In its decision of 4 November 2016, ECLI:NL:HR:2016:2517 (CIA / Heredium), the Supreme Court ruled that if – in hindsight – the right of suspension appears to have been invoked wrongfully, the debtor cannot be considered to be in default automatically. Whether a party was entitled to invoke a right of suspension depends on the interpretation of the agreement, taking all relevant circumstances into account.

Background of the case

Creative Industry Amsterdam B.V. (“CIA”) agreed to purchase the shares in Heredium Magnum B.V. (“Heredium Magnum”) from Heredium Coöperatie u.a. (“Heredium”). Heredium Magnum was the owner of a building in Amsterdam. At that time, both CIA and Heredium thought the deal was exempted from transfer tax as the owner of the building did not change. Nonetheless, the parties included a provision in the purchase agreement that in the event transfer tax applied, Heredium would meet such payment obligations.

Soon after the shares were transferred, an additional tax assessment (naheffingsaanslag) was imposed on CIA. Consequently, CIA suspended its obligation to pay the remaining purchase price. However, after administrative appeal proceedings the additional tax assessment was annulled.

Heredium claimed payment of the remaining purchase price and a penalty of EUR 500,000 plus statutory interest for both amounts. In this context, Heredium argued that CIA had invoked the right of suspension at its own risk and was therefore liable for the loss incurred by Heredium in that regard.

Right of suspension

Under Dutch law, a debtor has a right to suspend the performance of his obligation if (i) he has a due claim against his creditor, (ii) there is sufficient connection between the claim and the obligation, which may be assumed when the obligations result from the same legal relationship or from regular business activities between the parties and (iii) the suspension is proportionate.

Consequences of a wrongful invocation of the right of suspension

In its judgment, the Supreme Court decided on whether CIA was entitled to invoke the right of suspension under the given circumstances at the time and what the consequences would be if these circumstances change at a later stage.

The Supreme Court referred to the Ammerlaan/Enthoven judgment of 21 September 2007 (ECLI:NL:HR:2007:BA9610) in which the Supreme Court ruled that an invocation of a right of suspension which – in hindsight – appears fully or partially unjustified entails that the one claiming suspension is immediately in default.

Although there seemed to be little room for exceptions to this rule, the Supreme Court ruled in this case that under the given circumstances, the mere fact that there was no reason – in hindsight – to invoke the right of suspension does not mean that CIA was automatically in default. According to the Supreme Court, being in default implies that CIA was failing to meet its obligations required under the agreement. The Supreme Court continued by explaining that what was required under the agreement can only be determined on the basis of an interpretation thereof taking into account all relevant circumstances at that time. In the case at hand, these circumstances included the question as to who bears the risk of the actions of a third party (the tax authority), particularly in view of the soundness of the substantiation of the claim raised by the third party and possible specific contractual provisions.

The Supreme Court concluded that the additional tax assessment was annulled with retroactive effect. However, in the relationship between the parties to the agreement, prior to its annulment the additional tax assessment remained decisive in determining what was required under the agreement in accordance with the principles of reasonableness and fairness. Also relevant in that regard was the provision in the agreement that stipulated that Heredium would pay the transfer taxes, if any. As a consequence, CIA was entitled to invoke the right of suspension.

Thus, the circumstances in the case at hand led to an exception to the Ammerlaan/Enthoven rule. It remains to be seen whether, and if so what other circumstances may create such exception.

An obligation to compensate the interest benefit?

Even though the Supreme Court sided with CIA and ruled that CIA was entitled to invoke the right of suspension at the time, CIA did not remain entirely unaffected. Heredium claimed compensation for the interest on the suspended payment. According to Heredium, CIA derived a financial benefit from the substantial amount CIA had at its disposal.

CIA argued that the Court of Appeal wrongfully or incomprehensibly ruled that on the one hand CIA was not in default and on the other hand CIA was still obliged to compensate for half of the statutory commercial interest as referred to in article 6:119a DCC.

The Supreme Court first noted that in any event being in default is not required under article 6:119a DCC. Subsequently, the Supreme Court pointed to the fact that the Court of Appeal did not establish an obligation for CIA to compensate Heredium for interest on the basis of article 6:119a DCC. Instead, the Court of Appeal based the obligation to compensate interest on the principles of reasonableness and fairness, also in view of article 6:212 DCC on unjust enrichment. The Supreme Court assumed the Court of Appeal based its reasoning on the fact that even though CIA was entitled to invoke the right of suspension, this does not necessarily mean it is in accordance with the principles of reasonableness and fairness that CIA would also be entitled to retain the total interest benefit.

CIA argued that the Court of Appeal went beyond the ambit of the legal dispute or at least gave a decision contrary to the principles of due process as Heredium did not claim compensation for the interest based on the principles of reasonableness and fairness. The Supreme Court ruled that the Court of Appeal did not go beyond the ambit of the legal dispute but gave decision contrary to the principles of due process (ontoelaatbare verrassingsbeslissing), as no debate took place between the parties about the interest benefit that CIA in fact had as a consequence of the suspension. However, the Supreme Court did not shut the door on an obligation to compensate for the interest on the basis of the principles of reasonableness and fairness and the case will be continued at The Hague Court of Appeal.