The FD on 22 February(article) reported that Albert Heijn is imposing a corona fine on its suppliers. The fine is due if the supplier fails to deliver sufficiently what has been agreed, even if the failure to deliver sufficiently is due to corona or to government measures due to corona.
The question is whether the fine is legally valid and whether the fine can be enforced by AH.
The answer to the question whether the corona fine is legally valid is, as a starting point, 'yes'. In Dutch law, parties have the freedom to agree on what parties want. This is called the 'freedom of contract'.
However, freedom of contract is also subject to limits.
A supplier could claim an abuse of circumstances. This is a tough test, though.
In any case, the supplier will have to argue that there is great dependence on AH for its business operations. In addition, the supplier will, among other things, have to make it plausible (a) that AH knew about the dependency and (b) could reasonably understand that under normal circumstances the supplier would not have agreed to the fine.
If the supplier can make the requirements for abuse of circumstances plausible, the penalty clause could be annulled.
In certain cases, invoking the penalty clause may be unreasonable. One might think, for example, of government measures due to corona or when a party engaged by the supplier cannot deliver due to, for example, fire.
Despite the fact that such a circumstance does not contractually constitute force majeure, the supplier can ask the court to rule that force majeure can still be invoked. Again, the bar is high for the supplier. Circumstances that may help the supplier for a successful invocation of reasonableness and fairness are (i) that the supplier is very dependent on AH as client and (ii) the terms were non-negotiable.
If AH can invoke the penalty clause, the supplier must pay the penalty. Can the supplier then do anything against the amount of the fine?
The supplier can ask the court to moderate the penalty amount. A mitigation of the penalty would result in no or only a very small amount of penalty to be paid by the supplier.
The court may not simply moderate an agreed penalty. This has been confirmed in a recent Supreme Court ruling.
It is only when an agreed fine leads to an excessive result that the court can proceed to mitigation.
When assessing this, the following factors, among others, play a role:
The mere divergence between the actual damages suffered and the amount of the fine is insufficient to proceed to mitigation. Thus, quite a lot has to be argued before the court gets around to moderation.
What may help the supplier to successfully invoke mitigation of the agreed penalty is (i) that the supplier is very dependent on AH as a client, (ii) that AH is a large party and the supplier a (much) smaller party and (iii) the conditions were non-negotiable.
For the supplier, it is not a done deal when AH invokes the agreed penalty if the delivery obligation is not fully met. The supplier has several options to try to challenge the penalty.
Whether challenging the penalty is commercially convenient is certainly a question the supplier should ask itself. After all, not having to pay a penalty could be associated with an end to the cooperation.
If you intend to agree to a penalty clause or are faced with a contracting party invoking a penalty clause, get timely and knowledgeable advice.