The Bottom Line
- “Good Faith” is Judged Objectively: A party’s sincere belief that they are acting fairly or in the other party’s best interest is not a valid defense. Courts will assess whether the conduct meets an objective standard of reasonableness and fairness.
- Changed Circumstances Can Alter Contractual Duties: The original purpose of a long-term agreement can become outdated. Insisting on strict adherence to clauses that produce an unreasonable result after decades may constitute a breach of good faith.
- Strategic Refusal of Payment Carries Risk: Creditors cannot arbitrarily refuse payment of a debt from an interested third party if that refusal is primarily used to maintain a position of control and frustrates the contract’s ultimate objective, in violation of reasonableness and fairness.
The Details
The dispute originated from a “rescue” agreement drafted in 1932. A businessman, facing financial ruin, transferred his assets to a company named “Thubema,” which was set up and funded by his family members (the “family creditors”). The deal stipulated that Thubema would manage his assets and pay off his debts. The businessman could only regain control by buying back the shares in Thubema, but this right was contingent on one crucial condition: Thubema first had to fully repay all loans provided by the family creditors. This structure was designed to protect the assets from outside parties and ensure the family was made whole.
Twenty-two years later, the circumstances had changed entirely. The businessman was financially stable and wanted to dissolve the arrangement to regain control of his considerable fortune. He secured independent financing and offered to pay off Thubema’s debt to the family creditors in full. This would satisfy the condition and allow him to exercise his right to buy back the shares. However, the family creditors—who controlled Thubema—refused to accept the payment. They argued that the original spirit of the agreement was to protect him from such outside influence and that maintaining the status quo was in his best interest.
The Supreme Court delivered a foundational ruling on the nature of good faith in Dutch contract law. The lower court had sided with the family, reasoning that they were not acting in bad faith because they subjectively believed their actions were in the businessman’s best interest; they had no malicious intent. The Supreme Court rejected this interpretation entirely. It ruled that the principle of performing contracts in good faith—now enshrined as “reasonableness and fairness” in the Dutch Civil Code—is not about a party’s inner thoughts or intentions. Instead, it imposes an objective standard. The core question is not “Did you mean well?” but rather “Was your action objectively reasonable and fair given the nature of the contract and the current circumstances?” By refusing payment, the family was indefinitely preventing the contract’s ultimate purpose—the eventual return of control to the businessman—which the court found required objective justification.
Source
Hoge Raad (Dutch Supreme Court)
