Smartkas' UK vertical farm is bankrupt, its Amsterdam vertical farm has been dismantled and this summer the company was evicted from the premises with rent arrears. Yet Smartkas itself remains positive about the future, and the potential of vertical farming.
The company has pointed to the suppliers of cultivation systems as the root cause of its problems, accusing them of delivering substandard services. Several judges are now handling these disputes. The latest hearing took place last month when Smartkas and its supplier, Artechno, faced off in court on 25 September 2024. "We have a lot to discuss," the judge stated, signaling the complexity of the case.
In 2021, Smartkas Project Finance and Artechno Growth Systems partnered to build a vertical farm in Amsterdam. The agreement involved the delivery of three large climate cells, but Smartkas claims these were delivered late and did not function properly. As a result, Smartkas is seeking compensation from the supplier and the dissolution of the contract. However, Artechno argues that the contract outlined a total of 10 climate cells for the project, and they are demanding payment for the outstanding invoices. Additionally, Artechno has expressed dissatisfaction with the installation process, stating that parts have gone missing.
Vertical farming boom
For Smartkas, this is not the only lawsuit currently underway. Although the Amsterdam-based nursery was announced in 2021, the company officially began its journey in 2020, during the vertical farming boom. A year later, Smartkas raised millions through a Green Bond, a popular financing method that combines a standard bond with green certification, typically used for funding sustainable projects. With the Green Bond, along with its own capital and investments from others, the company aimed to establish vertical farms in multiple countries. The Amsterdam project was set to be followed by a second "turnkey" vertical farm for strawberries in Harlow, just north of London, UK.
Like its Amsterdam farm, Smartkas set ambitious goals for the new project, aiming for it to become the largest vertical farm in Europe, potentially even the world. The farm, located near London, was designed to grow thousands of kilos of strawberries annually to meet high demand. Spanning 2,250 square meters and standing 12 stories high, it would be fully automated, all in line with the company's mission to help end global food insecurity.
The Amsterdam facility is no longer operational, with Smartkas blaming the failure on faulty lighting systems supplied by Parus Europe. The lawsuit between the two parties began in March 2023, shortly after the UK nursery received its first plants, only for production to halt soon after. In response, Smartkas enlisted loss adjusters to assess and document the defects in the system.
UK bankruptcy
Unlike in the Netherlands, Smartkas' UK branch has been declared bankrupt, a process set to conclude in February 2024 at the request of United Gas & Power, the company's gas and electricity supplier, due to missed payments. A curator has since been appointed, and according to CEO David Meszaros, the financial issues following the bankruptcy have now been resolved.
The curator explains that Smartkas B.V. is the largest creditor of the bankrupt British company Smartkas UK as money was borrowed from the Dutch branch. He also said the lack of interest payments on the Green Bond obligation, as reported previously, have been resolved. Of the 25 million previously raised from the Green Bond, only 4.2 million is said to have been issued. Inquiries revealed that a bond could be downgraded due to missed interest payments.
David: "We had a rough time because of the failure of the suppliers of the projects. Because of this, we sued the responsible suppliers. We managed to significantly reimburse the debts caused by this, while now looking ahead to subsequent projects after restructuring."
Holding
Regardless, the lawsuits are still ongoing, and this Wednesday morning in The Hague, the judge asked what Smartkas and Artechno are anticipating as they almost disagreed on any issue. "It seems you're holding each other in a chokehold," the judge noted.
Shortly, it became pretty clear that the judge was not going to give a final verdict on Wednesday morning. Avoiding further legal proceedings also seems all but impossible. The conflict to be ruled on now no longer revolves solely around the disagreement over the delivered system, but has become even more complex because of Smartkas' seizures from Artechno.
Smartkas was evicted from its premises in Amsterdam because of rent arrears. A point of dispute is that Smartkas sold a cooling system from the vertical farm, and the court is asking how to deal with it. Smartkas claims that outside this system, everything was left on the property. On the day Smartkas left, the team took photographs and film footage to prove that the items were left behind. However, the disputed items do not appear in the footage. "Just out of sight," Smartkas' lawyer said. Artechno has since gained access to the Amsterdam facility and is disassembling and taking the system with it.
The court is now looking into how the two parties intend to reach a financial settlement, given parts of the supplied system appear to no longer be present and knowing that the quarreling parties are unlikely to agree on the value of the system.
'Semi-consumer party'
35 minutes deep into the court case, the judge comments, "Now, let's start hearing the case," as he commences the discussion of the contract. Smartkas says that there would be a turn-key system consisting of three climate cells, while Artechno claims that it would be 10 cells, as stated in drawings.
The financial issue plays a major role, as Smartkas was surprised by an 11-million euro offer for the second phase of the project, whilst it first was indicated that this would be the total budget. The lawyer forthrightly portrays Smartkas as a "semi-consumer party" that entered the market blank looking for help from experts.
The judge also questions the retention of title, which is unclear between the four contracts. What is that on? On everything, according to Artechno. Not true, according to Smartkas. "Once all the components combined become one, together with components from other suppliers, one system is created and the separate reservations expire." The judge comments with surprise: "The retention of title in agreement two is different from the other three. "This is more lien, while in the other three, it is the classic retention of title."
Completion
Moving on to the issue of completion, was a deadline ever agreed upon? According to Smartkas' attorney, no. The contract states that the timeline would be set in consultation. He refers to presentations and emails surrounding the July 26, 2021 contract, in which the supplier estimated a timeframe of roughly six to nine months. Smartkas assumed they could begin growing lettuce after this period. However, it was during this time that the first significant disputes arose between the parties, leading to summary proceedings. New agreements were made, including those regarding payments, and a new completion date for the system was set.
During the COVID-19 crisis, logistical challenges made it difficult to source parts, causing the 2022 deadline to be pushed back several times. Eventually, Artechno claims the system was delivered on July 20, 2023, but Smartkas strongly disputes that the agreed delivery occurred. According to Smartkas, Artechno's earlier schedules indicated that the components would be delivered first, followed by a full system commissioning, which was to take nine days.
During the July 20, 2023 examination of the system, only Smartkas' Operations Manager was present, as the directors were absent. He refused to sign off on the delivery, stating that it could not yet be considered complete. "There had already been a lot of back-and-forth, so afterward I wanted an agreement from both sides on a list of handover points," explained the CEO of Artechno. "The Operations Manager wasn't authorized by the Board to sign, even though he agreed that the system had been delivered. Now, the Board is using this to claim that delivery never occurred. I requested that everyone present at the handover write down their names to confirm the system had been delivered." A dispute over payments then arose, with Smartkas refusing to pay the final 5% of the invoices, which were due upon delivery of a fully operational system.
Towering million-dollar claims
A brief recess follows. After just under fifteen minutes, the lawyers return to continue their arguments and make their final case. Smartkas' lawyer raises multiple issues, including problems with the climate control and automation systems: "The system never reached the promised capacity, and the lettuce emerged damaged with tip burn. In the end, only 2.5% of the expected yield was achieved during the trials." Graphs, according to the lawyer, clearly demonstrate that the system failed to perform as intended. He added that Smartkas would have preferred nothing more than a fully functional system for growing lettuce.
Artechno's tone is equally sharp. They claim that Smartkas had made no arrangements to sell the produce from their cultivation project and had no real intention of growing crops. Additionally, Artechno argues that the staff at the Amsterdam facility "had no idea what they were doing." The company does not expect to receive further payment, as the loss on the Amsterdam project has already been written off. Now, Artechno's focus is on minimizing their losses and keeping all further claims at bay.
The Westlanders also note that the case brought by Smartkas against Artechno follows a familiar pattern, similar to the one filed against another supplier, Parus Europe. "The Site Acceptance Test (SAT) is used as a trump card; the final invoices remain unpaid, and once again, the claim is that the system doesn't work. This is Smartkas' modus operandi: making massive multi-million dollar claims against suppliers while withholding payments themselves," they assert.
Smartkas says it wants nothing more than to successfully grow lettuce and strawberries. That was and still is its objective. But indeed, Smartkas also pointed out in the UK nursery case that the system supplied would be garbage. "With that installation, we could never have achieved the promised harvest," David stated earlier, which led him to decide against paying the latest invoices. He pointed to consequential damages resulting from contracts he could not fulfill, and subsequently seized the aforementioned cultivation companies. Parus Europe dismisses these claims, asserting that planting was completed in December and that Smartkas was already planning to file a claim by January. They further noted that the power outage occurred just a few weeks later.
"To form an opinion about the system, you need to grow first; you can't just turn off the system before the first harvest," Smartkas argues as they seek to exit the contract. Meanwhile, Parus Europe insists on receiving payment for the final invoices. The Dutch court has repeatedly postponed its ruling on the case.
Final warning
In this case, a swift ruling appears to be a distant hope. Ultimately, the judge decides to review photographs submitted last-minute by Smartkas and allows both parties to provide a final written statement regarding the disputed settlement agreements. "You've managed to create quite a puzzle out of this," he remarks.
The judge warns that a ruling will be issued in two weeks, unless both parties can resolve their issues without further court intervention. "After all, this is starting to look like just rubbing in a stain," he adds with a final warning. "I will focus on the exhibits and not on everything surrounding them."
Pending the ruling, Artechno can continue with its ongoing projects. Among other achievements, they recently recorded positive results in a tomato propagation project. Additionally, a successful operation is already underway in Canada.
Despite the bankruptcy, bond adjustments, lawsuits, and eviction in Amsterdam, Smartkas is keeping busy. David expresses his belief in the potential of vertical farming "in the right context." However, in Brazil, where they currently operate, the company does not plan to establish a vertical farm. Instead, in the state of Minas Gerais, Smartkas intends to set up a greenhouse for bell pepper cultivation on 66 hectares of land, alongside open cultivation. "We are currently awaiting a soil analysis," the company stated.
David emphasized that the lawsuits initiated by Smartkas do not threaten the company's continued existence. "This marks a new beginning for us after a challenging period, but we are back on track. We've witnessed our projects go awry, resulting in employee layoffs and millions of dollars in losses, not to mention the opportunity costs we have incurred. Fortunately, we have other projects that would have been completed by now if not for the immense stress and resource demands these issues have created. While our legal team manages the ongoing litigation, we are now focusing on these future projects. We are confident that these cases will conclude positively."