An IT project that runs late is a nuisance. But what can you do if your supplier structurally fails to deliver, stops responding, or hands over a system that does not meet what was agreed?
The consequences can be considerable: business processes grind to a halt, deadlines towards your own customers are missed, and sums already paid are at risk. This article sets out the legal options available to you: claiming performance, serving a notice of default, suspending your payments, rescinding the contract, claiming damages and bringing summary proceedings. It also covers what you can do if the supplier is heading for insolvency.
Claiming performance
You do not have to move straight to rescission when an IT supplier fails to deliver. You can also claim performance: the supplier must then still do what was contractually agreed. That may involve delivering software, installing a system, or handing over source code and data. The statutory basis is Article 3:296(1) of the Dutch Civil Code, under which a party obliged towards another to give, do or refrain from something may be ordered by the court to render that performance.
Claiming performance is worthwhile above all where the project is well advanced and continuing the relationship still seems feasible, or where an alternative supplier is hard to find. Record as specifically as possible what the supplier must deliver and by when.
If the supplier is in fact no longer able to perform, for instance because of insolvency or because essential knowledge and resources are lacking, a claim for performance offers little prospect. Rescission combined with damages is then the more obvious route.
Notice of default and default
For rescission and for certain claims in damages, it is in many cases necessary that the supplier is in default. That is not always so: the law provides exceptions, for instance where a strict deadline applies or where the supplier has already made clear that it will not perform.
Where no exception applies, default arises through a written demand giving the supplier a reasonable period for performance. That is the notice of default under Article 6:82(1) of the Dutch Civil Code. What counts as a reasonable period depends on the nature of the performance: a few days may suffice for fixing a bug, whereas completing a migration is another matter. A vague or unreasonably short period may mean that default does not validly arise.
A workable notice of default contains at least:
- a description of the failure;
- a reference to the contractual obligation you are relying on;
- a clear deadline for remedy or delivery;
- a statement that the supplier will be in default if performance is not forthcoming;
- where appropriate, an announcement of further legal steps.
The exceptions are set out in the law. Article 6:82(2) provides that a written notice holding the supplier liable suffices where performance is temporarily impossible or a reminder would be pointless. Article 6:83 lists the situations in which default arises by operation of law, including on expiry of a strict deadline or where the supplier itself states that it will not perform.
Suspending your payment obligation
If the supplier does not deliver, you may be able to suspend your own payment obligation. You then withhold payment of an outstanding invoice until the supplier performs. There must, however, be sufficient connection between your payment obligation and the supplier's failure; where both obligations arise from the same IT contract, that connection is generally present under Article 6:52 of the Dutch Civil Code.
Suspension is not a licence to stop all payments. The measure must match the failure and be proportionate. Suspend too much or for too long and you risk being in breach yourself. Announce the suspension in writing and explain which failure you are relying on.
Example: "As the agreed delivery of module X did not take place on [date], we are suspending payment of invoice [number] until you have remedied this failure. This is without prejudice to our other rights, including the right to damages and to rescission."
Rescission and repayment
Rescission is not the same as termination by notice. Rescission concerns a failure to perform the contract and aims to unwind the contract wholly or in part. Termination by notice, by contrast, ends the contract for the future, is founded on the contract itself or on its nature, and does not require any failure.
Where continuing the relationship is no longer worthwhile, rescission may be an option. Article 6:265(1) of the Dutch Civil Code grants that power on any failure, unless the failure, given its special nature or minor significance, does not justify rescission. As long as performance remains possible, the power arises only once the supplier is in default; once again, the notice of default is the pivot.
After rescission the parties are in principle released from obligations not yet performed. What has already been delivered or paid must, where possible, be reversed. This restitutionary obligation is laid down in Article 6:271. An advance payment therefore qualifies for repayment to the extent that no usable counter-performance stands against it. For clients who paid a substantial sum at the start of an implementation project, that is often the most important foothold.
Damages
Rescission does not automatically result in compensation for all loss. In addition to the restitutionary obligations, Article 6:277 of the Dutch Civil Code confers a right to compensation for the loss you suffer because the contract is rescinded rather than performed by both parties, the so-called positive contractual interest. You must, however, sufficiently substantiate that loss and its connection with the failure.
In practice the heads of loss vary:
- additional costs of a replacement supplier;
- costs of remediation or further investigation;
- internal hours spent on the failed project;
- delay and project costs;
- lost turnover;
- any reputational harm.
Be cautious with lost turnover and reputational harm: these heads are generally harder to prove than direct costs, and many IT terms exclude consequential loss altogether. From the outset, therefore, keep all relevant documents: the contract, planning documents, emails, invoices, timesheets, remediation quotes and quotations from alternative suppliers. The more concretely the loss can be calculated, the stronger your claim.
Summary proceedings
If you need relief quickly, summary proceedings may offer a way forward. That is conceivable where your business continuity is at risk, an important deadline is approaching, or the supplier appears financially unstable. The basis is Article 254 et seq. of the Dutch Code of Civil Procedure.
In summary proceedings, provisional relief may in the right circumstances be sought, such as an order to deliver, to hand over source code and data, or to repay a sum. The court does not give a final ruling on all points in dispute in these proceedings. Summary proceedings can nonetheless provide a rapid solution, and in practice often serve as a means of pressure, until the matter is possibly dealt with in proceedings on the merits.
If the supplier becomes insolvent
In an insolvency, recovery against the supplier is uncertain. A claim for repayment or damages will generally have to be recovered from the estate as an ordinary unsecured claim, alongside those of other creditors. It is also uncertain whether ongoing work will be continued: in practice the trustee in bankruptcy will often not take over a development or delivery obligation.
If you do not hold the source code, you will equally be unable to arrange maintenance or further development independently. For business-critical bespoke software in particular, a supplier's insolvency can therefore hit your own operations directly.
Source code escrow: what to arrange in advance
For bespoke software it is therefore important to make arrangements about continuity in advance. Source code escrow can help: the source code is deposited with an independent escrow agent and is released when a contractually agreed event occurs, such as insolvency or a serious failure to perform.
An escrow arrangement is only useful if it is specific. Work through at least the following points:
- Who acts as escrow agent?
- Which version of the source code is deposited?
- How often is the deposit updated?
- Which events trigger release?
- Do you also obtain a right to use and modify the code after release?
- Are documentation, build instructions and the necessary credentials included?
A deposit containing outdated code, without documentation or without an accompanying right of use, offers little protection in practice.
Checklist for a non-delivering IT supplier
- Review the contract, the planning and the acceptance arrangements.
- Map out specifically what has not been delivered, or delivered late or defectively.
- Gather relevant correspondence, invoices and project documentation.
- Check whether a strict deadline or a notice-of-default provision applies.
- Send a clear notice of default where required.
- Assess whether suspending payment is legally justifiable.
- Calculate the potential loss and preserve the supporting evidence.
- Check whether source code escrow or another continuity arrangement exists.
- Assess whether summary proceedings are necessary.
- Make a deliberate choice between performance, rescission and damages.
The right step depends on the contract, the seriousness of the failure and the supplier's financial position. If in doubt, have a proposed notice of default or suspension reviewed in advance: a defective notice or an overly broad suspension can weaken your position rather than strengthen it.
In closing
The legal route depends on exactly what the supplier is failing to do, whether remedy is still possible, and how great the risk to your operations is. Sometimes claiming performance is the obvious course; in other cases suspension, rescission or summary proceedings are more fitting.
Law & More helps you assess your contractual position, draft a notice of default and determine your litigation strategy. We also advise, and where necessary litigate, on threatened insolvency and on disputes about source code and software continuity. Please feel free to contact us for a no-obligation discussion of your situation.
Frequently asked questions
Below we answer the questions we are asked most often on this subject.
What can I do if my IT supplier fails to deliver?
You can claim performance, serve a notice of default, suspend your payments, rescind the contract, claim damages or bring summary proceedings. Which route fits depends on the seriousness of the failure, the content of your contract and the supplier's financial position.
When should I send a notice of default?
As soon as it becomes clear that the supplier is not performing, or not performing properly, and no strict deadline has been agreed. Without default you will in many cases have no right to rescind or to claim damages. Describe in the notice the failure, the obligation you rely on and a reasonable period for remedy.
Can I suspend payment of invoices?
Often you can, provided there is sufficient connection between your payment obligation and the failure; where both arise from the same IT contract, that is usually the case. Suspension must be proportionate and announced in writing. Suspend too broadly and you risk being in breach yourself.
When can I rescind the contract?
On any failure, unless it does not justify rescission given its special nature or minor significance. Where performance is still possible, the power arises only once the supplier is in default. After rescission, performances already rendered must be reversed where possible.
Can I claim damages in addition to repayment?
Yes. Alongside restitution you are entitled to compensation for the loss you suffer because the contract is rescinded rather than performed. You must substantiate that loss and its connection with the failure; direct costs are generally easier to prove than lost turnover or reputational harm.
When are summary proceedings worthwhile?
Where you have an urgent interest, for instance a threatened halt to operations, an approaching deadline or signs that the supplier is financially unsteady. The court can then grant provisional relief, such as an order to deliver or to hand over source code and data. It does not give a final ruling on all points in dispute.
What happens if my supplier becomes insolvent?
Your claim for repayment or damages will generally become an ordinary unsecured claim against the estate, with limited prospects of recovery. The trustee in bankruptcy usually does not continue ongoing development or delivery work. Without the source code you also cannot arrange maintenance or further development yourself.
How does source code escrow work?
The source code is deposited with an independent escrow agent and released on a pre-agreed event, such as insolvency or a serious failure to perform. Pay attention to how current the deposit is, the release triggers, the right to use and modify the code after release, and whether documentation and build instructions are included.
What evidence should I keep?
The contract, planning documents, acceptance arrangements, emails, invoices, timesheets, remediation quotes and quotations from alternative suppliers. Also record in writing, and as factually as possible, what was agreed and what has been performed. The more concrete your file, the stronger your position.
When should I involve a lawyer?
In urgent situations, where the supplier's insolvency is looming, or where a substantial financial interest is at stake. If in doubt, it is also better to have a proposed notice of default or suspension reviewed beforehand, since a mistake at that stage can undermine your later position.
Do you have a dispute with an IT supplier, or would you like an IT contract reviewed? Our IT lawyers are happy to help.
