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Notice of default often obstacle in IT disputes

Notice of default often obstacle in IT disputes

For customers of IT systems that do not meet expectations, it is, generally speaking, rather difficult to hold the supplier liable for breach of contract and to terminate the concluded contract. This is applicable even if the supplier has clearly messed things up. There are various causes for this situation.

For instance, demonstrating the requisite failure to perform is often extremely difficult, in particular if the agreed specifications are insufficiently clear or can be interpreted in more ways than one. It is also regularly the case that contractual obstacles exist, notably if the supplier has been able to declare its own general conditions to be applicable. For instance, the in the Netherlands much-used ICT~Office conditions (previously referred to as the FENIT conditions) contain numerous formalities and stipulations that very effectively protect the supplier, so that customers must have well-founded arguments in order to successfully submit a claim.

One formality that is regularly underestimated in practice and thus often forms an obstacle for claims in Dutch IT disputes is the statutory requirement concerning default and notice of default. For both the termination of the contract and the claim for compensation, it is necessary in principle for the supplier to be in default. The Dutch Civil Code (Article 83(a) of Book 6) states that default can automatically arise through the failure to meet an agreed deadline for delivery.

In that case, however, it must be crystal clear that this deadline was intended by the parties as a so-called strict deadline. The supplier’s conditions often contain unpleasant surprises for customers in this regard as well. For instance, Clause 10 of the ICT~Office conditions states that merely exceeding a term or delivery date stated by a supplier or agreed between parties does not in fact automatically cause the supplier to be in default. In that case and also in the case where parties have not agreed a strict deadline, a notice of default is necessary (save for a few exceptions) for the supplier to end up in default. A notice of default is a written demand in which a reasonable period of time is stated for the obligations ensuing from the contract to still be properly fulfilled.

In other words: the customer must grant the supplier a final opportunity to still complete the project in a proper manner. The period of time that it grants to that end must be reasonable in light of all circumstances of the case. Sometimes this can amount to a couple of days; other times it might be as long as six months or even longer.

IT lawyers explaining this to clients wanting to terminate a contract with their supplier usually end up seeing them gasping in disbelief. When customers have finally decided to engage the services of a lawyer, the trust in their supplier has generally long since disappeared. In fact, when they have reached that stage, customers do not want to give their supplier another chance and certainly not if that means that shall take another couple of months. Still, it is a logical requirement, certainly given the drastic nature of a termination of a contract and a claim for damages. Particularly in situations where parties are not communicating optimally with each other, an official last warning can wake up the supplier and perhaps prevent a legal dispute after all.

Dutch case law is replete with examples of IT disputes where customers have not properly dealt with the requirements of default and notice of default. In a judgment by the District Court of Utrecht of 8 July 2009 (see LJN: BJ2078, Rechtbank Utrecht, 236199 HA ZA 07-1677 [in Dutch]), the claims of ASR Vermogensbeheer against Raindrop Information Systems Ltd. were unsuccessful due, among other reasons, to the fact that no proper notice of default had been sent. As a result, the supplier did not end up in default.

It is also evident from this judgment that courts critically test against this requirement. The fact that a client has expressed serious concerns several times in correspondence regarding the progress made on a project is insufficient; a demand must actually be sent stating a specific deadline by which time the project must still be delivered.

In addition, it must be made clear in the letter that the client shall hold the supplier liable if the supplier fails to meet the deadline. This last point has also been found to be rather difficult in practice, because clients do not desire to impair an already difficult relationship with the supplier any further by threatening to submit claims. Nonetheless, this is at some point necessary for preventing a claim from eventually being unsuccessful based on the requirement of default: desperate diseases require desperate remedies.

Theo Bosboom

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