In a recent landmark judgment , the Dutch Supreme Court has clarified the test that must be applied when determining whether a lender has validly required repayment of a loan prior to its specified maturity or made use of a right to cancel and require repayment of an uncommitted facility, or both (both referred to here as 'acceleration'). This judgment is important because it is the first of its kind and because it finally puts an end to more than a decade of uncertainty: uncertainty that was due, in part, to a judgment rendered by the Arnhem Court of Appeal in 2003.
The implications of the Supreme Court judgment for credit relationships between lenders and professional borrowers or (large) corporate borrowers (both referred to here as 'professional borrowers') are discussed below. First, we will briefly examine the 2003 Arnhem Court of Appeal judgment.
The Arnhem Court of Appeal judgment
According to the Arnhem Court of Appeal the question of whether or not a lender may validly accelerate must be determined on the basis of the standards of reasonableness and fairness, taking into consideration all relevant circumstances. Even if an agreement expressly sets out a right of acceleration, the application of these standards may entail that a lender is only entitled to exercise that right if there are sufficiently serious grounds for doing so. The court added that, given its role in society, a bank has a special duty of care towards its clients as well as towards third parties if, according to generally accepted unwritten rules of law, it is required to observe the interests of these parties. The scope of this duty of care should be determined on a case-by-case basis. In the court's opinion, this implies that an acceleration should comply with the standards of proportionality and subsidiarity. According to the court, factors that may be relevant in determining whether a lender is entitled to accelerate include the nature of the credit relationship, the borrower's creditworthiness and the bank's credit risk (taking into consideration value of existing collateral or the expected value of any collateral that can still be provided, or both), the gravity of any breaches of the credit agreement by the borrower, the likelihood of a successful restructuring or refinancing, and broader public interests (such as the continued existence of jobs).
For more than five years, the Arnhem Court of Appeal judgment was considered the leading case on acceleration and received wide support in decisions by lower courts and from legal commentators. The general view was that under the judgment the position of the borrower was relatively well protected under Dutch contract law and that acceleration by a lender was not an easy exercise.
Not surprisingly, however, as the credit crunch unfolded, opposition to the judgment started to be voiced by legal commentators. And at the same time, a large number of courts began to adopt approaches that differed in whole or in part from that of the Arnhem court.
The first point of criticism related to the way in which the Arnhem court applied the standards of reasonableness and fairness to the relevant credit agreement, using them to supplement the terms of that agreement (section 6:248(1) of the Dutch Civil Code ('DCC')). These standards can, for instance, provide a basis for the termination of an agreement despite the absence of termination provisions in that agreement. However, given that the credit agreement that was the subject of the Arnhem court proceedings did contain such provisions, as credit agreements invariably do, the court should instead have invoked the 'restricting effect' of reasonableness and fairness (section 6:248(2) DCC), which entails that a contractual provision (or the exercise of rights thereunder) does not apply to the extent that, in the given circumstances, this would be unacceptable according to the standards of reasonableness and fairness. The second point of criticism was that the reference to the standards of proportionality and subsidiarity is unclear and confusing since these standards are not defined in Dutch contract law. The third point of criticism was that the Arnhem Court of Appeal wrongly assumed a 'special' duty of care of banks towards their clients, whereas generally there is no such special duty under Dutch law in a credit relationship between a bank and a professional borrower.
The Supreme Court judgment
The Supreme Court makes clear that if a lender exercises a contractual right of acceleration, the validity of such acceleration indeed needs to be determined on the basis of section 6:248(2) DCC. This means that such exercise will be valid unless, having regard to the relevant circumstances, it must be considered unacceptable based on standards of reasonableness and fairness. The Supreme Court added that the application of section 6:248(2) DCC does not preclude a court from weighing the interests of the parties involved. Circumstances that may be considered include that the bank was subject to a duty of care-obligation pursuant to its own general banking conditions and that the acceleration triggered an obligation for the borrower to pay to the lender the net present value of the interest payments that the lender would forgo as a result of the early repayment by the borrower.
What does this judgment mean for lenders and borrowers in the Netherlands?
The judgment underlines that under Dutch contract law 'freedom of contract' and 'pacta sunt servanda' (agreements must be kept) are leading principles. If a lender is contractually authorised to accelerate, it may exercise such authority in accordance with its terms, unless such exercise must be considered to be unacceptable based on standards of reasonableness and fairness. The burden of proof is on the borrower and, although a court must consider all relevant circumstances, the Supreme Court has repeatedly ruled that the courts must exercise great restraint in refusing to enforce otherwise binding rules on the basis of standards of reasonableness and fairness. Moreover, the Supreme Court has ruled that in dealings between professional parties, the courts must exercise even greater restraint. In our view, an acceleration can only be unacceptable if no person acting reasonably would have done this in the same way under the same or similar circumstances. It should also be noted that section 6:248(2) DCC allows that lenders exercise their rights, even where this would be disproportionally prejudicial to the borrower's interests. Any exercise is allowed, unless, in the given circumstances, this would be unacceptable according to the standards of reasonableness and fairness.
Is the judgment now a licence for lenders to do as they like? No. A lender should always carefully consider, and prepare for, an acceleration. It must strictly observe the terms of the credit agreement, communicate with the borrower in a clear and unambiguous way and, if requested, be able to demonstrate that it has taken into account all relevant circumstances, including the interests of the borrower.
And does this mean that borrowers should be more concerned when it comes down to an acceleration? Not necessarily. After all, the Supreme Court judgment does not in itself improve, or change, the lender's contractual right to accelerate. It only confirms that as a general rule the terms of credit agreement are determinative of the parties' rights and obligations. Having said that, if one compares the position of a borrower under the Arnhem Court of Appeal judgment, with the position of a borrower under the Supreme Court judgment, it is clear that under the latter a borrower will be relatively less protected under Dutch contract law. This, in our view, may urge a borrower not to just sit and wait but to pro-actively approach a lender as soon as it becomes aware of any events that trigger, or may potentially trigger, the lender's authority to accelerate to discuss the situation and possible solutions. This may improve the borrower's chances in successfully arguing that the lender has taken an unacceptable approach.
Special duty of care for banks
A 'hot' issue that remains unresolved is whether banks are subject to a special duty of care in their dealings with borrowers. By way of explanation: the word 'special' is often used to distinguish this duty of care from the 'general' duty of care that by operation of law applies to all participants in social and economic life (and which has been incorporated in the general banking conditions that are used by all major Dutch banks, in particular in their dealings with consumers and small and midsized corporate borrowers). However, unlike a special duty of care, this general duty of care is not very strong, particularly in relationships between a lender and a professional borrower.
In our view, in particular in relation to professional borrowers, no such special duty of care exists. This view is supported by, among others, Supreme Court Advocate General Wuisman in his advisory opinion for the Supreme Court judgment of 13 May 2011, in which he took the view that a special duty of care only exists in 'special' circumstances, e.g. in situations in which a client of the bank has engaged that bank (given the latter's expertise and experience) to render advice on matters involving high financial risks for the client (given his income or assets), which risks are apparent to the bank and for which that client (given his frivolity or lack of expertise, or both) needs to be protected.