The Dutch Method of Dealing with Contradictory Clauses that exist due to the Incorporation of Multiple Sets of Terms and Conditions into a Commercial Contract by One of the Parties : A DUTCH SUPREME COURT RULING PUT IN

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MASTER THESIS EUROPEAN PRIVATE LAW

The Dutch Method of Dealing with Contradictory Clauses that exist

due to the Incorporation of Multiple Sets of Terms and Conditions

into a Commercial Contract by One of the Parties

A DUTCH SUPREME COURT RULING

PUT IN INTERNATIONAL PERSPECTIVE

JUDGED ON EFFICIENCY

Author: Erik Braun

Date: August 3, 2016

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Abstract

This thesis provides an analysis and evaluation from the perspective of efficiency of the new Dutch Law approach to the issue of parties incorporating multiple sets of terms and conditions which contain contradictory clauses into a commercial contract with another party.

The Dutch Supreme Court ruled that parties are able to incorporate multiple sets of terms and conditions into a contract with another party. Subsequently it ruled that in deciding which of contradictory clauses should be enforced, courts have to establish the intention of the parties by means of contract interpretation. Dutch courts can either choose for a subjective method of interpretation or a more objective method of contract interpretation if the circumstances justify such an approach. When a commercial contract is the subject of the dispute it is likely that parties to that contract are looked upon by the courts as professional parties. Dutch courts in that situation will use a more objective method of contract interpretation, in this case the method of incorporation of the contradictory sets of terms and conditions into the contract.

Instead of limiting the analysis to the Dutch solution, this thesis focuses on other existing approaches. It compares the Dutch Law approach with the approaches under English Law and International Commercial Law (representatives of International Commercial Law are the United Nations Convention on Contracts for the International Sale of Goods and the Unidroit Principles of International Commercial Contracts). All these legal regimes are analyzed and evaluated from the perspective of efficiency. From this select group of analyzed legal regimes this thesis aims to identify whether these legal regimes offer a more efficient approach to this issue than Dutch Law.

This thesis argues that the Dutch Supreme Court provided Dutch Law with an efficient approach to tackle this issue. However, it did not provide Dutch Law with the most efficient approach found in the analyzed legal systems. The approach that would achieve the most efficient situation would be the approach borrowed from the Unidroit Principles that uses the contra proferentem rule for interpreting the contract.

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I. Introduction

In commercial practice, contracts are made on a daily basis. These commercial contracts often have sets of terms and conditions incorporated. Terms and conditions are standardized non-negotiable additions to a negotiated contract. They can also regulate the contract as a whole. A commonly known problem is when two contracting parties each incorporate their own

standardized terms and conditions into the contract which contain contradictory terms. This situation is often referred to as: ‘the battle of the forms’. In accordance with the rules governing a battle of the forms dispute, different legal regimes apply either the terms and conditions from the party that first incorporated their terms and conditions or from the party that incorporated their terms and conditions applicable last (respectively the first shot rule and the last shot rule). Another method to solve this problem is by using the knock out rule which means that neither of the contradictory terms is applicable.

However, how is dealt with the situation where contradictory terms exist within a party’s terms and conditions, or even multiple sets of terms and conditions? This can be seen as a unilateral

battle of the forms.1 Although it can be looked upon as a unilateral battle of the forms, the

methods of dealing with this issue are different from the traditional approaches to settle battle of the forms issues.

I.1 ForFarmers/Doens Case

In July 2015, the Dutch Supreme Court gave a groundbreaking ruling in the ForFarmers/Doens

case.2 In this case ForFarmers and Doens entered into a commercial contract. Doens refers to his

general terms and conditions but also to the terms and conditions of his trade association. The General terms and conditions state that future disputes arising out of the contract shall be settled by means of arbitration. However, the terms and conditions of the trade association state that future disputes arising out of the contract shall be settled by the competent national court. In other words: Doens incorporated two sets of contradictory terms and conditions into the contract. Consequently, when a dispute arose out of that contract, it was not clear whether the dispute would be settled by the competent national court or by means of arbitration.

1_{Kruisinga, A. (2015). Wat is rechtens indien een contractpartij verschillende sets algemene voorwaarden van}

toepassing verklaart? Nederlands Tijdschrift voor Handelsrecht, 2015 (6), p 308

2

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4 In their ruling the Dutch Supreme Court ruled on how Dutch Law ought to deal with a situation in which multiple sets of terms and conditions, containing contradictory clauses, are incorporated by one of the parties of the contract into a commercial contract.

The first question that needed to be answered by the Dutch Supreme Court was whether a party is allowed to incorporate multiple sets of terms and conditions into a contract with another party, even when those sets of terms and conditions contain contradictory clauses. In an earlier case, the Visser/Avero case, the Dutch Supreme Court had ruled that two sets of terms and conditions (containing contradictory clauses) incorporated by one party into a contract with another party were both not applicable to that contract. This is an approach that is similar to the ‘knock-out’ approach to battle of the forms disputes. The contract in that case stated that terms and

conditions A or terms and conditions B would be applicable. By using the word ‘or’ it was not clear for the other party in the contract which set of terms and conditions would be applicable, consequently that party could never have accepted one of the two terms and conditions (or both) and acceptance of an offer is needed to conclude a contract.

In contrast to the Visser/Avero case, the Dutch Supreme Court ruled in the ForFarmers/Doens case that both sets of terms and conditions, containing contradictory clauses, were applicable to that contract. According to the court, now that in the Forfarmers/Doens contract both sets of terms and conditions were incorporated cumulatively, both sets of terms and conditions were accepted by ForFarmers and therefore became part of the contract between the parties. The Dutch Supreme Court consequently now allows parties, under Dutch Law, to incorporate multiple sets of terms and conditions into commercial contracts. It does not choose a ‘battle of forms’ approach in which one or two sets of terms and conditions are proclaimed not applicable based on for example a knock out rule. Both sets of terms and conditions are incorporated in the contract and thus are applicable.

The second part of the ruling gives an answer on how Dutch courts have to deal with contradictory terms within those multiple sets of terms and conditions, which both are applicable. According to the Dutch Supreme Court, that issue has to be settled by means of contract interpretation. In line with Dutch legal tradition, which favors subjective interpretation over objective interpretation, courts have to try to establish the true subjective intention of the

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parties.3 In order to decide on the contradictory terms, courts have to establish which of the

contradictory terms is intended by the parties. However, if circumstances justify a more objective method of contract interpretation, courts have to make use of a more objective method of

contract interpretation. In this case the court assessed the way in which the different sets of terms and conditions are incorporated in the contract.

I.2 Objective and Justification

This thesis analyzes the new groundbreaking Dutch approach concerning the issue of multiple sets of terms and conditions incorporated by one party into a commercial contract with another party and compares it to different approaches in different legal regimes. It evaluates these different approaches from the perspective of efficiency.

Efficiency is an important aspect in commercial transactions. Lower transaction costs enhance the performance of commercial activity. Inefficient Laws affect commercial activity in a negative way because they impose transaction costs. Therefore, laws should achieve efficiency by reducing transaction costs. Rulings of (supreme) courts are judge made laws and can be equally judged on efficiency as any other law made.

The objective of this thesis is to answer the question whether the new approach under Dutch Law is the most efficient approach to deal with the present issue, compared to the other analyzed approaches. Efficiency is the only perspective on which the approaches are evaluated in this thesis. This thesis will not analyze the problem from other perspectives, for example: whether a solution to the problem gives a just outcome. These other perspectives are outside of the scope of this thesis.

The approaches that are analyzed besides the Dutch Law approach are the English Law approach and the International Commercial Law approach. English Law is analyzed because, in contrast to Dutch Law, it favors objective contract interpretation over subjective contract interpretation. Also, English Law is an important choice of Law jurisdiction in international commercial

contracts.4 As representatives of International Commercial Law are chosen: the United Nations

Convention on Contracts for the International Sale of Goods and the Unidroit Principles of

3_{Tjittes, R.P.J.L. (2009). Privaatrecht; Uitleg van schriftelijke contracten. Nijmegen: Ars Aequi Libri. p 79} 4

Godwin, P., Roughton, D., Gilmore, D., Margetson, G., Coney, P., Bailey, C. (2010). Negotiating governing Law and

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6 International Commercial Contracts.

As of 31 December 2015, 84 countries have ratified the United Nations Convention on Contracts

for the International Sale of Goods (hereafter: the Vienna Sales Convention).5 Consequently, the

Vienna Sales Convention applies to commercial contracts between parties whose places of business are in different contracting states of the convention. The Unidroit Principles on International Commercial Contracts are not a binding instrument, however they do give insight in international commercial Law. It is argued that the principles (should) perform a gap-filling

function vis à vis the Vienna Sales Convention.6

I.3 Structure

Two rules can be derived from the Dutch Supreme Court’s ruling in the ForFarmers/Doens case. Firstly, multiple sets of terms and conditions can be incorporated by one party into a commercial contract with another party. Secondly, in order to decide on which of the contradictory terms courts have to make use of contract interpretation. All the chapters of this thesis follow this division.

This thesis commences with a short introduction into the realm of efficiency and Law &

Economics (chapter II). In this chapter the basics of Law & Economics are explained as far as it is relevant for this thesis. It explains the relevant economical doctrines of efficiency, complete contracts and contract interpretation.

Thereafter, the next chapter gives an analysis of the Dutch Law approach (chapter III). It

provides an analysis of the ForFarmers/Doens case and other relevant Dutch Law. Subsequently, the approach under English Law is analyzed in the next chapter (chapter IV). In the next chapter an analysis of the International Law approach is provided (chapter V). It consists both of the approach under the Vienna Sales Convention and the approach under the Unidroit Principles of International Commercial Contracts.

After the analysis of the different approaches to this issue, these approaches are analyzed on efficiency in the next two chapters (chapter VI and chapter VII). The next chapter contains the comparison of the findings (chapter VIII) Subsequently this comparison is evaluated in the next

5

UNCITRAL, (2016). Status United Nations Convention on Contracts for the International Sale of Goods (Vienna,

1980).

6

Garro, A.M. (1995). The gap-filling role of the Unidroit Principles in international sales Law: some comments on the interplay between the principles and the CISG. Tulane Law Review, 1994-1995 (69), p 1189

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7 chapter (chapter IX) and thereafter concluded in the last chapter (chapter X). This last chapter provides an answer to the question whether the approach under Dutch Law is the most efficient approach found within the analyzed legal regimes or do English Law and international

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II. Law & Economics

Evaluating laws on efficiency is part of the Law and Economics movement, combining two previous separated fields of science, namely: the study of law and the study of economics. This movement analyses legal situations from an economical point of view, aiming to find the most

efficient legal solution.7 It maps the positive effects and the negative effects of laws on society as

benefits versus costs.

In terms of efficiency this thesis evaluates a solution to a problem as an efficient solution to that problem when the benefits of that solution outweigh the costs of that solution. A solution can be evaluated as a more efficient solution than another solution if the benefits outweigh the costs more than the other situation (a more positive margin). Therefore, within efficient solutions a ranking can be made that ranks solutions from the most efficient solution to the least efficient solution.

II.1 Contracts and Transaction Costs

As previously noted above, in order to make situations more efficient either the benefits have to increase or the costs have to decrease (or both). For a situation to be efficient the benefits must outweigh the costs. Imagine a company that, in order to make more profit, should either reduce their costs or increase their earnings. Most of the time, a company is not completely in control of increasing their earnings, as it depends on the economical situation and buyers willing to buy their product. They are however, in control of their costs. It makes sense to make every effort to reduce their costs because decreasing their costs directly affects the profit of the company in a positive way.

In order to enhance their wealth, companies have to transact with other parties to sell their products. These transactions require contracts to govern the relationship between the parties involved in the transaction. Contracts contain the obligations and rights of both parties under the made agreement and what happens when one of these obligations is not fulfilled (or not on time). The rules on establishing a valid contract differ around the globe, however, generally a contract

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Weterings, W.C.T. (2007). De Economische analyse van het recht; rechtseconomische beschouwingen. Den Haag: Boom Juridische Uitgevers. p1

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is established by an offer which is accepted.8 Contracts are inevitable for commercial activity as

they provide parties with the legal certainty needed to get involved in commercial transactions. Consequently, every transaction contains costs for the parties, the so called: ‘transaction costs’. Transaction costs consist of all the costs that are required to establish the transaction. Negotiation

costs and the costs of drafting the contract are not the only transaction costs that exist.9 If a

company analyzes that there is a risk of possible litigation arising out of the transaction, it also has to calculate the costs of litigation together with the probability that litigation becomes necessary. The probability of litigation together with the costs of litigation therefore also are transaction costs. Put in a formula, the calculation of the transaction costs looks like this: TC = D + (L*P)

TC stands for transaction costs. These transaction costs should be as low as possible to have the most efficient situation as possible. TC consists of the costs of negotiating and drafting the contract (D) plus the costs of litigation (L) times the probability of litigation (P). The lower the transaction costs, the more efficient a transaction becomes.

The costs of drafting can be divided through every transaction. The costs of litigation however cannot be divided because (most of the time) litigation cannot be shared between different disputes. Therefore, the costs of drafting the contract in this formula are relatively lower than the costs of litigation.

II.2 Complete Contracts

The issue of complete contracts is heavily discussed from the perspective of efficiency. Contracts govern future problems that potentially arise out of a legal (trade) relationship between two or

more parties. The longer the duration of the contract, the more unpredictable the future gets.10 A

perfect contract regulates all those problems and therefore can deal with those problems

8_{Beale, H. (2010). Chapter 2: Notions of Contract. Cases, Materials and Text on Contract Law. Oxford and Portland:}

Hart Publishing.

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It goes beyond the scope of this thesis to elaborate all types of transaction costs. This thesis only explains the types of transaction costs that are relevant to answering its question.

10

Eggleston, K., Posner, E.A., Zeckhauser, R. (2000). The Design and Interpretation of Contracts: Why Complexity Matters,” Northwestern University Law Review, 2000-2001 (91), p 126 note: 101

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efficiently.11 This provides parties with legal certainty.

Consequently, parties try to contractually regulate all unforeseen future problems that can possibly arise out of that contract. However, creating a contract that regulates all unforeseen future problems is (too) costly because of the drafting costs and it would probably be impossible

to let the probability of litigation decrease to 0% (see formula previous paragraph).121314 This

results in a tension between creating a perfect contract which is efficient and the increased transaction costs of creating such a contract, which makes it costly and therefore inefficient. In an effort to reduce these transaction costs, contracting parties draft standardized terms and conditions which they incorporate into (all) their contracts. The standardized terms and

conditions reduce negotiation costs because they are non-negotiable. Also, terms and conditions save drafting costs because they are drafted only once (though regularly updated) so

consequently they do not have to be drafted again for every new transaction/contract. Therefore, terms and conditions are a tool of achieving efficiency. Terms and conditions create a more complete contract which decreases the probability of litigation. This positively affects the transaction costs in combination with the decreased transaction costs.

II.3 Contract Interpretation

Contract interpretation means that courts have to figure out what the terms of the contract are, or

how they should be understood, by interpreting that contract in a certain way.15 It is used in cases

where the parties have a contract but disagree about how that contract should be understood. Literal interpretation is the starting point, until the point where one of the parties claims that the written word does not reflect the intention of the party/parties. The courts then decide in what way the contract (or a clause within that contract) should be understood. Sometimes ambiguous terms in a contract are put in there deliberately, as it might be a necessary condition of making the contract. This is because the parties might be unable to agree on certain terms but are

11

Weterings, W.C.T. (2007). De Economische analyse van het recht; rechtseconomische beschouwingen. Den Haag: Boom Juridische Uitgevers. p 53

12_{Weterings, W.C.T. (2007). De Economische analyse van het recht; rechtseconomische beschouwingen. Den Haag:}

Boom Juridische Uitgevers. p 54

13

Tirole, J. (1999) Incomplete Contracts: where do we stand?. Econometrica, 1999 (Vol 67, No. 4), p 743-744

14_{Posner, R.A. (2004). The Law and Economics of Contract Interpretation. Chicago Working Papers in Law and}

economics (second series), 2004 (no. 229), p3

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11 confident on their chances to successfully resolve that disagreement later, with or without

judicial intervention, should the need for that arise.16

Basically, contract interpretation can be divided in subjective and objective interpretation.17

Subjective interpretation gives precedence to the true state of mind of the parties and is therefore

called ‘the will theory’.18

Objective interpretation, in contrast, gives precedence to the external

effect of words in which the will is objectively expressed.19

An efficient method of contract interpretation should aim to minimize contractual transaction

costs.20 A clear method of contract interpretation decreases the probability of litigation and the

costs of litigation. Probability of litigation decreases when a method of interpretation is clear because the outcome of litigation is more clear (more legal certainty) and consequently parties will feel less inclined to resort to litigation. Also, a clear method of contract interpretation leads to less complex litigation and thus less expensive litigation. An unclear method of contract interpretation leads to the opposite results as it creates more legal uncertainty. The probability of litigation shall increase as parties feel inclined to take a chance in court because the outcome is uncertain and could be in their favor. Also, an unclear method of contract interpretation results in more complex litigation and consequently more expensive litigation. If applied on the transaction cost formula of the previous paragraphs, it results in different amounts of transaction costs and consequently different levels of efficiency.

According to Posner there are four methods of contract interpretation.21 Every method of

contract interpretation has its effect on drafting costs, probability of litigation and costs of litigation. Three of those methods are relevant within the scope of this thesis. This thesis also identifies a fifth and sixth method of contract interpretation, namely: interpreting the contract from perspective of the reasonable person and interpreting the method of the incorporation of the set of terms and conditions into the contract.

16_{Posner, R.A. (2004). The Law and Economics of Contract Interpretation. Chicago Working Papers in Law and}

economics (second series), 2004 (no. 229), p3

17

Beale, H. (2010). Cases, Materials and Text on Contract Law. Oxford and Portland: Hart Publishing. p668

18_{Beale, H. (2010). Cases, Materials and Text on Contract Law. Oxford and Portland: Hart Publishing. p668-669} 19

Beale, H. (2010). Cases, Materials and Text on Contract Law. Oxford and Portland: Hart Publishing. p668

20

Posner, R.A. (2004). The Law and Economics of Contract Interpretation. Chicago Working Papers in Law and economics (second series), 2004 (no. 229), p3

21

Posner, R.A. (2004). The Law and Economics of Contract Interpretation. Chicago Working Papers in Law and

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12 Literal interpretation

The first method of contract interpretation is literal interpretation. Literal interpretation means that only the interpretation of the text counts. The written contract always embodies the complete

agreement of the parties according to this method of interpretation.22 Only the text needs to be

taken into consideration, no other evidence than that text is evidence of that contract’s meaning. Literal interpretation is an objective form of contract interpretation. This methodology has low costs of litigation (only the text has to be considered) and a low probability of litigation as it provides a clear rule for settling issues. It cannot be used for deciding on issues concerning contradictory clauses as the literal text is the cause of the contradiction.

Tie-breaker rule

Secondly, the courts can apply rules which they made in advance for breaking ties. An example of such a rule is the ‘contra proferentem rule’ which means that the contract is interpreted against the party who has drafted the contract (that party had influence on the writing of the contract and therefore is punished for not making the contractual term(s) clear). The methodology of applying rules, like the contra proferentem rule, has low costs of litigation, however, it also has a low level of benefits because the outcome in many cases will be arbitrary. In case of the contra

proferentem rule it punishes the party who has written the clause. Generally it gives a clear method of interpreting the contract and therefore legal certainty resulting in a low probability of litigation and low costs of litigation.

Subjective interpretation

The third method of contract interpretation consists of the courts undertaking to determine what the parties really meant when they concluded the contract. This is a form of subjective

interpretation as it tries to determine what the true state of mind of the parties was when they concluded the contract. As the complete opposite of literal interpretation, (subjective) evidence other than the text is considered to determine what the parties meant when they concluded the contract. Because of the expensive inquiry into the intention of the parties, this method of interpretation is very costly. However, it also gives the greatest benefits as it can give the most

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13 complete answer to what parties really intended at the time they concluded the contract.

However, it also depends on the ability of the court to correctly establish the intention of the parties. For example: if a court consists of judges who have never been part of the world of b2b commercial contracts, the less likely it becomes that they can establish the true intention of the parties. Those judges might be unaware of certain commercial practices which play a part in establishing the parties true intentions. Consequently, this leads to legal uncertainty because the parties are not sure whether the judges at the court will be capable of establishing their true intentions.

Another problem is the evidence to establish the subjective intention of the parties when it comes to terms within terms and conditions. Most of the time there will not have been negotiations over the content of the terms and conditions, as they are standardized. Therefore there will be less evidence to prove a parties subjective intention when it comes to a specific contradictory clause within a parties terms and conditions. During negotiations however, there might be

communicated by the parties about the terms and conditions as a total. Consequently, there might be evidence that a party intends one set of terms and condition more than another set of terms and conditions that is made applicable to the contract. The contradictory clause in the intended terms and conditions would then also be the clause intended by the party and therefore be in force. Because of these reasons subjective interpretation leads to the most legal uncertainty and the highest probability of litigation and costs of litigation.

The perspective of the reasonable person

The fourth method of contract interpretation is interpreting the contract and relevant

circumstances from the perspective of the reasonable person in the same circumstances as the party/parties. This is a more objectified method of contract interpretation. It does not look for the true subjective will of the parties but it rather objectifies that will interpreting what a reasonable person’s will would or should have been under the same circumstances. This more objectified method contract interpretation provided more legal certainty than subjective interpretation as it is more objectified. It does not however, remove all legal uncertainty as reasonable minds can differ what a reasonable person would intent under the same circumstances.

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14 The method of incorporation in the contract

A last method of contract interpretation that can be used for deciding on contradictory terms within multiple sets of incorporated terms and conditions is too look at the way the sets of terms and conditions are incorporated into the contract. This is an objective method of contract

interpretation as it tries to find objectified evidence in the way of incorporation to find the intention of the party’s. For example: if terms and conditions A are incorporated into the front page of the contract in handwriting and terms and conditions B are in the fine print just because they are part of the preprinted paper of the contract, terms and condition A prevail when there are contradictory clauses with both sets of terms and conditions. This method provides a clear rule that does not increase legal uncertainty and consequently it does not increase the probability of litigation nor it increases litigation costs.

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III. Dutch Law

Dutch Law is the law applicable in The Netherlands, a civil law country. As a civil law country, laws are mostly written down in statutes and/or codes by the legislature. Case law however, fills the gaps that are left open by the legislature.

Under the present Dutch Civil Code, a contract is established by an offer and the acceptance of

that offer.23 Acceptance of an offer is only valid when the acceptance is announced by a

statement of a party which reveals the will of that party to accept the offer (in accordance with

the ‘will theory’).24

The issue of multiple contradictory terms within a party’s terms and

conditions is not regulated in the Dutch Civil Code. That problem is regulated in gap-filling case Law: the ForFarmers/Doens case.

III.1 Facts of the case

ForFarmers B.V. entered into a commercial contract with Doens Food Ingredients B.V. The contract concerned the sale of organic corn to ForFarmers who uses it to make animal feed. However, the delivered organic corn had a dioxin level that was too high. Therefore, ForFarmers sued Doens for damages due to non-conformity. The dispute was brought before the Dutch Court of First Appeal in Middelburg. Doens stated that the Dutch national court lacked the competence to handle the case due to the terms and conditions of the contract which stated that all disputes arising out of the contract have to be settled by means of arbitration.

The front page of the contract stated: “contract conditions: C.N.G.D.” This means that the

‘Conditions of the Dutch trade on Grains and Animal Feed’ apply to this contract..25

These conditions are the terms and conditions as they are set by the Royal Dutch Association The Committee of Grain Traders, an industry association. In the C.N.G.D. conditions is stated that all disputes arising out of a contract to which the C.N.G.D. conditions are applicable, will be settled by means of arbitration. This is the clause on which Doens bases their claim of the lack of competence of the Dutch national court on. In accordance with Dutch Law, the Dutch court,

consequently has to dismiss the case due to their incompetence.26

23

Article 6:217(1) Dutch Civil Code

24_{Article 3:33 Dutch Civil Code} 25

’Conditiën van de Nederlandse Handel in Granen en Diervoedergrondstoffen’ (Dutch)

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16 However, a second set of terms and conditions is also incorporated into the contract. At the bottom of the pages of the contract is stated, in preprinted fine print, that: ‘our General Sales and Payment Conditions (hereafter: General Terms and Conditions) are applicable to all of the transactions of Doens Food Ingredients B.V.’ The General Sales and Payment Conditions are deposited at the Dutch Chamber of Commerce and state that all of the disputes arising out of a contract on which the General Terms and Conditions are applicable, will be settled, excluding every other court, by the Dutch court of first instance in Middelburg.

ForFarmers did not agree with Doens that the dispute had to be settled by means of arbitration. According to ForFarmers both terms were not applicable because the terms are contradictory.

That claim of ForFarmers is based on previous established case Law: the Visser/Avero case.27 In

that case one of the parties to the contract referred to two sets of terms and conditions, using the word ‘or’, not stating which of the terms and conditions would be applicable (e.g. terms and conditions A or terms and conditions B are applicable). The Dutch Supreme Court ruled in that case that both terms and conditions were not applicable because the other party could not have known which of the terms and conditions would be applicable and therefore the other party could never have accepted it.

III.2 The ruling

The Dutch courts and ultimately the Dutch Supreme Court disagree with ForFarmers and decide to not declare both contradictory terms not applicable (no knock-out approach). Consequently this means that both terms and conditions are now part of the contract between the parties. A contract with two additional sets of terms and conditions incorporated, containing contradictory clauses, which both are applicable.

The court now has to decide on which of the contradictory clauses will be enforced. This is a matter of contract interpretation. Dutch Law takes the ‘will theory’ as a starting point for contract interpretation. In accordance with the ‘will theory’, contracts are interpreted not conclusively based on the text of the contract but more on what parties could reasonably derive from each other’s statements and conduct, reflecting the will of the parties establishing the agreement,

under the given circumstances.28

27

HR 28 November 1997, ECLI:NL:HR:1997:ZC2512

28

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17 This rule of subjective contract interpretation is known as the Haviltex formula, established in

the Haviltex case.29 Important element of the Haviltex rule is that statements and conduct are

interpreted under the given circumstances. For example: if a party hires a legal expert during the negotiation and drafting of the contract or the party has professional legal knowledge in house, the courts are less inclined to believe that the will of the party is different than what the drafted text of the contract states. On the other hand, the fact that the text of the contract is not decisive, does not mean that the text of the contract is not of interest. The way in which a particular part of the contract is drafted can be an important indicator of what the parties meant when they

concluded the contract.30 For interpreting a detailed commercial contract the courts give more

weight to the text of the contract because it is likely that parties have intensively negotiated and put extra care in drafting the contract. This should mean that the text of the contract reflects the

true will of the parties.31 In that case the courts make use of a more objective method of

interpretation. To summarize, the circumstances of the case (for example the capacity of the

parties) determine whether the courts make use of objective or subjective interpretation.3233

In this present case, the ForFarmers/Doens case, the Dutch Supreme Court had to decide whether it was going to interpret the contradictory sets of terms and conditions subjectively or

objectively. The court chose in favor of a more objective method of interpretation because it sees ForFarmers as a professional party, which was in a long term trade relationship with Doens and

had solid knowledge of the content of the C.N.G.D. conditions.34 This is in line with previously

established case Law.35

In that objective assessment the courts can take into account the way that the terms and

conditions are mentioned or incorporated in the contract. This was decided in previous case Law

of the Dutch Supreme Court.36 According to the Dutch Supreme Court, the C.N.G.D. association

terms and conditions should prevail over the General Terms and Conditions of Doens Food

29

HR 13 March 1981, ECLI:NL:HR:1981:AG4158

30_{Hijma, J. (2010). Rechtshandeling en overeenkomst. Deventer: Kluwer. p 288} 31

HR 29 June 2007; ECLI:NL:HR:2007:BA4909

32

Bierenbroodspot, B. (2008) Uitleg van overeenkomsten: maatwerk op basis van Haviltex. Onderneming en

Financiering, 2008 (1). p 68

33

HR 20 February 2004;ECLI:NL:HR:2004:AO1427

34

HR 24 April 2015, ECLI:NL:HR:2015:1125; Consideration 3.2.2. (last paragraph)

35_{HR 19 January 2007, ECLI: NL: HR: 2007} 36

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18 Ingredients B.V. because these terms and conditions are mentioned in the part of the contract which is filled out in every transaction separately. The General Terms and Conditions however were solely on the contract because they were preprinted on the paper of the contract, therefore most likely less intended by the parties. Consequently, the Dutch Supreme Court concluded that the C.N.G.D. association terms and conditions were intended by the parties to be in force and that consequently the dispute had to be settled by means of arbitration.

This appears to be an application of the lex specialis rule, however the Dutch Supreme Court

refuses to acknowledge the existence of such rule in Dutch Law.3738 The Dutch Supreme Court

did not state anything about making use of the contra proferentem rule in this case. This although the contra proferentem rule (see next chapter) has become more important in Dutch Law. In a recent case the Dutch Court of Appeal of ‘s-Hertogenbosch ruled that the use of the contra proferentem rule is extended from clauses within the terms and condition to main clauses in the contract.39

III.3 Conclusion

The Dutch Supreme Court ruling in the ForFarmers/Doens case gave an answer on how under Dutch Law is dealt with the problem of contradictory terms in multiple terms and conditions incorporated into a contract by one of the parties. In contrast to the Visser/Avero case, the Dutch Supreme Court now rules that if multiple terms and conditions are cumulatively incorporated into a contract by one of the parties, all the incorporated terms and conditions are in fact applicable to that contract, even if these terms and conditions contain contradictory clauses. Secondly, in order to decide on the contradictory terms the Dutch Supreme Court uses the existing Dutch framework of contract interpretation that is established in its case law over the years. Courts have to do research into the intention of the parties when they concluded the contract (subjective interpretation). However, if the circumstances justify a more objective interpretation, courts have to give more weight to the text of the contract (literal interpretation). In accordance with previously established case law, when the subject of the dispute is a

37

Lex Specialis: Laws concerning specific matters prevail over Laws that only govern the matter in general (in case of two Laws governing the same situation)

38

HR 13 June 2003, ECLI:NL:HR:2003:AF5538; Consideration 3.6 (second paragraph)

39

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19 commercial contract and the parties are thus professional parties, Dutch courts will make use of a more objective method of contract interpretation instead of subjective interpretation. In that objective assessment the courts can take into account the way that the terms and conditions are mentioned or incorporated in the contract. However, the courts will choose the method of contract interpretation based on the specific circumstances of the case. Consequently, in a

slightly different situation, the court might favor subjective interpretation over a more objectified method of contract interpretation.

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20

IV. English Law

As a common law legal system, English Law consists mainly of judge made law. However, some parts are regulated in statutes or codes made by the legislature. For example the United Kingdom Sales of Goods Act of 1979. It governs the formation of contracts for the sale of goods. The same as under Dutch Law, a contract is established by the acceptance of an offer. However, it also has

an extra requirement to fulfill, namely: there has to be consideration.4041 The issue of

contradictory terms within a party’s terms and conditions is not regulated in statutes or codes but in case law.

In English case law is mainly spoken of ‘inconsistent terms’ instead of ‘contradictory terms’. Judge Bingham gave the definition of what an inconsistent term is under English Law: “it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must

contradict another term or be in conflict with it”.42

Two recent cases before the English courts contain similarities to the ForFarmers/Doens case.

The first case is the RWE Npower v. Bentley case.43 Moreover, the CLP Holding v. Sing case is

briefly analyzed.44

IV.1 RWE Npower v. Bentley case

This case involved a complex commercial contract in which Bentley agreed to carry out civil engineering works for RWE. The second clause of the contract contained a list of several contractual documents including: the NEC3 Engineering and Construction Contract Conditions 2005, Contract Data Parts 1 & 2, post-tender clarifications and Works Information plus Site Information. Additional to the list of documents, clause two of the contract also contained a hierarchy clause. This clause stated that all of the listed documents form part of the contract and should be read and construed in the prescribed order of precedence.

For the purposes of this paper it is not important to go further in depth on these documents. It is sufficient to understand that these documents contained information on how the contract should

40

Consideration means that both parties have to give something up/exchange something. For example: if a party t gets a product from another party without having to pay or do something else for it, there is no consideration and consequently no contract has formed.

41

Article 2(1) UK Sales of Goods Act 1979

42_{Pagnan SpA v. Tradax Ocean Transportation SA [1987] 3 All ER 565} 43

RWE Npower Renewables Ltd v J N Bentley Ltd [2014] EWCA Civ 150

44

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21 be carried out. In other words: these documents contained additional terms and conditions to the contract and were part of the total agreement between the parties.

A dispute arose out of the contract when RWE believed that Bentley was not acting according to their obligations under the contract. The obligation in question was governed in the additional terms and conditions in two separate clauses which were inconsistent. After the dispute was referred to adjudication (where it was concluded that the clauses were inconsistent and the hierarchy clause answered which clause took precedence) RWE commenced proceedings in the High Court, which had a different opinion. According to the High Court the contract has to be read and interpreted as a whole, not interpreting the different clauses separately. It states that the contract as a whole revealed the intention of the parties. The two inconsistent clauses were not significantly inconsistent and therefore could be read together. Bentley appealed against this decision stating that there is a clear discrepancy between the two clauses and therefore one of the two clauses should be discarded in accordance with the hierarchy clause. However, the High Court of Appeals disagreed and stated that only in the case of a clear irreconcilable discrepancy between the two clauses it would resort to the hierarchy clause.

The RWE Npower v. Bentley case firstly shows that under English Law multiple sets of terms and conditions can be incorporated into a contract by one party. Secondly the case demonstrates how the English courts deal with contradictory terms within a party’s terms and conditions. English courts make use of literal interpretation in order to find the commercial intention of the parties at the time they concluded the contract. They solely look at the contract and the

contractual documents and not to other evidence to establish the intention of the parties (as is the case when the courts make use of subjective interpretation).

RWE Npower v. Bentley shows that English courts are reluctant to hold that clauses are

inconsistent in a commercial contract. They rather give effect to an interpretation of the contract that reconciles or avoids the conflict. By reading all the contractual documents in the context of complementing each other the English courts try to find the parties’ commercial intentions. What if the clauses are in fact irreconcilable? The case in the next paragraph illustrates how is dealt with irreconcilable clauses under English Law.

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22

IV.2 CLP Holding v. Singh

A conflict arose out of a commercial contract for the sale of a commercial property. The contract had two sets of terms and conditions incorporated, namely: the standard terms & conditions and the special terms and conditions. Under the special conditions, the purchase price of the property was 130.000 pound. However, the standard terms and conditions stated an obligation to pay a VAT (value after tax) on top of the purchase price of 130.000 pound. A hierarchy clause in the contract stated that the special conditions take precedence over the standard terms and

conditions.

The court found both clauses irreconcilable inconsistent and followed the hierarchy clause. However, the method that the courts used gives insight in how irreconcilable inconsistent clauses are approached under English Law. Paragraph 23 and 24 of the judgment by Lord Justice Kitchin states:

“The correct approach to the interpretation of a contract is well established. The aim is to determine what the parties meant by the language they used, and this involves ascertaining what a reasonable person would have understood the parties to have meant. The relevant reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. This necessarily means that the parties' subjective intentions are irrelevant.

There are two aspects of this general approach which merit a little elaboration in the context of this case. The first is that, in construing the words of the contract, the court must have regard to the circumstances of the parties' relationship and the relevant facts surrounding the transaction as known to them. The second is that a contract must be construed as a whole and every effort must be made to give effect to all of its clauses.”45

A few things can be derived from this paragraph on how is dealt with inconsistent clauses under English Law. Firstly it shows that the English courts make use of literal interpretation to find the intention of the parties. Judges look at the text of the contract and try to find the intention of the parties in the words of that contract. Secondly, their interpretation is further objectified by interpreting the text of the contract from the perspective of a reasonable person who has all the

45

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23 background knowledge that was reasonably available to the parties at the time when they

concluded the contract. The Court of Appeal even state that subjective intentions are irrelevant which strengthens the conclusion that the English courts make use of objective interpretation. Thirdly, Lord Justice Kitchin elaborates further on the way how the courts construe the words of the contract. The court have to take into account the relationship between the two parties and other relevant facts that surrounded them at the time they concluded the contract. Furthermore Justice Kitchin explains that the contract must be construed as a whole to make every effort to give effect to all the clauses of the contract, an element of the ruling that was also mentioned in the RWE Npower v. Bentley case.

IV.3 Conclusion

The cases in this chapter show how under English Law is dealt with contradictory terms within a party’s terms and conditions. In both cases it is demonstrated that English Law allows one party to incorporate multiple terms and conditions into a contract with another party. The first case shows the reluctance of the English judges to hold that two terms are contradictory. They rather give effect to an interpretation of the contract that reconciles or avoids the conflict by construing the contract as a whole. In order to assess whether the terms are inconsistent and to find the intention of the parties the courts look at the text of the contract, the relationship between the parties and the relevant circumstances. The court tries to interpret the contract from the objectified perspective of the reasonable person with the background knowledge that was reasonably expected of him.

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24

V. International Commercial Law

This chapter gives an analysis of the United Nations Convention on Contracts for the

International Sale of Goods (hereafter: the Vienna Sales Convention) and the Unidroit Principles of International Commercial Contracts (hereafter: the Unidroit Principles) on how they deal with the problem of contradictory terms within a party’s terms and conditions.

V.1 United Nations Convention on Contracts for the International Sale of Goods

The Vienna Sales Convention applies to contracts for the sale of goods between parties whose places of business are in different contracting states or when the rules of private international

Law lead to the application of the Law of a contracting state.46 Parties can however opt out of the

convention.47 Where the Vienna Sales Convention applies, it displaces local and national rules.48

It does not seek to harmonize national Laws, it merely created an additional set of rules that is

applicable to international contracts for the sale of goods.49

The Vienna Sales Convention does not achieve a unified international commercial Law.50 It is

merely a set of rules and does not have its own courts. Contractual disputes concerning the Vienna Sales Convention therefore are dealt with in the national courts. These courts might have different understandings of the rules of the Vienna Sales Convention, consequently resulting in

different results in different courts.51

Although the convention consists of 101 articles, it does not regulate all problems that can arise

out of a contract for the sale of goods.52 Chapter I gives some further restrictions on the

applicability of the convention including that it only applies to the sale of goods (not services)

and that it is not concerned with the question whether the contract is valid.5354 Furthermore,

46_{Article 1(1) United Nations Convention on Contracts for the International Sale of Goods} 47_{Article 6 United Nations Convention on Contracts for the International Sale of Goods} 48

Rosett, A. (1984). Critical reflections on the United Nations Convention on Contracts for the International Sale of Goods. Ohio State Law Journal, 1984 (Volume 45, Number 2). p 265

49_{Rosett, A. (1984). Critical reflections on the United Nations Convention on Contracts for the International Sale of}

Goods. Ohio State Law Journal, 1984 (Volume 45, Number 2). p 268

50

51

52_{Lookofsky, J.M. (2008). Understanding the CISG: A Compact Guide to the 1980 United Nations Convention on}

Contracts for the International Sale of Goods. Alphen aan den Rijn: Kluwer Law International; p 22

53

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25 article 7(2) of the Vienna Sales Convention gives a general provision how to deal with matters governed by this convention that are not expressly settled in it. Such matters have to be settled in conformity with the general principles on which the convention is based or, in absence of those principles, in conformity with the Law applicable by virtue of the rules of private international

Law.55 This basically means that if the convention does not expressly regulates a particular

problem within the scope of application of the convention, those matters have to be settled in conformity with the principles on which the convention is based. If there are no related principles, the matter has to be dealt with under the rules of the national Law that would be applicable under private international Law rules if the convention would not be applicable. V.2 Unidroit Principles of International Commercial Contracts

The Unidroit Principles set forth general rules for international commercial contracts.56 These

rules are applied when parties have agreed that their contract is governed by the Unidroit Principles. Besides that binding concept, the Principles are a non binding instrument to the

member states of Unidroit.57 The Principles are therefore predominantly used as soft Law. They

can be used to interpret or supplement international uniform Law instruments (like the Vienna Sales Convention) by national and international legislatures. In contrast to the Vienna Sales Convention, its scope is broader as it not only governs international contracts for the sale of goods but all international commercial contracts.

V.3 Complete Contracts

The first question that needs to be answered is whether International Commercial Law allows a party to incorporate multiple terms and conditions into a contract with another party. Because of the nature of the Vienna Sales Convention and the Unidroit Principles it is hard to predict how they would deal with the specific issue handled in this thesis. Different courts might interpret the rules of these instruments differently. The following analysis in the next two paragraphs stays as close to the literal meaning of the articles as possible.

54_{Article 4 contains exceptions when the convention does concern itself with validity matters} 55

Article 7(2) United Nations Convention on Contracts for the International Sale of Goods

56

Preamble Unidroit Principles of International Commercial Contracts

57_{Vogenauer, S. (2010). Common Frame of Reference and Unidroit Principles of International Commercial}

Contracts: Coexistence, Competition, or Overkill of Soft Law? European Review of Contract Law, 2010 (Volume 6, Issue 2) p 154

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26

Vienna Sales Convention

Analyzing the text of the Vienna Sales convention leads to the conclusion that nowhere in the text the issue of multiple incorporated terms and conditions is expressly governed. It is not expressly restricted nor is it expressly allowed. In accordance with article 7(2) of the Vienna Sales Convention such an issue has to be settled in conformity with the general principles on which the convention is based. These principles are not expressly laid down within the text of the

convention.58 However, they can be logically derived from the text of the convention. One of

these principles that can be logically derived from the text of the Vienna Sales Convention is the

principle of party autonomy.59 It can be derived from article 6 of the convention and is

indisputably the most important general principle of the Vienna Sales Convention which takes

priority over the other general principles.60 In accordance with the principle of autonomy it

would not make sense to restrict parties in their ability to incorporate multiple terms and conditions. An argument that is strengthened by another principle of the convention, namely:

freedom of form.61 Consequently it makes sense that a party can incorporate multiple terms and

conditions as it is just a matter of form (parties could also copy the text of the terms and conditions into the main content of the contract instead of referring to different documents). Furthermore it seems consistent with how contracts are formed under the convention. Under the Vienna Sales Convention a contract is formed when an acceptance of an offer becomes

effective.62 This means that if a contract including multiple incorporated terms and conditions is

proposed to another party and that proposal is accepted by the other party, the contract including the multiple terms and conditions is concluded.

Unidroit Principles

The Unidroit Principles do not only acknowledge the principles of party autonomy and freedom

of form, but also include these principles within its text by codification.63 A contract under the

Unidroit Principles is also formed in the same way as in the Vienna Sales Convention, namely by

the acceptance of an offer.64 However, in contrast to the Vienna Sales Convention, the Unidroit

58

Janssen, A. Kiene, S.C. (2009) The CISG and Its General Principles http://ssrn.com/abstract=1595989 p 10

59_{Janssen, A. Kiene, S.C. (2009) The CISG and Its General Principles http://ssrn.com/abstract=1595989 p 11} 60

Janssen, A. Kiene, S.C. (2009) The CISG and Its General Principles http://ssrn.com/abstract=1595989 p 11

61

The principle of freedom of form can be derived from articles 11 and 29 of the Vienna Sales Convention

62_{Article 23 United Nations Convention on Contracts for the International Sale of Goods} 63

Article 1.1 and 1.2 Unidroit Principles of International Commercial Contracts

64

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27

Principles expressly govern the issue of contracting under standard terms.65 Firstly, it states that

where one party or both parties use standard terms in concluding a contract, the general rules on formation apply. Secondly, it refers to three more articles that are applicable to contracts which use standard terms, namely: surprising terms, battle of the forms and conflicts between standard

terms and non standard terms.66 For the purpose of this thesis it is interesting to see that the

Unidroit Principles expressly governs on how should be dealt with conflicting standard terms and non standard terms. Standard terms under the Unidroit Principles are terms which are ‘prepared in advance for general and repeated use by one party and which are actually used

without negotiation with the other party’.67

According to the Unidroit Principles, in case of a conflict between a standard term and non-standard term, the non-standard term prevails (this is

an application of the lex specialis principles to the field of standard terms).68 It can therefore be

concluded that the Unidroit Principles favors negotiated terms over non-negotiated terms. V.4 Contract interpretation

After establishing that under International Commercial Law a party can incorporate multiple sets of terms and conditions into a contract with another party, deciding on arising issues caused by contradictory terms within those terms and conditions becomes a matter of contract

interpretation.

Vienna Sales Convention

The issue of contract interpretation is expressly dealt with in article 8 of the Vienna Sales Convention. Article 8 contains both a method of objective interpretation and a method of subjective interpretation but prioritizes the latter. In the first paragraph of article 8 is stated that: ‘statements made by and other conduct of a party are to be interpreted according to his intent

where the other party knew or could not have been unaware what that intent was’.69

Only if the method of subjective interpretation in the first paragraph of article 8 is not applicable, the courts can resort to the method of objective interpretation in the second paragraph. This second paragraph states the following: ‘statements made by and other conduct of a party are to

65

Article 2.1.19 Unidroit Principles of International Commercial Contracts

66

Article 2.1.20 – 2.1.21 Unidroit Principles of International Commercial Contracts

67_{Article 2.1.19(2) Unidroit Principles of International Commercial Contracts} 69

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28 be interpreted according to the understanding that a reasonable person of the same kind as the

other party would have had in the same circumstances’.70

This second paragraph of article 8 of the convention gives a method of objectifying a party’s intent by making use of the reasonable person doctrine (the same as the English Law approach).

The third paragraph of article 8 gives further specification on how the intent of a party or the understanding of a reasonable person ought to be determined. In that determination, ‘courts have to give consideration to all the relevant circumstances of the case including negotiations, any practices which the parties have established between themselves, usages and any subsequent

conduct of the parties’.71

This paragraph explains more about the evidence that can be used for determining the intent of a party or the understanding a reasonable person would have.

Back to the question of how the convention deals with contradictory clauses within a party’s terms and conditions. In accordance with article 8(1) of the Vienna Sales Convention, if a dispute concerning contradictory clauses within a party’s terms and condition arises, first the courts will try to determine the subjective intention of the parties, which of the clauses was really meant by the parties to be in force. Secondly, if the subjective intention concerning the

contradictory clauses cannot be established (read: evidenced), the courts will replace that

subjective intention of the parties with what the objective reasonable person would have intended concerning the contradictory clauses.

Unidroit Principles

The Unidroit Principles deal with contract interpretation in a similar way as the Vienna Sales

Convention.72 It prefers the method of subjective interpretation in order to find the true common

intention of the parties. Only if such an intention cannot be established the courts will interpret from the perspective of a reasonable person of the same kind as the other party under the same circumstances.

However, the Unidroit Principles also gives some further rules on interpretation. Firstly, it states that terms and expressions shall be interpreted in the light of the whole contract or statement in

which they appear.73 Secondly, it states that if contract terms supplied by one party are unclear,

70

Article 8(2) United Nations Convention on Contracts for the International Sale of Goods

71_{Article 8(3) United Nations Convention on Contracts for the International Sale of Goods} 72

Article 4.1 and 4.2 Unidroit Principles of International Commercial Contracts

73

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29

an interpretation against that party is preferred, also known as the contra proferentem rule.74 The

contra proferentem rule is used to give drafters of contracts an incentive to draft the clauses of

the contract and terms and conditions as clear as possible.75 When it comes to contradictory

clauses with multiple sets of terms and conditions this would mean that the courts would interpret these contradictory clauses in favor of the party who has not drafted the contract. For example: party A has drafted a contract two sets of terms and conditions incorporated. Terms and conditions A state: party B has to pay a fee to party A when it does not fulfill his obligations under the contract within 30 days. Terms and conditions B state: party B has to pay a fee to party A when it does not fulfill his obligations under the contract within 60 days. When a disputes arises in which party B has fulfilled his duties after 45 days, the courts will interpret the contract against the drafter. In this case that would mean that terms and conditions B would prevail over terms and conditions A, as the clause in that set of terms and conditions is more beneficial to party B.

However, it shall not always be that easy to identify the clause that is most beneficial for the non-drafting party to the contract. For example the ForFarmers/Doens case: is the arbitration clause more beneficial for Doens or the clause stating that a dispute shall be settled by the competent court? In such cases it might not always be clear which of the contradictory terms would prevail. It could be settled by letting the non-drafter choose for the clause that is most beneficial to him. This way the contra proferentem rule would keep giving an incentive to parties for clear drafting and the courts do not have to identify the clause that is more beneficial to that party while that party is more capable of making that evaluation than the courts.

V.5 Conclusion

The Vienna Sales Convention does not expressly govern the issue of whether multiple terms and conditions can be incorporated into a contract by one of the parties to that contract. When an issue is not expressly governed in the convention it has to be settled in accordance with the principles on which the convention is based. Allowing parties to incorporate multiple terms and conditions applicable into a contract by themselves is in line with the general principles of party autonomy and freedom of form. Therefore it can be concluded that the Vienna Sales Convention

74_{Article 4.6 Unidroit Principles of International Commercial Contracts} 75

Boardman, M.E. (2006) Contra Proferentem: The Allure of Ambiguous Boilerplate. Michigan Law Review, 2006. (Vol. 104 No. 05) p 1108

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30 does not restrict it. The rules of the Unidroit Principles implicitly enable a party to incorporate multiple sets of terms and conditions.

In order to decide on contradictory terms, under both the Vienna Sales Convention and the Unidroit Principles, courts first have to try to establish the subjective intention of the parties concerning the contradictory terms. If the courts are not able to do that they have to make use of objective interpretation in the form of the understanding that a reasonable person would have under the same circumstances.

Under the Unidroit Principles a few more rules to decide on contradictory terms exist. Firstly, negotiated terms prevail over standard terms. Secondly, terms have to be interpreted in the light of the whole contract. Thirdly, if contract terms supplied by one party are unclear, an

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VI. Economical Analysis I:

Complete Contracts

All the legal regimes analyzed in this thesis allow party’s to incorporate multiple sets of terms and conditions into a contract with another party. When made applicable to a contract, terms and conditions basically become part of the total contract between the parties. In other words: the contract becomes more complete due to the adding of terms and conditions. As stated in chapter II, the more a contract is complete, the more it is efficient because it is able to govern more possible future issues efficiently. Such a complete contract contributes towards an increased legal certainty for the parties because they know in advance how future problems arising out of the contract are dealt with. However, negotiating and drafting a complete contract is very costly because of increased negotiation and drafting costs (which increases transaction costs) and creating a complete contract is probably impossible.

Standard terms and conditions are a tool for contracting parties to achieve completer contracts without the high costs of negotiating and drafting it because they only have to be written once (though regularly updated) but can be used repeatedly. Therefore, if parties are allowed to incorporate multiple sets of terms and conditions, they save transaction costs and the contract becomes even more complete than when the parties are only allowed to incorporate one set of terms and conditions into a contract with another party.

This creates a positive incentive for parties to incorporate more than one set of terms and conditions. Parties are enabled to incorporate multiple sets of terms and conditions, even if they did not write those terms and conditions themselves. It gives parties the opportunity to

incorporate the terms and conditions of their trade association, cumulatively to their own drafted terms and conditions, profiting from those specialist terms and conditions.

Incorporating multiple sets of terms and conditions however, is not without a negative

consequence. The more clauses a contract contains, the higher the risk that in future events these clauses contradict each other. Consequently, by incorporating multiple sets of terms and

conditions into a contract, the risk of contradictory clauses increases. When there is no clear way to decide on which of contradictory clauses is going to be enforced, legal certainty decreases. A complete contract which should have an increased legal certainty becomes less efficient because the legal certainty devaluates due to contradictory clauses. As a result, parties get the incentive to

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32 check the multiple sets of terms and conditions they added to the contract for contradictory

clauses in order to avoid contradictory clauses resulting in legal uncertainty. 76

Whether allowing a party to incorporate multiple sets of terms and conditions into a contract with another party, including the risk of contradictory clauses, is efficient can best be illustrated by two examples using the transaction cost formula (see chapter II).

TC = D + (L*P)

TC = Transaction costs

D = Costs of drafting/checking the contract L = Costs of litigation

P = Probability of litigation

The first example considers the situation in which a party is not able to incorporate multiple terms and conditions into a contract (the default situation). Costs of drafting/checking the contract are 500 euro, litigation costs are 20.000 euro and the probability of litigation is 20%. TC = D + (L*P)

500 + (20.000*0.2) = 4500

The second example is the situation where a party is able to incorporate multiple sets of terms and conditions and therefore ends up with completer contract. This results in more legal certainty and therefore a lower probability of litigation ( -15%). However, it also increases the risk of contradictory clauses resulting in decreased legal certainty and therefore a higher probability of litigation (+10%).

500 + (20.000*0.15) = 3500

The party receives an incentive to check the terms and conditions for contradictory clauses to counteract that increased legal uncertainty (-10%), which increases the costs of drafting/checking the contract ( + 250) as long as it ultimately leads to lower transaction costs.

76

The Dutch Method of Dealing with Contradictory Clauses that exist due to the Incorporation of Multiple Sets of Terms and Conditions into a Commercial Contract by One of the Parties : A DUTCH SUPREME COURT RULING PUT IN

MASTER THESIS EUROPEAN PRIVATE LAW