Prejudicial question (prejudiciële vraag) regarding apportionment of fines

On 11 December 2015, the Dutch Supreme Court held that a party can rely on a clause to recover a fine imposed by a public body (verhaalsbeding) from a contractual counterparty (Dutch Supreme Court, 11 December 2015, ECLI:NL:HR:2015:3568). The Supreme Court rendered this judgment after the  ‘s-Hertogenbosch Court of Appeal submitted the following prejudicial question to the Supreme Court:

“Is a contractual clause, of which performance is being requested, void (nietig) for being contrary to the law, good morals or public policy, as referred to in Article 3:40 of the Dutch Civil Code, to the extent that the clause concerns the possibility to recover a fine imposed by a public body pursuant to the Foreign Nationals Employment Act (Wet arbeid vreemdelingen, “FNAC”) for that party’s own violation thereof?”

European case law

Whether parties are at liberty to make arrangements regarding the apportionment of liability for public fines has been uncertain for a long period of time. On 10 April 2014, the European Court of Justice held that in the absence of any contractual agreement, the apportionment of joint and several liability for the fines imposed must be determined by a national court (Areva et al./European Commission). From this it may be concluded that the European Court of Justice does not necessarily consider the apportionment of fines impermissible and leaves it to national courts to use their discretion in such cases. With its judgment of 11 December 2015, the Dutch Supreme Court has provided clarity on this issue.

Assessment by the Supreme Court

The case at hand, in brief terms, concerned a chain of construction contracts based on which a fine imposed by a public body for the violation of the FNAC could be recovered from a link lower in the chain. After the Labour Inspectorate (Arbeidsinspectie) imposed a fine on the main contractor for violating the FNAC, the main contractor tried to recover this fine from the subcontractor in accordance with the recovery clause agreed upon between the parties.

In assessing whether such a recovery clause was void in this case, the Supreme Court stated that conflict with public policy (openbare orde) should be considered first and foremost. Nullity of a recovery clause for being contrary to public policy requires the substance or implication of the clause to be contrary to (i) the fundamentals of the legal system, or (ii) public interest of a fundamental nature.

Subsequently, the Supreme Court reviewed the substance and consequences of the recovery clause with the purpose and implications of the FNAC. The purpose of the FNAC  is to control illegal employment and it uses a broad concept of employer to prevent parties from circumventing the licensing requirements and fines. Under the Act, it is therefore possible that several employers can be held liable for the illegal employment of one foreigner.

On the one hand, according to the Supreme Court, having the option to recover a fine undermines its deterrent effect and the objectives of the FNAC. On the other hand, the FNAC does not prevent employers from contractually delegating compliance with the FNAC to a third party. In that context, the Supreme Court considers it relevant, based on the FNAC, that the employer itself remains responsible for compliance with the Act and that any recovery clause is intended to apply if the third party, the lower link in the chain, is the party that actually employs the personnel.

The recovery clause does not mean that any of the employers involved escapes either the licensing requirements or the fines imposed for violation of the Act. In addition, the total amount of fines imposed by a public body (on the various employers in the chain) is not altered as a result of the recovery clause. However, such a clause does concentrate the financial incentive for the employer lower in the chain most likely to have direct involvement in employing the personnel. There is an extra incentive for this lower link in the chain to comply with the FNAC. Finally, the Supreme Court considers it relevant that the FNAC contains other sanctions for repeat offenders, as a result of which the incentive to comply with the FNAC also remains in place for the employer seeking to recover its fine.

Based on the above factors, the Supreme Courts held that the recovery clause in this case was not unacceptably detrimental to the aim and purpose of the FNAC and the enforcement mechanism provided therein. Therefore, the recovery clause is not void for being contrary to the law, good morals or public policy.

Nullity (nietigheid) owing to special circumstances?

Finally, the Supreme Court discussed whether a recovery clause can be void owing to special circumstances, such as when the party invoking the clause can be seriously blamed for violating the FNAC. As the nullity of a recovery clause is assessed based on the situation at the time  the clause was agreed upon and because such special circumstances only occur afterwards, they do not lead to nullity of the clause. However, invoking the recovery clause could be unacceptable according to the criteria of reasonableness and fairness (naar maatstaven van redelijkheid en billijkheid onaanvaardbaar), as a result of which the party that can be seriously blamed for the violation cannot rely on the clause. Furthermore, according to the Supreme Court, a recovery clause can be void if at the time of agreeing the clause the parties (i) intended to frustrate the collection of fines, or (ii) agree that a party is also indemnified in the event of willful misconduct or gross negligence.

Implications in practice

It follows from the Supreme Court’s judgment that – as a starting point-  parties are at liberty to make arrangements regarding the apportionment of liability for fines imposed by a public body. This judgment is of great importance in daily practice not only in terms of complying with the FNAC, but also in a broader context, such as the implications of  joint and several liability for fines imposed e.g. for competition law infringements.

Parties that wish to be able to recover fines imposed by a public body from their contractual counterparty have to keep the following  two points in mind. First of all, for the validity of a recovery clause it is important that the clause does not undermine the aim or purpose of the underlying legislation. Secondly, it is advisable that the recovery clause is explicitly stipulated in the agreement with the counterparty.