Negotiating a contract under conditions; subject to finance

Introduction

In the pre-contractual phase, Dutch professional contracting parties often negotiate a financing arrangement clause or a “subject to finance” clause.  A subject to finance clause provides a condition under which an agreement will be concluded (totstandkomingsvoorwaarde), a suspensive condition (opschortende voorwaarde) or a resolutive condition (ontbindende voorwaarde). This depends on the wording of the clause and the circumstances of the case. Contracting parties can accept a subject to finance clause both in writing as tacitly.

Whether and how parties may succeed in an invocation of a subject to finance clause is the subject of this blogpost.

Subject to finance and best-effort obligations

Based on settled case law, a party who invokes a subject to finance clause is bound by a best-efforts obligation to obtain finance. If the party does not fulfil this best-efforts obligation, the invocation of the subject to finance clause is unacceptable according to standards of reasonableness and fairness (art. 6:248 DCC). See SC 21 June 1996, ECLI:NL:HR:1996:ZC2109, NJ 1996/698.

Whether or not the best-efforts obligation should be construed widely depends on the circumstances of the case. The interpretation of the “subject to finance” clause is decisive hereby. Based on settled case law, invocation of the subject to finance clause is generally successful if a party has approached two or more banks under the usual financial conditions.

However, an invocation of the subject to finance clause can also be successful if there is no causal link between the breached best-efforts obligations and the alleged loss. This applies if a party who invokes the subject to finance clause argues convincingly that even if it had fulfilled the best-efforts obligation, it would not have obtained finance anyway. See also the jurisprudence from the District Court of ‘s Hertogenbosch 22 November 2006, ECLI:NL:RBSHE:2006:AZ2919 where parties had entered into a purchase agreement (for an apartment) with a subject to finance clause. Here, the purchaser invoked the clause and submitted only one rejection letter. This letter showed that other banks would also not have provided financing for the project. The court ruled that the purchasers had materially fulfilled their best-efforts obligation.

The general principle in literature and jurisprudence is that Dutch contracting parties can accept a subject to finance clause in writing as well as by means of tacit acceptance. A tacitly agreed subject to finance clause can apply by virtue of the requirements of reasonableness and fairness (art. 6:248 DCC).

Whether a tacitly agreed subject to finance clause exists, depends on the circumstances of the case; see District Court Almelo 26 November 2003, NJF 2004/202, where the interim relief judge accepted a tacitly agreed subject to finance clause. In the purchase agreement for a catering business, parties had clearly laid down resolutive conditions. However, a subject to finance clause was not included in the agreement. The Court ruled that a tacitly agreed subject to finance clause applied, however, because contracting parties would normally use a subject to finance clause in this situation. Of course, parties have the possibility to depart from this habit, but in that case parties should make this explicitly clear in the agreement. Furthermore, the Court ruled that it did not matter that the parties were not aware of this habit. In literature however, the point has been made that this last consideration is not consistent with a ruling from the Dutch Supreme Court 21 September 1990, NJ 1991/799 (Van der Ven/Stevens). Based on this case law, a tacitly agreed subject to finance clause can only apply if both parties are aware of the habit of using a subject to finance clause in this situation.

It is a general rule that if parties exclude a subject to finance clause, the Court will not find one. See Court of Appeal ‘s Hertogenbosch 11 September 2007, ECLI:NL:GHSHE:2007:BB6848 where the Court of Appeal did not accept a tacitly agreed subject to finance clause in a purchase agreement for a catering business. The Court of Appeal ruled that legal effects can apply by virtue of the requirements of reasonableness and fairness (art. 6:248 DCC) as far as parties did not lay down anything in the agreement. However, in this case the parties had concluded an agreement in which they clearly laid down that there was not in fact a subject to finance clause.  For that reason, the Court did not find one.

The general principle in literature and case law is that a restrained approach to tacitly agreed subject to finance clauses is required for reasons of legal certainty.

Conclusion

Whether or not an invocation of a subject to finance clause is successful depends on the circumstances of the case, as does the presence of a tacitly agreed subject to finance clause. The interpretation of the clause is decisive hereby. In Dutch legal practice, it is therefore recommended to clearly lay down the conditions with reference to the subject to finance clause (for example how many requests are required, within which period, etc.) in order to avoid a potentially unpleasant future surprise which may lead to disagreement.

The post “Negotiating a contract under conditions; subject to finance” is a post of www.stibbeblog.nl


Cathrien van Bunningen
All posts by Cathrien van Bunningen

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