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Confusing legal terms for contract termination in Dutch and English

September 21, 2015
Marnix van den Bergh, M&A attorney, Höcker Advocaten, Netherlands

Hocker-logoIntroduction
My practice involves legal matters to which Dutch law is applicable, both nationally and internationally. As such, either or even both of the parties involved may not understand the Dutch language, and contracts I draft may be in English as often as they are in Dutch. As long as the parties understand what they agree upon, there are little problems writing in English, even when Dutch law applies. However, sometimes there are difficulties translating Dutch legal concepts into English; there may not be an accurate translation at all, or even if a translation is correct in the literal sense, it may have a different meaning in another legal system. One attempt at solving such misunderstandings is including the Dutch version between parentheses after the ‘dubious’ term (like this).

Below is an example of a situation showing why such clarifications may be very useful; in fact this example concerns two terms that may both simply be translated as ‘termination’ in English, while they are different legal notions entirely. In fact, as shown below, the concepts are even mixed up in a solely Dutch context. To avoid misunderstandings I have used the terms ‘cancellation’ and ‘rescission’ to distinguish between the two.

Cancellation and rescission (opzegging en ontbinding)
Under Dutch law, a contract may be terminated (beëindigd) either by cancellation (opzegging) or rescission (ontbinding). Both cause the contract to end, but in a legal sense the two are different concepts. In a recent case law example from the Dutch Supreme Court, this difference played a prominent role. The matter concerned a student whose flight school ended his pilot training for lack of progress.

First of all, a word about the difference between cancellation and rescission. Cancelling a contract, on the one hand, is the usual way of ending a contract that would otherwise continue. If the contract specifies a fixed term, early termination is usually allowed only if the parties have so agreed. Continuing obligation contracts not specifying any term may normally be cancelled without the parties having agreed so.

Rescission, on the other hand, is only an option if there is are grounds for rescission. Dutch law identifies default as grounds for rescission, which means that either party is not complying with their obligations under the contract. Parties may agree upon other grounds, but rescission may, in any case, not be called upon just like that. In addition, in a situation of default, the default must ‘justify the rescission’ and be sufficiently serious.

The implications of rescission differ from a cancellation’s effects. While cancellation only results in the reciprocal rights and obligations coming to an end, but has no effects on the past, rescission actually invokes obligations to undo. Performances must be reversed, as far as possible. Depending on the contract that may imply the repayment of sums or the returning of goods.

Judgement Dutch Supreme Court, 12 June 2015
On 12 June 2015, the Dutch Supreme Court ruled on a matter concerning the termination fo a contract between a student and a flight school. The student had previously paid just under € 100,000 in tuition fees for a commercial pilot course which would consist of five segments over around 18 months.

The contract contained two clauses on termination and repayment of prepaid tuition fees (clauses 4.1 en 4.2). in summary, the flight school had no obligation to repay if the education would be terminated (beëindigd) early by the student, and neither if the flight school would cancel (opzeggen) the course due to a student’s showing disappointing study results.

Apparently the student did not progress much, as he had failed to finish the first segment of the course even after 20 months, despite having attended extra lessons. Moreover, according to the contract, the costs for those lessons were to be paid by the student himself. Eventually the flight school told the student that he had failed to reach the required proficiency and informed him initially that they had decided to ‘terminate (beëindigen) the course early’ and, later, that they had to ‘decide’ to ‘the rescission of the contract in accordance with clauses 4.1 and 4.2’. Interestingly, while the contract mentions cancellation (opzeggen), the flight school uses the terms (termination (beëindigen) and) rescission (ontbinding).

Consequently, the student claimed repayment of a large part of the prepaid school fees since he never got to participate in stages 2 through 5 of the course. Clauses 4.1 and 4.2 appear to be aimed specifically at avoiding such repayment, but only in the event of early cancellation (opzegging).

Curiously, in the procedures before the first instance court and the appeals court, it becomes an established fact that the rescission (ontbinding) of the contract was invoked, and not the cancellation (opzegging) thereof, ensuring that clauses 4.1 and 4.2 do not apply here. It would seem that the flight school has acted against it own interests in that respect. The appeals court judged that, since the student has not been allowed to enjoye stages 2 through 5 of the course, the student was entitled to a substantial repayment.
Although the Dutch Supreme Court has reversed the appeals court’s judgment on technical grounds, concerning interest and the valuation of the school’s performance, the matter with regard to the rescission has not been reversed.

From the judgment it has not become clear to me why the flight school chose to invoke the contract’s rescission instead of its cancellation. Considering the legal effects of a rescission (i.e. the contract’s undoing), the repayment of tuition fees as compensation for courses that have not been delivered seems appropriate. Invoking clauses 4.1 and 4.2, written for the occasion, would have seemed much more effective.

The above stresses the difference between the legal concepts of cancellation and rescission. It may thus be rewarding to be very careful in using different concepts that appear interchangeable, and to specifically state whether a termination is intended to qualify as cancellation or rescission.

Marnix van den Bergh - H+Âcker Advocaten 2015 All image rights reserved by Julien Dony-8509About the author
Marnix van den Bergh is an associate partner in the corporate law division of Höcker Advocaten. His efforts focus on drafting and advising on commercial contracts. If necessary, he litigates with respect to such matters. These often regard transaction documentation for acquisitions or joint ventures or trade contracts with respect to services, distribution, agency or franchise. Marnix represents both large and medium sized companies in the Netherlands and abroad.