Go Live is no final deadline; first notice of default, then count your blessings

 In IT & Internet

In its judgement of 21 October 2013 the Court of Appeal in Amsterdam pointed out that a contract cannot be terminated (ontbinden) without explicitly serving the other party prior notice of default and setting a final deadline for remedying the shortcoming. “Go Live” is not considered a final deadline, especially not if the PID refers to ‘planned’ and ‘expected’ in this context.

Tycobuiding Services B.V. and InterAccess signed a contract on the implementation of an SAP system. The contract – in English – provided that either party could terminate the contract if performance “remained impossible” (but excluding circumstances beyond that party’s control). It had also been agreed that either party could terminate if the other party did “not fulfill some substantial obligations arising from the Agreement and also after written proof of default in which a reasonable time is given in which to thoroughly comply, remains liable to fulfull Party’s obligations (…) (sic)”. Moreover, if InterAccess “repeatedly and in a continued manner fails to meet the System Availability during the terms of the Agreement and it cannot be required of Customer to continue this agreement, then the Customer (Tyco) may terminate this Agreement (..)”.

This may have been badly formulated in bad English, but all ended well for InterAccess.

Go Live was set for 1 October 2007. This deadline was not met, as happens on a regular basis where IT projects are concerned. Even the courts seem to have noticed this: “it is fact of common knowledge that automation projects may overrun” (District Court of Amsterdam, 7 April 2004). Tyco regarded the Go Live date as a final deadline and terminated the contract without serving prior notice of default and specifying a timeframe for InterAccess to remedy the shortcomings.

The Court of Appeal focusses on the terminology in the PID (project initiation document), which refers to ‘planned start date’ and ‘expected start 2nd half 2007’. These phrases certainly do not indicate a final deadline. The Court points out that parties do not seem to have agreed on a final deadline when entering into the contract. Tyco tries to convince the Court that the Go Live date gradually turned into a final deadline because parties had agreed that the planning could only be changed in mutual consultation (as a PID usually stipulates) and that Go Live is seen as a final deadline in the IT branch. Tyco’s expert witnesses put forward that a Go Live date gradually becomes a final deadline, which parties cannot change without agreeing on alternative measures to be taken. The Court is willing to accept this, but it does not consider this to be relevant for the question whether the Go Live date is a final deadline in the sense of the Netherlands Civil Code. If it is, this means that Tyco, before terminating the contract, should serve a notice of default including a timeframe for InterAccess to remedy any shortcomings.

Tyco also tries to convince the Court it was entitled, pursuant to the principle of reasonableness and fairness,  to terminate the contract without any prior notice of default now that the other party had defaulted. Case law allows this, provided there are sufficient circumstances to support the claim and provided these circumstances can be proven. Tyco does not meet these criteria, as becomes apparent from the Court’s repeatedly using phrases such as “insufficiently clarified” and “insufficiently demonstrated”. Tyco argues that InterAccess failed to meet its obligations and that this was discussed more than once, but it has not explained why it would not have to serve a notice of default. Tyco has also failed to clarify why Tyco could not be expected to remedy the shortcomings (in which case a notice of default possibly needn’t be served). For these reasons, Tyco can not rely on the principle of reasonableness and fairness.

It would have been interesting to see what would have happened if Tyco had actually supported its claim by proving the circumstances as required in case law. In principle late delivery is temporary non-performance: delivery remains possible, but at a later date. The Netherlands Civil Code provides that a liability claim for the consequences of non-performance can be seen as a notice of default and then no further timeframe for remedying the shortcomings is required. Unfortunately, Tyco didn’t plead this option.

Tyco has invoked the contractual stipulations concerning its right to terminate the contract, but these are also rejected by the Court because they have not been substantiated. The question remains what is meant by ‘substantial obligations’ and when there is a ‘continued manner’.

The Court rules, on formal legal grounds, that InterAccess was not in default and that Tyco had no right to terminate the contract. Since the contract has not been terminated in accordance with the law, Tyco will have to continue to pay the € 27,000 monthly instalments and compensation of damages amounting to € 35,000 plus interest. Bad luck for Tyco because the question whether InterAccess breached the contract or not has no relevance whatsoever in this case.

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