Waiver of subrogation rights in general terms of a bank: a matter of interpretation?

It is common practice for group financings that the lender requests to limit the right of subrogation of the obligors. This is to avoid a situation where the obligors would subrogate in the claims of the lender and potentially benefit from the security granted to the lender in the event that such obligor pays a debt owed by another obligor to the lender; otherwise the other obligors could potentially become competing creditors of the lender and "dip" in the security. This can be avoided by using appropriate contractual arrangements.

The Dutch Supreme Court gave an interesting ruling on 29 September 2023 regarding the interpretation of provisions in general terms used by Rabobank. The key question was whether the right of subrogation was waived or excluded in the general terms. This case shows that a (seemingly) small difference in interpretation can lead to totally different outcomes.

This case is interesting because the Supreme Court confirmed that subrogation rights can be excluded (in addition to being waived); and it gave more clarity on whether general terms should be interpretated objectively or whether there is more room for the intention of parties.

Contract interpretation principles

In this case, the wording was unclear and the contract, therefore, needed to be interpreted. Under Dutch law, the principles for the interpretation of contracts has been developed in case law.

The key principle is referred to as the "Haviltex criterium". In short, this principle is that the meaning of contractual provisions also depend on the meaning the parties, under given circumstances, could have reasonably given to the provisions and what parties reasonably could have expected from each other in that respect. In further case law, it was added that some contracts (such as one-sided contracts or collective bargaining agreements), justify a more objective approach, whereby, in principle, the literal wording of that provision is decisive – known as the "CAO standard".

The main principle remains that, when interpreting a written contract, all the circumstances of the case are of significance, valued according to what the standards of reasonableness and fairness entail.

In the past, the Supreme Court denied the approach of the CAO standard for general terms; but, under Dutch case law for interpretation of commercial contracts, there is more emphasis on the objective approach. There are good arguments for the view that general terms (used between commercial parties) should in principle be interpreted objectively; for instance, because these are hardly negotiated and usually apply to many legal relationships at once. This current case gives some new insights for that discussion.

The Rabobank dispute facts

Rabobank provided multiple facilities to a group of companies on the basis of its general terms. On the basis of applicable terms, the parent company Anchor II, its 100% subsidiaries Melamo and Melamo Las- en Montagetechniek were jointly and severally liable for the obligations towards Rabobank.

Melamo and Anchor were declared bankrupt. Both Melamo and Anchor had outstanding loans with Rabobank. Anchor granted a right of mortgage to Rabobank, and Melamo granted various other security. Rabobank enforced the security of Melamo and was able to recover the total outstanding amount under the Melamo loan. The excess of the enforcement proceeds of the Melamo security and the enforcement of the Anchor security was used by Rabobank to repay the Anchor loan. The proceeds that were left were transferred to the bankrupt estate of Anchor. So Rabobank got off without a scratch… or not?

The bankruptcy trustees of Melamo demanded that Rabobank needed to pay the remainder to the Melamo bankrupt estate. In the view of the trustees, because of the joint and several liability, Melamo subrogated in the rights the Rabobank and, therefore, have the right to recover half of the proceeds of the enforcement of the mortgage.

Rabobank took the position that subrogation was excluded in the general terms. "By signing this agreement, the customer irrevocably waives for the benefit of the bank - to the extent necessary in advance – its subrogation rights and all (ancillary) rights which he may acquire as a result of subrogation, including security rights. By signing this agreement, the customer accepts this waiver."

According to the trustees that did not exclude the right of subrogation, because this is only an obligation to waive any rights of subrogation (as set out in article 6:160 of the Dutch Civil Code). Because the right of subrogation of Melamo came into existence after its bankruptcy, it was not longer capable of waiving that right, according to the trustees. This is standard case law since 2012, referred to as the ASR/Achmea case (note the provision in the general terms quoted above was from before that year). 

Legal analysis

Based on the fixation principle (fixatiebeginsel) under the Dutch insolvency law, a bankrupt company will no longer be able to control its assets. In that sense, the line of argumentation of the trustees is correct. If there still was a right of subrogation, the company would not be able to waive it after its bankruptcy. But if the general terms can be interpreted as to exclude the right of subrogation, the right of subrogation will not come into existence at all as was ruled in the very same court case in 2012.

In the first instance, the court decided to follow the principle of the objective approach, also seen in the Dutch case law regarding collective agreements (also referred to as the "CAO norm" and called the collective agreement standard). The rationale is that for agreements that are not negotiated by the individual parties such agreements need to be interpreted according to objective standards; whereby, in principle, the wording of the provision, read in the light of the entire text of the agreement, is decisive. The court therefore decided in favour of the trustees.

The Court of Appeal (Gerechtshof) upheld the first court's judgement and ruled that the wording of the general terms was different to the explanation given by Rabobank. It also found that the undesired result that in case of bankruptcy the subrogation could not be avoided would need to remain a risk for Rabobank; this took into account that Rabobank drafted the general terms in which Melamo was not involved. The fact that two years after the bankruptcies Rabobank changed the relevant provisions seems to suggest that it thought the relevant provision was not clear enough. Rabobank did not have any other arguments to substantiate its interpretation.

The Supreme Court ruled that for the interpretation of a written agreement all circumstances of the specific case are decisive and that this needs to be valued taking into account the standards of reasonableness and fairness.

This means that the plausibility of legal consequences of one or the other interpretation should under circumstances be taken into account in the interpretation. The Supreme Court decided that the mere fact that Rabobank drafted the agreement could not be held against Rabobank, so no contra proferentem as this is different for contracts with consumers (article 6:238(2) of the Dutch Civil Code). It confirmed that the plausibility should also be taken into account (whether Rabobank indeed intended to make a difference in subrogation rights in and outside bankruptcy). In the view of the Supreme Court it would not be very likely to accept that Rabobank used a provision in its general terms which has no effect when it matters most, namely in the bankruptcy of an obligor. 

The Supreme Court therefore referred the case back to another court of appeal.

Osborne Clarke comment

For the interpretation of contracts between commercial parties, there is, in principle, not a difference between general terms and a normal contract. In both cases, the objective interpretation seems to be the starting point. The Supreme Court, however, also made clear that there is room for other aspects, such as the plausibility of the legal consequences of a provision.

In addition the Supreme Court repeated its main rule: "For the interpretation of written contracts, all circumstances of the specific case are relevant, valued according to the principles of reasonableness and fairness." How much room there is foremost depends on the drafting. When the drafting is clear and concise, there should be little (or no) room for interpretation.