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Coronavirus - Questions raised on commercial contracts performance - France

  • France
  • Commercial agreements
  • Coronavirus - Contractual issues
  • Coronavirus - Country overview

16-03-2020

COVID-19 is hindering performance of commercial contracts in almost every sectors and not only as a consequence of the situation in China, as the outbreak is now spreading on a global scale.

Under French law, a party may have legal grounds to try to avoid being held liable for not performing a commercial contract due to COVID-19 effects in business to business transactions.

Force majeure

French law provides for specific rules applicable to certain sectors which may allow to rely on force majeure to face COVID-19. For public contracts with the State and public entities, the French Minister of Economy and Finances Bruno Le Maire said that COVID-19 will be considered as a case of force majeure for companies, justifying the non-application of penalties in the event of delay in performance of contracts.[1] For air flight tickets, force majeure may be invoked to cancel the travel and obtain reimbursement in certain conditions.[2]

For commercial contracts governed by French law more generally, the force majeure concept may be invoked to suspend or terminate of a contract without incurring any liability, damages or penalties.

Force majeure is defined in Article 1218 of the French Civil Code as an event:

  • which is beyond the control of the obligor;
  • which could not have been reasonably foreseen at the time of the contract execution;
  • the effects of which cannot be avoided by appropriate measures; and
  • which prevents performance of its obligation by the obligor.

If the effects are temporary, the performance of the obligation is suspended unless the delay which may result from this suspension justifies termination of the contract. If the effects are definitive, the contract is automatically terminated and the parties are discharged of their obligations without being liable for damages.

Under French law, it is common for a commercial contract to provide for a force majeure clause including a list of specific events which the parties agree to consider as force majeure events. Outbreaks or epidemies are often listed among these events.

Several hypothesis may therefore be considered, in particular by a supplier facing a force majeure event.

1.    Contract providing for a force majeure clause with express reference to outbreaks

A party affected by COVID-19 effects, such as a manufacturer facing components supply shortages, may have good arguments to rely on such clause in order to justify a suspension or termination of contracts with distributors or customers for instance.

The date on which the contract was executed or renewed should however be double-checked. Indeed, if this date appears to be concomitant or subsequent to the announcement of the outbreak, this may challenge the “unforeseeable” character of COVID-19 for the parties, which would no longer constitute a force majeure.

It seems that the date on which COVID-19 was made public may in itself raise issues as it is quite undefined due to the chronology of the event. Worldwide media started to echo the outbreak early January for China but it was only officially qualified as Public Health Emergency of International Concern (PHEIC) by WHO’s Director-General on 30 January.[3]

2.    Contract without force majeure clause

Even though the contract is silent on force majeure or does not mention outbreaks in the force majeure clause, an affected party may have good arguments to invoke the force majeure concept since it does not need to be expressly stated in a contract to apply. The conditions developed above for force majeure under Article 1218 of the French Civil Code must however be met.

Like in case 1, there may be a debate on the “unforeseeable” character of the outbreak if the contract was concluded or renewed early 2020. Otherwise, the force majeure argument would be strong to suspend or terminate the contract as impacted, even though the contract does not address a specific force majeure regime.

3.    Contract excluding expressly outbreaks events

Should the contract provide for a force majeure clause which expressly excludes outbreak events, then the party facing COVID-19 effects could not challenge the performance of the contract.

This party may however try and argue that the outbreak events which were specifically excluded by the force majeure clause are distinct from the COVID-19 outbreak. The party may try to say, for instance, that (i) the excluded outbreaks were heard by the parties as outbreaks personally infecting the parties’ staff whereas (ii) COVID-19 may affect performance of the contract even though the parties’ staff is not personally infected.

The three abovementioned hypothesis are more likely to address the situation where a supplier, debtor of an obligation to perform specific actions as part of the contract (e.g. manufacturing, delivery) is prevented from performing a contract due to a force majeure event.

A buyer trying to escape its contractual obligations by invoking a force majeure event may have less strong arguments, in particular if the force majeure event does not impact its ability to buy the products in itself. Indeed, it may be very difficult for a buyer to evidence the impossibility to perform the contract when its main contractual obligation is the payment of the price. For instance, even though a buyer loses any interest in purchasing certain products because he will itself not be able to make profits with such products during the COVID-19 economic downturn, it may be argued that this does not impact as such the possibility for the buyer to perform its contractual obligation vis-à-vis the supplier, i.e. to pay products’ price.

Hardship may then be a further ground to try to address such situation.

Hardship

Hardship, as defined in Article 1195 of the French Civil Code, leaves the door open to parties for renegotiation or termination of their contract in the event of a change of economic circumstances which, without totally preventing a party from performing the contract, renders this performance excessively onerous. Two other conditions must also be fulfilled:

  • the change in circumstances could not have been predicted at the time the contract was entered; and
  • the party affected by the change of circumstances had not assumed such risk.

If these conditions are met, Article 1195 of the French Civil Code provides for a three-stage process:

  1. The affected party can request its counterparty to renegotiate the contract, while continuing to perform its obligations during the renegotiation.
  2. In the event of refusal of the other party to renegotiate, or if the renegotiation is not successful, the parties may agree to terminate the contract on agreed date and conditions. Alternatively, the parties may mutually request the judge to adapt the contract.
  3. If the parties do not reach an agreement within a reasonable time period, the judge may, at the request of a party, revise the contract or terminate it.

This legal regime may however be contractually excluded or arranged by the parties. Its application would therefore depend on the terms of the contract. If the case is brought to Court, the outcome may also be very uncertain in our view as this legal ground has not often been admitted in case law and has only been inserted in the French Civil Code in 2016.

Depending on the drafting of the contractual hardship clause, a supplier may have grounds to request the renegotiation of a distribution contract for unforeseen circumstances if, for instance, production and/or delivery costs of materials increased for COVID-19 related reasons, making the performance of the contract excessively onerous for the supplier.

From the perspective of a buyer experiencing, for instance, a drop in its own customers demand during or further to the outbreak period, there may be fewer possibilities in our view to rely on a hardship clause to renegotiate or cancel orders to a supplier. The buyer may however have arguments if it shows a change in economic circumstances which directly impacts the price of the contract. The may be the case of increased import taxes or exchange rate fluctuations which in fine raise the products total price.



[1]                 Speech of Bruno Le Maire following the meeting with social partners at French Employment Ministry, 28 February 2020, https://www.economie.gouv.fr/coronavirus-soutien-entreprises

[2]                 Coronavirus : quels droits en cas d’annulation d’un vol ou d’un séjour ?, French Directorate for legal and administrative information, 26 February 2020, https://www.service-public.fr/particuliers/actualites/A13868. See notably Article L. 211-14 of the French Tourism Code for tour packages and EU Regulation 261/2004 of 11 February 2004 on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights

[3]                 https://www.who.int/news-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-outbreak-of-novel-coronavirus-(2019-ncov)