Suspension of SaaS-contracts in the event of non-payment under Dutch law
In a short period of time the economic mood has evolved drastically due to the coronavirus: in the beginning of March 2020, the focus was on collaboration, transactions and new projects. However, in that same month, the central question became what legal measures can be taken during the corona crisis. No one was prepared for this situation, which requires solidarity and a helping hand in managing the crisis as effectively as possible.
One of the themes that we are now dealing with in the Netherlands on a daily basis concerns the suspension of digital cloud services such as Software as a Service (SaaS). Digital services often play a crucial role within a company. What happens with your business if the (SaaS) service provider suspends the (SaaS) service because of non-payment of invoices? Is this a real threat and what are the consequences?
Suspension of cloud services: is that possible and allowed under all circumstances under Dutch law?
Many organizations make use of an IT service provider in the context of their business applications and processes. This includes for example online booking applications, the digital office environment, planning and logistics software, the accounting software etc. The IT service provider provides a monthly invoice for running the relevant services and (software) applications.
As soon as the company is in default with the payment of the services, under Dutch law the service provider usually has the legal or contractual right to suspend the cloud services. In short, this means that the digital service will be (temporarily) stopped until payments are being made again. This involves a far-reaching measure. Especially when it concerns business-critical processes that require the support of the IT service provider. Such organizations will therefore most likely think twice before leaving the IT provider’s invoice unpaid.
Yet there are situations that leave the SAAS-customer with no other option. The corona crisis, for example. The revenue flow for companies in the restaurant, hospitality and travel industry has (almost) come to a complete stop. Whereas the costs continue to mount up.
May cloud services be suspended under circumstances like these? Or should the IT provider observe certain Dutch law safeguards?
The Dutch legal framework concerning the right to suspend
The starting point is that suspension without reason is not allowed. First, there must be an invoice that is due and payable under Dutch law. This means that the customer is late with the payment of an invoice. Secondly, there must be “sufficient coherence” between the claim and the (to be suspended) obligation (i.e. the IT service). This means that only the unpaid IT services may in principle be suspended. Third, performance should not be permanently impossible.
Anyway, back to the main question: If, in principle, the IT supplier is entitled to suspend, does this imply that he is allowed under Dutch law to actually invoke that right under all circumstances? The answer is: No, it is not. As mentioned, a suspension is a powerful leverage. In certain circumstances, such measure may therefore be unlawful because it is considered disproportionate. If the complete virtual office environment goes black immediately a few days after expiry of the payment term, that will not be considered proportionate. The same would apply when the majority of the invoice has been paid, but the VAT was not included.
The damage a company may suffer due to the suspension of IT services can be significant. Especially when it involves services that are essential for business continuity. In that respect, the IT service provider has a legal obligation to limit the damage as much as possible.
Unlawful suspension in the event of non-payment
The Oilily / SaaSPlaza-case demonstrates that even in default situations, a suspension may still be unlawful. SaaSPlaza, a cloud service provider who enabled Oilily to record its worldwide sales, supplies and stock supply, announced the suspension of services after Oilily was granted a suspension of payments. This left SaaSPlaza with unpaid invoices in the amount of roughly 200,000 euros. Although the District Court of Amsterdam considered that all conditions for the lawful suspension had been met, SaaSPlaza was not allowed to suspend the cloud services due to the circumstance that these services were essential for the continuity of Oilily’s business operations. Instead, the judge proposed a pragmatic solution: SaaSPlaza was ordered to continue the cloud services for a few months so that Oilily was given the opportunity to phase out the dependence on these services. In addition, (the trustee of the now bankrupt) Oilily had to make an advance payment for receiving the IT services over this period.
Courtesy in times of corona?
Last week (March 26, 2020) the Dutch government announced that tenants who are no longer able to pay the rent due to the corona crisis, may not be evicted from their homes by the landlords. An interesting development, also in view of SaaS or other cloud services. After all, you can argue that an IT service, essential for the company’s business continuity, may not be suspended or terminated by the IT service provider simply because the customer is temporarily unable to pay its invoices as a result of the corona virus. In this respect, under Dutch law, the company could rely upon unforeseen circumstances for this default situation. To date, the Dutch courts have been reluctant to grant such an appeal, however, the current corona crisis is an exceptional situation. Similar as to the Oilily case, in times of corona a judge may seek for a pragmatic solution without suspension, even if the conditions for suspension are met.
Tips and attention points regarding suspension under Dutch law
From the perspective of the IT service provider:
- Take into account proportionality and the interests of the customer company;
- Compare the default against the (business-critical) nature of the IT service;
- Provide the customer company with a written notice of default thereby warning him for the potential suspension of the IT service before actually invoke the right to suspend;
- To avoid a damage claim for wrongful suspension, consider the possibility of other – less intrusive – measures, such as for example, temporarily not providing support, or temporarily disabling certain functionalities.
From the perspective of the customer company:
- Assess whether there exists a default of creditors because this may deprive the IT supplier of the valid invocation of the right to suspend the IT service;
- Avoid the so-called vendor lock-in and assess whether certain IT services can be provided by multiple IT service providers.
Would you like to know more about the right to suspension, or do you have another IT related question, do not hesitate to contact Chantal Bakermans.