IT supplier liability: when are you liable for damage and delay?

An IT supplier is liable for damage and delay when it fails to perform the contract, the failure can be attributed to it and, in most cases, it is in default (verzuim). Whether the client actually recovers its loss then depends largely on the contract and the general terms, which usually cap liability and exclude consequential loss, except in cases of intent or wilful recklessness.

The basis is Article 6:74 of the Dutch Civil Code (BW): every failure to perform obliges the debtor to compensate the resulting loss, unless the failure cannot be attributed to him. This article explains when liability arises, which loss qualifies, how liability caps work, what delay means legally and what clients and suppliers should check.

When is an IT supplier liable?

The supplier is liable if it fails to perform as agreed and that failure is attributable to it. Examples are software that does not meet the agreed specifications, a migration that causes data loss, or a project that is not delivered by the agreed date.

A failure is not attributable if it is not the supplier’s fault and does not count as its risk under the law, the contract or generally accepted views (Article 6:75 BW). This is force majeure (overmacht). Even then, the client may still be able to rescind the contract.

Is a notice of default required?

In most cases, yes. As long as performance is still possible, damages for delay can only be claimed once the supplier is in default (Article 6:74(2) BW). Default arises when the client has sent a written notice giving a reasonable period for performance and that period has passed without performance (Article 6:82(1) BW).

Default arises without notice in three situations under Article 6:83 BW: a deadline for performance has passed, unless the deadline was meant differently; the obligation is to pay damages; or the supplier has said that it will not perform. Where performance has become permanently impossible, no notice is needed at all.

Can the supplier also be liable in tort?

Yes. Under Article 6:162 BW, a party that acts unlawfully towards another must compensate the resulting loss. This mainly matters for third parties without a contract with the supplier, for example customers of the client whose personal data leaked because of a security error.

Which loss qualifies for compensation?

Under Article 6:96 BW, financial loss includes both losses suffered and lost profit, plus reasonable costs to limit the loss and to establish loss and liability. The loss must be sufficiently connected to the failure to be attributed to the supplier (Article 6:98 BW).

Contracts usually distinguish direct loss from indirect (consequential) loss. Direct loss covers, for example, the cost of repairing defective software, the extra cost of a replacement supplier and the cost of establishing the cause of a defect. Consequential loss covers lost profit, missed savings, business interruption and reputational harm, which in practice are often far higher than the contract value.

Standard IT terms almost always exclude consequential loss. Between professional parties, Dutch courts respect such an exclusion in principle. When you negotiate the contract, check the definitions and expressly classify the heads of loss that matter to you, such as business interruption up to a fixed amount, as direct loss.

Does a limitation of liability always hold?

Not always, but usually. Most IT suppliers use the NLdigital Terms or similar general terms, which cap liability per event, for example at the contract value or a multiple of the annual fee, often with an absolute annual maximum. Check which edition of the terms was actually agreed, because older editions remain applicable to contracts that refer to them.

A cap generally offers no protection in cases of intent or wilful recklessness (bewuste roekeloosheid) by the supplier’s management. In addition, a clause in general terms can be annulled if it is unreasonably onerous (Article 6:233(a) BW), although companies that publish annual accounts or employ 50 or more people cannot rely on this ground (Article 6:235 BW), and reliance on any contractual rule fails if that would be unacceptable by standards of reasonableness and fairness (Article 6:248(2) BW). Between professional parties, these thresholds are high.

The general terms must also have been validly agreed and the supplier must have given the client a reasonable opportunity to read them (Article 6:233(b) BW). If it is unclear which terms apply, that question comes first.

What are the consequences of delay?

Delay is one of the most common causes of IT disputes. Whether the supplier is in default straight away depends on how the deadline was agreed.

If the contract sets a date by which the supplier must perform, default arises when that date passes without performance, unless it follows that the date was meant differently, for example as a target date (Article 6:83(a) BW). IT contracts often describe dates as “indicative” or provide that the supplier is only in default after a written notice; in that case, a notice of default with a reasonable period remains necessary.

A notice of default should state precisely what still has to be delivered and by when. Send it in writing and keep proof of dispatch.

What does a penalty clause add?

A penalty clause (boetebeding) obliges the supplier to pay a fixed sum on late or defective performance, for example a percentage of the contract value per week of delay (Article 6:91 BW). The client does not have to prove its actual loss.

The penalty replaces statutory damages, and it is not due if the failure cannot be attributed to the supplier (Article 6:92 BW). The court can reduce a penalty if fairness clearly requires it, but never below the statutory damages, and can award additional damages on top of it in exceptional cases (Article 6:94 BW). If you want to claim loss above the penalty, agree that expressly.

Can the client rescind the contract?

Yes, every failure to perform gives the right to rescind the contract wholly or partly, unless the failure is minor (Article 6:265(1) BW). As long as performance is still possible, rescission requires the supplier to be in default (Article 6:265(2) BW).

Rescission and damages can be combined. Under Article 6:277 BW, the supplier must compensate the loss the client suffers because the contract is rescinded instead of performed. Contractual limitations of liability still apply to that claim.

What should you check as a client?

• Which general terms apply, which edition, and were they validly agreed and provided?
• How high is the liability cap, and is consequential loss excluded?
• Are milestones, deadlines and measurable acceptance criteria recorded, and is it clear whether a deadline is binding?
• Is there a penalty clause, and may you claim loss above the penalty?
• Have you complained about defects within a reasonable time after discovering them (Article 6:89 BW)?
• Have you sent a written notice of default with a reasonable period before claiming damages or rescinding?

What should you check as a supplier?

• Do your general terms apply, and did you give the client a reasonable opportunity to read them?
• Do you keep project records of decisions, change requests and acceptance tests?
• Do you document scope changes in writing, with their effect on price and planning?
• Do you record when the client fails to provide input, decisions or test capacity? This can amount to creditor’s default (schuldeisersverzuim, Article 6:58 BW) and limit your liability for delay.
• Do you report threatened delay immediately and in writing, with the cause?

Which arrangements prevent disputes?

Clear arrangements at the start reduce the risk of a liability dispute. Three instruments are common in Dutch IT contracts:

• source code escrow, so that the client keeps access to the source code if the supplier goes bankrupt or stops performing;
• acceptance test protocols that objectively establish when a delivery is accepted;
• phased invoicing linked to functionality that has been delivered and accepted.

What can we do for you with IT supplier liability?

Our IT lawyers advise both clients and IT suppliers. We can:

• review the IT contract and general terms, including the liability cap and the definition of direct loss;
• negotiate liability, penalty and acceptance clauses before you sign;
• draft a notice of default or a response to one;
• assess whether the supplier is in default and which loss can be claimed;
• prepare a rescission or damages claim, or the defence against it, before the court.

Read more about what an IT lawyer does.

Summary

• An IT supplier is liable for attributable failures to perform (Article 6:74 BW), usually only once it is in default.
• A passed deadline creates default without notice, unless the deadline was meant differently (Article 6:83(a) BW).
• General terms usually cap liability and exclude consequential loss; intent or wilful recklessness of management breaks through the cap.
• A penalty clause removes the need to prove loss but replaces statutory damages unless agreed otherwise.
• Good records of scope, decisions and client input are the supplier’s best defence.

Frequently asked questions