Corporate │ M&A

Explaining pledge agreement- “court decision by a competent court”

By juli 3, 2017No Comments

Under Dutch law, contracts are interpreted according to the ‘Haviltex-doctrine’. This means that not only the wording of the contract is decisive, but also the meaning that parties could reasonably have attached to it (the so-called ‘subjective interpretation’). After all, a small entrepreneur can not be expected to bring in a lawyer to arrange every detail of a contract. In that case, it is likely that a subjective interpretation of contractual clauses prevails. On the other hand: If two large companies, assisted by legal professionals, conclude a contract, more value can be attached to the literal/grammatical  meaning of the terms of the contract.

However, this general rule does not apply in every case, as is evidenced by the following court decision.

A Russian bank has provided a secured loan to A. C and D have pledged their shares in a Dutch company (BV) to the bank.  When A default on its repayment obligation of the loan, the Russian bank submits the case before an arbitration court in Moskow. The Russian arbiter finds that there is a default of the debtor and rules that the loan has become due immediately. A decided to appeal against this decision.

In the meantime, the bank wants to execute the collateral, but the Dutch notary refuses to auction off the shares. The Russian bank summons the notary, as well as C and D to appeal before the Dutch court.

The disputed matter evolves around the question how the deed of pledge must be interpreted. The deed contains a clause that the bank is entitled to execute the collateral, if the default is “evidenced by a court decision of a competent court”.  The bank argued that this clause had to be interpreted in a literal sense: the Russian arbiter was competent and the default is evidenced by this institution. So what is notary waiting for?

The Dutch court finds that the litigious clause has the purpose to protect the pledgers (C and D), since the collateral secured a loan provided to a third party, namely A. Under these circumstances, it should not be easily assumed that there is a default. The provision must therefore be interpreted in such a way that a final decision of a competent court is required. Since the case is still under examination by the Russian court of appeal, this requirement is not fulfilled. Consequently, the auction of the shares cannot take place. The judge thereby ignored the grammatical interpretation of the clause.

This case is a typical example of how Dutch law looks beyond the letter of a contract. To avoid disputes like these, it is important to adopt a clause in which parties express their preferences for a grammatical interpretation. Together with well drafted definitions, this will reduce the number of uncertainties around the contractual interpretation.

The court decision can be found here (in Dutch).