The FD of 22 February (article) reported that Albert Heijn is imposing a coronavirus fine on its suppliers. The fine is payable if the supplier fails to deliver sufficient quantities as agreed, even if the shortfall is due to the coronavirus or to government measures resulting from the pandemic.
The question is whether the fine is legally valid and whether AH can enforce it.
The answer to the question of whether the coronavirus fine is legally valid is, in principle, ‘yes’. Under Dutch law, parties are free to agree on whatever they wish. This is known as ‘freedom of contract’.
However, there are also limits to freedom of contract.
A supplier could argue that the circumstances constitute an abuse of position. However, this is a high threshold to meet.
In any event, the supplier will have to demonstrate that there is a high degree of dependence on AH for its business operations. In addition, the supplier will, amongst other things, have to demonstrate (a) that AH is aware of this dependence and (b) that AH could reasonably have understood that, under normal circumstances, the supplier would not have agreed to the penalty.
If the supplier can demonstrate that the requirements for a claim of abuse of circumstances are met, the penalty clause could be set aside.
In certain cases, invoking the penalty clause may be unreasonable. Examples include government measures resulting from the coronavirus or where a party engaged by the supplier is unable to deliver due to, for instance, a fire.
Although such circumstances do not constitute force majeure under the terms of the contract, the supplier may ask the court to rule that force majeure can nevertheless be invoked. Here too, the bar is set high for the supplier. Circumstances that may help the supplier to successfully invoke the principles of reasonableness and fairness include (i) the supplier being heavily dependent on AH as the client and (ii) the terms and conditions not being negotiable.
If AH can invoke the penalty clause, the supplier must pay the penalty. Can the supplier still do anything about the amount of the penalty?
The supplier can ask the court to reduce the amount of the penalty. A reduction in the penalty would mean that the supplier would have to pay no penalty, or only a very small amount.
The court cannot simply reduce an agreed penalty. This has been confirmed in a recent ruling by the Supreme Court.
Only where an agreed penalty leads to an excessive outcome may the court decide to reduce it.
The following factors, amongst others, are taken into account in making this assessment:
The mere fact that the actual loss suffered differs from the amount of the fine is insufficient grounds for reducing it. Consequently, a substantial case must be made before the court will consider reducing the fine.
Factors that may help the supplier in a successful appeal for a reduction of the agreed penalty include (i) the supplier being heavily dependent on AH as the client, (ii) AH being a large party and the supplier a (much) smaller party, and (iii) the terms and conditions not being negotiable.
For the supplier, it is not a foregone conclusion when AH invokes the agreed penalty for failure to fully meet the supply obligation. The supplier has various options for challenging the penalty.
Whether challenging the penalty is commercially sensible is certainly a question the supplier must ask themselves. After all, avoiding having to pay a penalty could result in the end of the business relationship.
If you intend to agree to a penalty clause, or if you are faced with a contracting party invoking a penalty clause, do seek timely and expert advice.