PART I: Standards of conduct, attribution and judicial review

In Part I the provisions in Dutch law that provide the most important basis for director's liability and the system set out in these provisions have been studied. These provisions are Articles 2:9, 2:138 and 6:162 of the Dutch Civil Code ("DCC"). Article 2:9 DCC sets out the standard of liability of directors towards the company for a failure in the proper performance of their tasks. Article 2:138 DCC provides for liability of managing directors for the deficit in the bankrupt estate of the company in case of a manifest failure in the proper performance of the task of the managing board. Directors may also be held liable based on the general provision of tort, set out in Article 6:162 DCC.

The main part of the analysis in Part I relates to the nature of a specific legal standard that has been developed in Dutch case law on director's liability — the standard serious blame (ernstig verwijt) — and its use in relation to the framework of standards of conduct and attribution that applies to said provisions. Also, the standard of judicial review applicable to these provisions has been studied. In Part I an argument is made for a consistent system of standards of conduct, attribution and judicial review to be applied thereto. On the basis of this system it is possible to align the wording of Articles 2:9 and 138 DCC, which would lead to an amendment of said provisions.

A director may be liable towards the company based on Article 2:9 DCC in case the matter at hand belongs to the sphere of duties (werkkring) of two or more directors, a failure in the proper performance of the assigned task has occurred and the director is not able to successfully argue that this cannot be blamed on him and he has not failed to take measures to avert the consequences of such failure. Two main issues are relevant to the assessment of the liability: i) establishing whether a failure in the proper performance of the task has taken place (violation of the standard of conduct), and ii) whether the director can exonerate himself (or, put differently: whether the violation of the standard of conduct can be attributed to the individual director).

A review of the case law of the Dutch Supreme Court on liability pursuant to Article 2:9 DCC does not show that this dichotomy is applied as such. With the serious blame standard as introduced by the Supreme Court in its key ruling in Staleman v Van de Ven, the Supreme Court seems to apply an integrated approach to the assessment of the performance of the task and the question whether a failure in the proper performance has occurred on the one hand, and circumstances that are relevant for the assessment of the attribution, or an exoneration defence, on the other hand.

The legislative history of Article 2:9 DCC and its predecessors shows that the grounds for exoneration were considered in view of attribution (toerekening), i.e. fault. But the interpretation that was given to the term serious blame by the Supreme Court in Staleman v Van de Ven is rather different, where it mainly considers criteria relevant for determining whether the management task was properly performed.

It is not entirely clear from the legislative history to the proposed amendment of Article 2:9 DCC in the Legislative Proposal On Corporate Governance and Supervision (Wetsvoorstel Bestuur en Toezicht) what role the criterion of serious blame should play. In Chapter 2 I argue that the amendment to Article 2:9 DCC in line with the Legislative Proposal On Corporate Governance and Supervision would be a logical moment to use the term serious blame exclusively to refer to the standard required for attributing a failure in the proper performance (onbehoorlijke taakvervulling) to an individual director and no longer for assessing whether a violation of the standard of conduct proper performance (behoorlijke taakvervulling) — has occurred.

Adopting this methodology may result in promoting the formulation of more specific standards of conduct for proper management in case law.

I argue that the term serious blame, which I apply as a standard of attribution, should indicate a degree of blame. I see no reason why the nature and content of the term serious blame as used when applying Article 2:9 DCC should be of a different order than for the term serious blame as used in the old Dutch Civil Code within the context of employer's liability and which is currently referred to in Articles 7:658, 7:661 and 6:170 DCC as intent or wilful recklessness.

Although it is true that higher demands may be made of directors regarding the performance of their tasks than of (ordinary) employees, this does not mean that directors should also be liable in the absence of intent or wilful recklessness. The tasks of directors have more impact than and are consequently different from those of (ordinary) employees. This is reflected in the heavier responsibility that rests on them. If the degree of blame required for being accountable would be eased, the threshold raised for director 's liability would become too low. In my opinion it would suffice to account for the heavier responsibility of directors in the assessment of the manner in which the management board has to execute its tasks and whether there is a failure in the proper performance. Thereupon it may be considered whether an individual director may exonerate himself on the ground of absence of serious blame, because he has not acted intentionally or in a wilfully reckless manner.

The basic premise would in that case have to be that these terras refer to the actual awareness of the director concerned concerning the breach of the standard of conduct. Just as with respect to employee's liability, in litigation the company's obligation to furnish facts and its burden of proof may to some extent be objectified. It would suffice to furnish evidence of facts and circumstances from which such awareness can be derived. The director may then refute this by asserting relevant facts and circumstances, which show that no such actual awareness existed, or could invoke exoneration grounds.

In addition to Article 2:9 DCC, another basis for director's liability is liability arising from tort (onrechtmatige daad). Pursuant to Article 6:162 DCC, a director is liable to compensate the damage the company or a third party suffers due to tort committed by the director towards that party, if the tort can be attributed to the director. In the past four years the Dutch Supreme Court has rendered four judgments in which it applied the criterion of serious blame introduced for Article 2:9 DCC to the liability of a director arising from tort: in Ontvanger v. Roelofsen, Holding Nutsbedrijf Westland, NOM v. Willemsen and Eurocommerce. These rulings seem to show that the Supreme Court does not use a fixed basis for applying the term serious blame. In any event, the said rulings give mixed messages as regards the role serious blame plays with respect to director's liability. It does not become clear whether this term is relevant for establishing that the director has committed a tort, or that it plays a specific part in the attribution of the tort to the director.

Since furthermore an integrated approach of serious blame has been developed in case law in relation to Article 2:9 DCC — indicating both the seriousness of the conduct (violation of standard of conduct) and of the blame (attribution) — it is difficult to fit this term within the clear system laid down in Article 6:162 DCC, in which the unlawfulness and attribution are each given a separate role.

In my opinion it would not be better, from a legal methodology point of view, to merge the unlawfulness and the attribution. I think it is important to make a distinction between these elements, since by joining them a subjective standard of conduct is created, which does not directly provide which conduct is generally unacceptable. In case — as I propose — within the context of Article 2:9 DCC the term serious blame is applied solely as a standard of attribution, in the same vein this criterion would apply to attribution with respect to a tort claim. In that case serious blame would "colour" the attribution due to fault pursuant to Article 6:162 (3) DCC.

It is commonly held that the Supreme Court only assumed attribution on the basis of fault (personal serious blame) when assessing the liability of directors arising from tort. However, my examination of the legislative history of and case law regarding Articles 2:9, 2:138 and 6:162 DCC shows that for years director's liability based on those provisions has also included a strict liability. In certain cases a liability claim may still be allowed onder those provisions, even if the director is not to blame for a specific factor (he is not at fault from a subjective point of view).

In the first place, Articles 2:9 and 2:138 DCC provide for a joint and several liability, which includes an element of strict liability. From the legislative history of those provisions it may furthermore be inferred that directors are expected to possess a certain level of knowledge and skills As a result, it is possible to express the actual level of knowledge and skills of an individual director in abstract terras when assessing the liability. A director who is not fit for his tasks faces a larger risk of being held liable than a director who is. In this view, before accepting an appointment, a director will have to carefully ask himself whether he is up to the job.

In this respect, the standard for the proper performance of the task that a director should meet is to a certain extent objectified. Not only are the personal characteristics of the directors reviewed, but also the characteristics they would have possessed if they had been "standard directors". The basic premise, according to Staleman v. Van de Ven, is: "the knowledge and diligence that may be expected from a director who is fit for his tasks, and who carefully performs them". According to this criterion the subjective concept of fault is ignored and the knowledge and capability are objectively tested. I regard this as a form of strict liability.

Such tendency towards liability based on an extensive interpretation of fault, may also be inferred from the case law regarding director's liability arising from tort, in which an objective concept of fault is applied. However, the legislative history of Article 6:162 (3) DCC shows that the concept of objective fault was dismissed. In the instances in which someone is held liable for tort despite fault, he is being held accountable on the basis of the standard of generally prevailing opinion. This ground for attribution has been laid down in Article 6:162(3) DCC. The legislative history gives the archetypical inexperienced physician as an example of this. In my opinion this ground of attribution also applies in respect of what a director "should reasonably" know or understand, or when attributing on the basis of the concept of "standard director". Objectifying the concept of "standard director" means objectifying the director's skills, knowledge and level of awareness, which falls outside the scope of attribution on the basis of fault.

This observation may be material for the direction the debate of director's liability is to take in the Netherlands. The important question can be raised, to what extent it is desirable to apply attribution according to the standard of generally prevailing opinion when determining director's liability, since it is generally presumed that this liability should be applied with reticence. However, by categorising objective fault as attribution on the basis of fault as is currently the case in case law — the concept of fault is merely stretched. By widely applying this attribution on the basis of fault, the fact that it may also include a form of strict liability is disguised.

If one really believes that in case of directors' liability there should be no attribution on the basis of generally prevailing opinion in the sense as I described before, it may be questioned whether the application of such objectifying elements should be pushed back. That is where the real importance of this discussion lies.

To further fuel the discussion regarding the limits of attribution with respect to director's liability, I maintain that should this high standard of attribution be deemed to be desirable, it would be better to make the possibility of attribution on the basis of generally prevailing opinion more explicit and to add the following phrase to the grounds for exoneration of Articles 2:9 and 2:138 DCC: "and is not attributable to a cause for which he is accountable in accordance with generally prevailing opinion."

In chapter 3 I set forth that in my view it does not follow from the legislative history of Article 2:138 DCC that it was not intended that a materially different standard of conduct for directors in Article 2:138 DCC than the one that applies to Article 2:9 DCC (proper performance) would be applicable by introducing the phrase manifestly improper performance. The requirement of relativity of the standard of conduct in Article 2:138 DCC, which provision is intended to protect creditors, may in practice be expressed in view of the fact that liability on the basis of this provision only exists in case there is a causal link between manifestly improper performance and a major cause for the bankruptcy. Consequently, in practice it is not necessary to integrate a qualified test (towards creditors) in the standard of conduct of manifestly improper performance in Article 2:138 DCC that would result in a deviation from the standard of conduct in Article 2:9 DCC.

In any case, the circumstance that Article 2:9 DCC aims to protect the company, whereas Article 2:138 DCC aims to protect the creditors, does not have to be a reason for applying a different standard of attribution for these provisions. The standard according to which attribution on the basis of fault may be applied within the context of these provisions, may in my opinion be the same for botte: serious blame.

Another matter is that the threshold for accepting director's liability could also be raised by applying a strict standard of judicial review. The applicable standard of judicial review must be distinguished from the standard of conduct and the standard of attribution. A standard of judicial review is a standard that needs to be applied by a court in the assessment of the question whether in a certain case the standard of conduct has been breached. By applying a strict standard of judicial review, it can ensure that management boards of companies will have sufficient discretionary power to enable it to do business. Since I qualify serious blame as a standard of attribution, I do not regard it as a standard of judicial review.

It is generally assumed that the application of a term such as manifestly signifies an instruction for the court to apply a restrictive standard of judicial review to the standard of conduct laid down in the relevant provision. With respect to liability pursuant to Article 2:138 DCC it has to be determined whether the directors have manifestly improperly fulfilled their tasks. The legislative history of Article 2:138 DCC does not make it clear whether this terminology includes an instruction for the court to apply a restrictive standard of judicial review. In Gilhuis q.q. v directors Panmo, the Supreme Court ruled that manifestly improper management within the meaning of Article 2:138 DCC can only be said to have occurred "if no reasonably thinking director would — under the same circumstances — have acted in the same marmer." This criterion may therefore be regarded as a restrictive standard of judicial review.

The wording of Articles 2:9 and 6:162 DCC do not imply the applicability of a restrictive standard of judicial review. In case of judicial review within the context of these Articles, the discretionary power of the board may be expressed by applying a similar assessment criterion as in Article 2:138 DCC. In my opinion there is no reason to apply different standards for judicial review for these provisions. The legislative history of Article 2:9 DCC also shows that no liability should arise in case of doubt and that faulty management as such does not necessarily result in a failure in the proper performance. This examination shows that the function of the term serious blame as presently applied in the case law in respect of Article 2:9 DCC and the term manifestly in the phrase manifestly improper performance in Article 2:138 DCC are essentially the same: raising the threshold for director's liability.

In view of this, the wording of these provisions might be synchronised by referring in the text of Article 2:9 DCC — as is the case in Article 2:138 DCC to manifestly improper performance and by including in Article 2:9 DCC and Article 2:138(3) DCC the absence of serious blame as a ground for exoneration. This would prevent future semantic discussion regarding this terminology and would increase uniformity in future case law based on these provisions.