IT suppliers dealing with customers in financial difficulties may be obliged to continue providing services

02 November 2010

Roelien van Neck, Stephanie Welbergen

Some recent Dutch case law and proposed legislation both suggest that IT suppliers are now subject to special restrictions on their ability to suspend services to non-paying customers. IT may be regarded as goods and services deemed essential for a business to carry on trading. In economically uncertain times, this may lead to a shift of risks toward IT suppliers.

Oilily case

In these interlocutory proceedings the president of the Amsterdam District Court had to decide whether SaaSplaza, an IT supplier, was permitted to suspend providing services to Oilily, a chain of children’s and women’s clothing stores. Oilily owed an outstanding total debt to SaaSplaza of approximately EUR250,000 and SaaSplaza gave notice of its intention to suspend services until Oilily paid the related outstanding invoices. Oilily then claimed that the IT services should continue to be provided, arguing that any immediate suspension of the IT services would lead to the shutting down of Oilily’s entire administrative and logistic systems, as these all used SaasPlaza’s services platform. All sales and supplies would come to a halt as a result, and trading would become impossible.

The president of the District Court considered that, in principle, non payment of invoices would be a sufficient ground for SaaSplaza to suspend services. However, the president decided that special consideration should be given to the fact that the services rendered were essential for the proper functioning of the company. As a consequence, the president ruled that suspension of SaaSplaza’s services would be unreasonable and that Oilily should first be given the opportunity to prepare itself for the termination of the IT services contract. SaaSplaza argued that it had already agreed to allocate system capacity for other customers and that continuing to provide services to Oilily would require substantial additional investments (far exceeding any sum it would be able to recoup from Oilily), but this argument was rejected. The president agreed that SaaSplaza could not be required to make loss-making investments but stated that SaaSplaza had not shown enough evidence in that respect. Moreover, Oilily had offered adequate security to SaaSplaza for payment of four weeks additional services (but not for any of its previous outstanding payments). SaaSplaza was therefore ordered to continue to provide services for fourteen (14) days.

The Oilily case contrasts sharply with another case from 2009 in which an IT supplier simply pulled the plug on IT services to its customer, an energy supplier. The customer was then left without access to email, internet or hosted applications. The energy supplier owed some EUR1.3 million in unpaid invoices and the IT supplier suspended providing its services until a sufficient solution was agreed. The supplier later commented that, while this may have been unethical, it was an approach that worked.

Suspension of performance

The issue of suspension of performance has become more and more relevant as it is a forceful measure to ensure payment. Under normal circumstances, it is a measure that can be easily put into action in The Netherlands.

Under Article 6:52 of the Dutch Civil Code, a creditor is entitled to suspend the performance of its obligations until its claim is satisfied, if there is sufficient connection between the claim and the obligation to justify such suspension. Such a connection may be assumed in the event that the obligations from both parties result from the same legal relationship (e.g. the rendering of services against payment of a fee) or from regular previous dealings between the parties. Normally, this requirement is met without difficulty. Only in exceptional cases will suspension in such cases not be permitted. These are cases, for example, where suspension of performance is deemed to be contrary to the standards of reasonableness and fairness.

The question arises whether the measure of suspension is now less readily available for IT suppliers following the Oilily case decision. Usually, IT suppliers have an operational position of power in their customers’ organisations. This is all the more so where IT has been outsourced completely and/or otherwise functions externally (e.g. where the supplier provides SaaS or cloud computing services). In the event of customer insolvency, the IT supplier, although legally not normally granted any preferential position as a creditor, may use its operational position of power to enforce a higher preferential rank over other creditors.

The Oilily case highlights that the test of reasonableness and fairness may indeed lead to a limiting of IT suppliers’ statutory right to suspend the provision of their services. The Dutch legislator may expressly lay down such limitations for IT suppliers in the proposed new Dutch Bankruptcy Act (Voorontwerp Insolventiewet), providing for specific regulations on suspension of performance and termination of contracts in the event of insolvency.

The proposed new Bankruptcy Act

According to the Oilily case, in certain circumstances, an IT supplier is not permitted to suspend their services without giving a reasonable period to the company to prepare for such suspension. These circumstances occur when the services are of such importance to the customer that, without the services, the customer would be unable to continue their business. In return, the customer should provide adequate security for the provided services during this period.

It seems that the court anticipated the proposed new Bankruptcy Act, under which, a supplier of services that are necessary for the continuation of a business, such as an IT supplier, can be denied the right to suspend performance or terminate an agreement with an insolvent debtor. In a ‘cooling-off’ period of up to three months after the declaration of insolvency, these rights are restricted. This new article is based on Articles 37b and 237b of the existing Bankruptcy Act, which relate specifically to the supply of gas, water, electricity and heating. The idea behind the proposed changes is to extend this to apply to all services that may be essential to the continuation of a business. In the explanatory notes to the proposed new Bankruptcy Act, IT services are explicitly included in this category. The goal is to prevent certain creditors achieving a de facto preferential position over other creditors and also to enable the insolvency trustee to restart the business of the debtor. As this will be mandatory law, any contractual terms to the contrary may be rendered ineffective during the cooling off period.

Conclusion

The position of operational power enjoyed by IT suppliers seems to trigger a higher responsibility for IT suppliers towards customers in financial difficulty or customers that have become insolvent. Under certain conditions, the IT supplier may be obliged to continue its services, even though the customer has not paid for the delivered services. This will have severe consequences for the legal position of the IT supplier. As a result of these legal developments, the IT supplier will lose an important leverage to enforce payment. Furthermore, during the period that the IT supplier is obliged to continue its services, the IT supplier will not be able to serve new (paying) customers instead. This way, the IT supplier may run the risk of not only ending up with unpaid (but rendered) services but also with the danger of losing potential profit-generating customers. Therefore, it will become more and more important for the IT supplier to monitor its customers closely and to act upon non-payment earlier. Should a customer get in financial difficulty, it may be more likely that the IT supplier will want to amend contractual arrangements or let the customer go altogether before the amount of unpaid invoices becomes substantial or the supplier is faced with an insolvent customer. Against the background of the Oilily case and the proposed legislation, greater flexibility may be required in IT contracts in order to address these issues.