No work performed during lock-down and still get paid!

Slowly but surely, COVID-19 related rulings are trickling in. With that, it is becoming increasingly clear how judges are allocating the risks of the COVID-19 outbreak. In other words, about who is actually footing the bill. So too in cases where wholesalers and other DIY companies have contracts with their suppliers. For example, how is the pain shared between a hardware store that has a long-term contract with a cleaning company in which a fixed price is agreed upon for the cleaning of all physical hardware stores? After all, the construction market in question has an interest in a reduced purchase of cleaning services, while the cleaning company would prefer not to tamper with the agreements. A telling ruling was recently (Amsterdam District Court, Sept. 1, 2020) between a cleaning company and a hotel.

COVID-19 and unpaid invoices

The parties had entered into an agreement under which the cleaning company would provide cleaning services for the hotel for a certain period of time. Following the COVID-19 outbreak and in connection with the intelligent lock-down - it was still the first at the time - the hotel was forced to temporarily close its doors in the spring of 2020. It communicates to the cleaning company that cleaning services were no longer needed during the closure. The cleaning company claims payment of over EUR 212,000.00 in outstanding invoices for cleaning services performed during the closure.

Who pays the bill?

The case ends up in court. There the parties argue about whether they agreed that the hotel would pay a fixed amount per month for the cleaning work, regardless of the amount of cleaning work performed. The cleaning company believes so, while the hotel believes that the parties agreed that they would only pay for the cleaning work actually performed. Based in part on the wording of the agreement, the court ruled that the hotel was not obligated to pay the outstanding invoices. So far, the case appears to be, at its core, a conducted discussion about interpretation of a contract provision. Such discussions are commonplace. More interestingly, the court added a consideration "for the sake of brevity.

Unforeseen circumstances

The court ruled that, even in the event the parties had agreed on a fixed amount per month, the hotel would likely be able to successfully invoke Section 6:258 of the Civil Code. That is a legal provision that allows a contract to be broken open with reference to so-called unforeseen circumstances. In other words, even if the parties had agreed on a hard payment obligation, the hotel is not left empty-handed. It can, according to the judge in this case, probably successfully ask the court to modify the effects of a contract or dissolve it in whole or in part.

Revenue decline

The judge in this case arrived at this judgment based in part on the decline in revenue the hotel faced (as much as an expected 86% decline in revenue versus 9% from the cleaning company). This case demonstrates that judges are lending a helping hand to parties who have been squeezed as a result of the COVID-19 outbreak.

Tips for wholesalers and other DIY businesses at COVID-19 time

Based on the aforementioned court ruling, it can be tentatively concluded that wholesalers and other DIY companies do not necessarily have to continue paying their suppliers, such as cleaning companies, in full while the physical stores are compulsorily closed. In some cases, an appeal to unforeseen circumstances may give them relief. That appeal is more likely to succeed if there is a loss of sales due to the COVID-19 measures implemented by the government.

At the same time, we must remember that we have been living with COVID-19 by necessity for quite some time. I can well imagine that judges are increasingly reluctant to break open contracts on contingency grounds the longer COVID-19 has been among us. After all, the longer we have been facing COVID-19, the more market participants have been able to anticipate COVID-19, the less likely there will be "contingencies. Against that background, the advice is to regulate, at least for new contracts, how the risks of a subsequent lock-down will be distributed. If parties do not make arrangements, this could easily have financially detrimental consequences for wholesalers and DIY companies by requiring them to continue paying their suppliers.

I am regularly asked by wholesalers and other DIY companies how they can contractually arm themselves in COVID-19 times. My first advice is to have the general terms and conditions adjusted, for example by including that a mandatory closure of physical stores due to government COVID-19 measures is or is not (depending on which party has to perform) a force majeure situation. My second advice is to enter into discussions with suppliers and buyers about ongoing contractual obligations back and forth and how they relate to sales trends on both sides. After all, making good and reasonable mutual agreements prevents (lengthy) legal proceedings and that is the last thing that wholesalers and DIY companies need at the moment.

Need a brief sparring session on current or future contractual obligations? Then get in touch.