The bank argued that the client should have understood the condition precedent provision in such a manner that, given market practice, a satisfactory outcome of the bank’s internal credit verification process was part of the condition precedent. This argument did not uphold before the Court of Appeal.
Amsterdam Court of Appeal 9 February 2016 (ECLI:NL:GHAMS:2016:461)
In 2007 a Dutch bank entered into a credit facility agreement with its client under which an amount of EUR 10,000 was made available. By the end of that year, the client expressed its wish to expand its business and entered into negotiations with the bank about an increase of the credit facility. On 27 December 2007, the bank made a formal proposal to the client to amend the existing credit facility agreement resulting in an increase of the credit facility to EUR 50,000.
The amended credit facility agreement contained a provision stipulating that “the entry into of the credit facility agreement is subject to verification of [client] data”. The client informed the bank about the nature of its new business activities by an email dated 8 January 2008. The bank responded with a letter in which it argued that it had insufficient understanding of the relationship between payments received into the client’s bank account and the nature of the client’s business activities. The bank indicated that such lack of understanding posed a risk which could not have been foreseen at the time of the entry into of the credit facility agreement. Finally, the bank stated that it intended to terminate its relationship with the client and, as a result, the bank would no longer be obligated to provide loans under the credit facility agreement.
In response to these events, the client filed an application with the District Court against the bank claiming compensation for damages resulting from the bank’s failure to comply with its obligations under the credit facility agreement. The bank argued that it was under no obligation to provide loans under the credit facility agreement because, as indicated in its letter, the condition precedent had not been satisfied on the basis that its internal credit verification process had not been completed to its satisfaction. The District Court denied the claim.
Following an appeal by the client, the Court of Appeal had to determine whether the bank was in a position to successfully invoke the condition precedent based on the bank's argument that its internal credit verification process had not been completed to its satisfaction. For this purpose, the Court of Appeal had to determine whether the satisfactory completion of the bank’s internal credit verification process fell within the scope of the condition precedent. Given the fact that the verbatim wording of the condition precedent provision did not contain an explicit reference to the bank’s internal credit verification process, the Court of Appeal used the so-called “Haviltex-criterion” to interpret the condition precedent provision. The bank argued that the client should have understood the condition precedent provision in such a manner that, given market practice, a satisfactory outcome of the bank’s internal credit verification process was part of the condition precedent. The client argued to the contrary.
The Court of Appeal rejected the bank's argument and held that the bank should have informed the client of the fact that its interpretation of the condition precedent provision implied a condition that the bank’s internal credit verification process had to be satisfactorily completed. On the basis of the court’s interpretation of the condition precedent provision, it ruled that the bank was not in a position to invoke the condition precedent.
The ruling of the Court of Appeal demonstrates that, in spite of market practice, a bank may not assume that a client shares its understanding of a condition precedent provision. Therefore, banks must ensure that any condition precedent provision is phrased with as much clarity as possible.