Navigating the ESG crossroads: termination of a credit agreement in the Netherlands

The Netherlands has established a clear framework regarding a lender's ability to terminate credit agreements governed by Dutch law, codified by the Dutch Supreme Court in 2014. This framework requires that when a lender exercises an agreed-upon termination authority, this action must be assessed through the lens of the restrictive effect of reasonableness and fairness.

While extensive case law and literature have been developed applying this framework, there is limited case law specifically addressing termination for ESG reasons, raising important questions about how such terminations should be evaluated.

Freedom of contract as starting point

The parties' freedom of contract serves as the fundamental starting point.

Although this freedom may be constrained by obligations stemming from legislation such as the Dutch Anti-Money Laundering and Anti-Terrorist Financing Act, lenders generally maintain discretion in deciding with whom they establish and maintain credit relationships. Article 35 of the General Banking Conditions, which are applied by all banks in the Netherlands, grants banks broad termination authority at their sole discretion, without requiring borrower default.

Credit agreements and their applicable terms frequently incorporate specific termination provisions. Revolving credit facilities, for example, can be structured to permit daily termination. Additionally, credit agreements typically include grounds for termination and acceleration when events negatively affect lender-borrower relationships or the lender's integrity or reputation. The broad language of such provisions can be interpreted in a way that a termination right exists on the basis of a breach of a lender's ESG policies.

Fundamental termination principles

The exercise of contractual termination rights must be evaluated according to the restrictive principles of reasonableness and fairness. In principle, contractual termination rights may be exercised, unless this would be unacceptable in the specific circumstances. The bank's duty of care, as outlined in Article 2(1) of the General Banking Conditions, plays a role in this assessment, requiring banks to consider borrowers' interests when terminating relationships.

Furthermore, case law establishes that lenders must act carefully by explaining termination reasons, offering reasonable notice periods, and providing borrowers opportunities to question or challenge the termination before giving effect to such termination.

A 2003 Court of Appeal judgment established a "catalogue of circumstances" used by lower courts when evaluating terminations under Article 6:248(2) of the Dutch Civil Code. This non-exhaustive list includes considerations such as (i) the credit relationship's duration, complexity, and progression, (ii) the time granted for refinancing and potential financial consequence and (iii) the lender's decision-making process, communication approach, and rendering warnings.

ESG considerations: evolution of the existing framework?

Lenders can terminate credit relationships unless no termination authority exists or this authority is strictly limited to specific circumstances – which is uncommon in practice.

Dutch Supreme Court rulings dictate that courts should exercise restraint when evaluating termination validity, placing the burden of proof on borrowers to demonstrate that the exercise of a termination right should be restricted. Only when borrowers establish a compelling and fundamental interest in maintaining the credit relationship, the analysis shifts to whether the lender possesses a more significant competing interest to terminate, which may or may not override the borrower's interest.

Despite this restrained approach, courts must provide tailored solutions when assessing whether termination exercise is unacceptable according to reasonableness and fairness principles. They will consider all circumstances, including the previously discussed "catalogue of circumstances".

While termination cannot be guaranteed simply through policy formulation and extensive contractual obligations, a lender's well-documented and transparent ESG-policies may influence judicial evaluation. The framework for ESG-based terminations represents not an entirely new paradigm but rather an evolution of existing principles, making further case law development in this area particularly significant to monitor.