Duty of Care Banks
Termination Credit agreement
In the current economic climate individuals and businesses will be more often faced with termination of the credit by the bank. Therefore, it is very important to be aware of the legal conditions that are relevant in connection therewith.
On the basis of the contractual conditions of the credit documentation and the relevant terms and conditions of the bank, in principle the bank shall be entitled to terminate / accelerate the credit agreement. Generally, among other things, the following events of default will be included:
- bankruptcy or suspension of payment by the borrower,
- failure to comply with any payment obligations,
- failure to comply with any other obligation under the credit documentation,
- seizure/attachment on any assets of the borrower,
- if in the opinion of the bank there are legitimate concerns that the credit will not be paid back.
In addition, many other events of default will be included in the credit documentation. On this basis the bank will have sufficient possibilities to invoke the termination and/or acceleration of the credit. Whether such termination / acceleration will also be legally acceptable, will be dependent on a number of other factors, including the duty of care of the bank. The duty of care of the bank is given by the general banking conditions and further developed in the jurisprudence.
General Banking Conditions
The general banking conditions apply to all Dutch banks in relation to its clients. Article 2 of the general banking conditions is as follows: “The Bank shall exercise due care when providing services. In its provision of services, the Bank shall take the Customer’s interests into account to the best of its ability. None of the provisions of these General Banking Conditions or of the special conditions used by the Bank shall detract from this principle.”
The case law of the Dutch Supreme Court confirms that banks, as a professional service provider, have a special duty of care. This special duty of care follows from the reasonableness and fairness, taking into account the social function of banks and the expertise. This special duty of care applies in relation to the clients of the bank under the contractual relationship and also in relation to third parties whose interests they should take into account on the basis of general legal rules. If the termination / acceleration of the credit actually will have the intended effect, should be assessed on the basis of reasonableness and fairness in relation to the circumstances of the case. The special duty of care is relevant in connection thereto and the termination / acceleration should meet the requirements of proportionality and subsidiarity. From case law it follows that, among other things, the following factors are relevant:
- the duration, the degree of exclusivity, the size and complexity of the credit relationship,
- a significant decrease in creditworthiness and/or significant increase in the banking credit risk, which will be especially important if there is sufficient coverage by security,
- the behavior and the reliability of the borrower and the extent to which and the timeliness with which this has informed the bank of all the relevant circumstances for the credit relationship
- whether and to what extent the borrower is in breach of contract (for example by structural and/or extensive exceeding the credit limit),
- the likelihood that the company of the borrower, whether or not after reorganization or otherwise, will survive and the extent to which the borrower has started a reorganization,
- which term the borrower will be granted to change to another (house) bank and which material financial problems for the borrower (will) arise if it cannot attract any borrowing elsewhere on a short term,
- the decision-making process of the bank prior to the termination / acceleration and the way in which the bank has consulted with the borrower and whether and to what extent the bank has warned the borrower in advance,
- if the bank by own behaviors (such as admission of exceeding the credit limit) has aroused expectations,
- other social interests (including the existence of employment).
If termination of the legal relationship or acceleration of credit by the bank will be legally acceptable, shall subject to the conditions mentioned herein. In any case, it can be stated that the bank may not act without due care and not disproportionate. If an individual or a business owner is faced with an event of termination / acceleration of the credit (agreement), it is advisable to search legal advice about this. In that case it is recommended act quickly to undo the termination / acceleration.