blue Taxi and its drivers, but to prevent such a dispute in the event that SFT’s position concerning the break agreements turned out to be correct. Furthermore, the Court of Appeal ruled that SFT had a right to claim independent of the drivers, and this right was not affected by a waiver of the drivers.

Supreme Court judgment

The Supreme Court upheld the decision of the Court of Appeal because SFT indeed had a right to claim its own damages, and this right did not depend on the waiver of the drivers. The Supreme Court decided to take this opportunity to shed light on when a settlement agreement may be in breach of mandatory law to clarify the scope of article 7:902 DCC.

Article 7:900 DCC states that a contract of settlement is a binding agreement between the parties in order to end or avoid any uncertainty in respect of what, in law, shall apply between them. According to article 7:902 DCC, such a settlement might even be in breach of mandatory law, but only if its goal is to terminate existing disputes or uncertainties. In its decision, the Supreme Court eliminated any lack of clarity on whether existing uncertainties also fall under the scope of article 7:902 DCC by stating that article 7:902 DCC is not limited to contracts of settlement that are aimed at ending an existing dispute but also includes agreements that intend to end an existing uncertainty. Under the scope of article 7:902 DCC, the legislator only meant to exclude agreements that seek to prevent (future) uncertainties or (future) disputes.

The Supreme Court did specify that the right to conclude settlement agreements contrary to mandatory law is not unlimited. The aim of a settlement agreement is to make it possible for parties to end an uncertainty concerning the interpretation of a rule of mandatory law or the consequences of such a rule without going to court (SC 21 April 1995, ECLI:NL:HR:1995:ZC1711). However, parties seeking to use the settlement agreement to circumvent mandatory law and thus undermine its mandatory character in an unacceptable way must be avoided. Article 7:902 DCC opens a way for this by stating that a settlement may not be valid because, either in content or by implication, it would be in breach of good morals and public policy. Furthermore, a settlement agreement may in itself be void according to article 3:40 DCC, if, for example, parties seek by agreement to circumvent mandatory law.

Conclusion

This judgment of the Supreme Court clarifies when a settlement agreement that is in breach of mandatory law is valid. The agreement must intend to end an existing uncertainty or dispute and not avoid a (future) uncertainty or dispute. It must not be used by parties to circumvent mandatory law. If they do, the settlement may be invalid or the whole agreement may be void.

The post “Dutch Supreme Court elaborates on the validity of a settlement agreement that is contrary to mandatory law” is a post of www.stibbeblog.nl


Toni van Hees
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Sofja Goldstein
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