COVID-19 Coronavirus Business Impact: How to deal with private law contract enforcement issues under French law?
The global coronavirus disease (COVID-19) pandemic as well as the containment measures adopted by various countries, including France since 17 March 2020, affect all companies. Some of these are questioning their ability to comply with their commercial duties with a view to prevent any risk of subsequent lawsuits.
It is therefore appropriate to analyze the legal tools offered to companies facing difficulties in enforcing private law contracts which were previously concluded, in order to limit the impact of the current health crisis and of the subsequent measures adopted.
Do the measures taken under the state of health emergency exempt companies from complying with their contractual obligations?
No, companies shall still meet their contractual obligations.
Emergency measures have been taken by the French Government to take account of the health situation and to try to prevent lay-offs and business bankruptcies, in addition to the rapid spread of the novel coronavirus wave.
The Order No. 2020-306 of 25 March 2020 relating to the extension of deadlines that expire during the period of the state of health emergency and to the procedural adjustment of proceedings during that same period (Ordonnance n° 2020-306 du 25 mars 2020 relative à la prorogation des délais échus pendant la période d’urgence sanitaire et à l’adaptation des procédures pendant cette même période) provides that for all obligations imposed by law and regulation, there should be an interruption to deadlines expiring between the 12 March 2020 and one month following the end of the state of health emergency1 (i.e. 24 June 2020 except in case of amendment). For those deadlines, the legal timeframe for such action shall run from 24 June 2020, up to a maximum of two months from the end of the state of health emergency2. The principle therefore remains unchanged as to the execution by companies of their contractual obligations.
However, the orders taken under the state of health emergency suspends the effect of the contractual default mechanisms.
Weakening the principle of contracts enforcement, the aforementioned Order No. 2020-306 suspends the effects of some contractual provisions that aim at sanctioning the debtor’s failure to performe the agreement (such as lump sum indemnity per day of delay, liquidated damages, unilateral termination and forfeiture provisions). If the duration of the state of health emergency remains the same, these penalties and provisions will start to produce their effects on 24 July 2020 if the debtor has still not performed its obligations at that time. Delay penalties and liquidated damages provision that had been triggered prior to 12 March 2020 are suspended until 24 June 20203.
A similar moratorium has been enacted by Order No. 2020-316 of 25 March 2020 relating to the payment of rent, water, gas and electricity bills relating to the business premises for the companies whose business is affected by the spread of the COVID-19 (Ordonnance n° 2020-316 du 25 mars 2020 relative au paiement des loyers, des factures d’eau, de gaz et d’électricité afférents aux locaux professionnels des entreprises dont l’activité est affectée par la propagation de l’épidémie de covid-19), specifically concerning the effects of non-payment of rent and charges (particularly those relating to gas, water and electricity).
What are the remedies available to companies that are no longer able to fully comply with their contractual obligations toward their contractual partners?
1. Consider renegotiating the terms of the agreement with your contractual partners on the grounds of the unforeseen change of circumstances at the time of the conclusion of the contract.
In contractual matters, parties can always mutually decide to amend the terms of their agreements. Generally speaking, no specific formal requirement is imposed on renegotiation. However, it is advisable to formalize it through a written amendment to the contract. In addition, the contract may include specific provisions governing the contractual renegotiation.
Moreover, given the exceptional impact of the current health crisis, companies facing contractual enforcement issues may, for agreements signed after 1 October 2016, seek to obtain a relief or a reduction in their contractual obligations by asserting an unforeseen change of circumstances as provided by Article 1195 of the French Civil Code. This remedy does not provide an immediate solution since the initial agreement remains binding during the renegotiation phase.
The remedy, known as “théorie de l’imprévision” in French, allows a party to request the renegotiation of the agreement from the other party if the enforcement of the agreement has become excessively onerous – but not impossible – for one of the parties due to an unforeseeable event when the contract was concluded. In the case of a refusal or a failure to renegotiate, parties may agree to terminate the contract at a date and on the terms already agreed, or request the Court by mutual agreement to amend or terminate it. Lastly, if no agreement is reached within a reasonable time period, the judge may, at the request of one party, amend or terminate the contract at a date and under terms to be fixed.
These provisions are not regarded as imperative norms where the public order is involved and the parties may therefore adjust the terms, conditions and effects of the hardship. It is therefore necessary, to analyze the terms of the agreements concluded in order to ascertain whether Article 1195 of the French Civil Code has not been adjusted or excluded.
Thus, subject to the specific provisions of the agreement, a company wishing to raise the unforeseen change of circumstances to renegotiate its commitments, or even to terminate them, will have to demonstrate that:
- the change of circumstances which occurred as a result of COVID-19 was unforeseeable at the date of conclusion of the contract, which might exclude agreements concluded after the outbreak of the health crisis;
- the change of circumstances made the performance of the contract excessively onerous; and
- the affected party did not agree to assume the risk of a change of circumstances.
2. Where it is clear that a party will not be able to perform its contractual duties, its contracting partner may suspend performance of its own contractual obligations.
In the event that it is obvious that the contracting partner will not be able to perform its contractual duties on time and that this non-performance would have significant consequences, Article 1220 of the French Civil Code authorizes the other party to raise the exception of non-performance and to suspend the performance of its obligation. In such a case, the company should ensure that it notifies the other party of the suspension of performance as soon as possible and that it explains the reasons why.
3. Raising “force majeure” in order to seek exemptions from contractual performance.
Despite the statement by the Minister of the Economy and Finance, Bruno Le Maire, on 28 February describing the COVID-19 pandemic as a "case of force majeure for companies, employees and employers", the possibility for a company to raise force majeure to oppose the enforcement of a private law contract remains uncertain and, far from being automatic, it requires a case-by-case analysis of each contractual situation.
The exception of force majeure is not imperative, so it is necessary to check the provision of the contract: whether force majeure is excluded, whether a force majeure clause is provided, what is the definition of force majeure provided in the agreement, what are the formal requirements to raise force majeure and what are the effects of force majeure on the agreement. By way of example, the agreement may specifically provide that an epidemic constitutes force majeure or, conversely, expressly exclude it.
- What are the criteria that the COVID-19 pandemic shall meet to be qualified as force majeure?
In the absence of a specific contractual clause, force majeure is governed by the provisions of Article 1218 of the French Civil Code and is defined as "an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor."
Thus, in order to determine whether the current health crisis constitutes a case of force majeure likely to exonerate a company from the enforcement of its contractual obligations, the following questions must be answered:
- Was the COVID-19 pandemic foreseeable on the day of conclusion of the contract? Real uncertainty exists with regard to contracts concluded as of 1 January 2020, since the existence of the virus in China was revealed on the beginning of the year.
- What is the impact of the COVID-19 pandemic, and of the health crisis in general, on the performance of the contract? It is not sufficient that performance of the contract became more expensive, it must be established that, despite the implementation of all appropriate measures, non-performance of the contract was inevitable. For example, in the case where remote working allows the continued performance of the contract, even if remote, force majeure cannot be invoked.
- Is the force majeure external to the parties? Although it is traditionally held to be a determining factor in the case of force majeure, there is a trend in case law to drop this third condition4, in particular in the event of illness. Thus, although linked to the person of the debtor, the courts qualify illness as external and independent of the patient’s will.
- Could the COVID-19 crisis meet the conditions of force majeure?
So far, case law seems to have been rather reluctant to recognize an epidemic as a case of force majeure. In particular, the H1N1 flu epidemic of 20095, Ebola6, or the Chikungunya virus were not considered as force majeure7.
Nevertheless, a case law review demonstrates that the qualification of force majeure has generally been dismissed for purely factual reasons. For instance, in the case of the Chikungunya epidemic, the Court of Appeal of Basse-Terre decided that the disease was not unpredictable and irresistible since the symptoms could be relieved by painkillers and were therefore surmountable8. It seems that such reasoning could not be transposed to the current situation, given the unprecedented scale of the COVID-19 pandemic, the strict measures taken by the government, or the declarations of the World Health Organization (WHO).
In a very recent decision, the Court of Appeal of Colmar held in a foreigner law matter that the fact that the asylum seeker did not appear before the court was justified "due to the exceptional and insurmountable circumstances, of the nature of force majeure, linked to the current outbreak of COVID-19" since it was established that the asylum seeker had been in contact with a person infected with this virus9.
Moreover, beyond the mere health aspect, a mandatory act of the public authority which causes damage to a third party may be qualified as a “fait du prince” (mandatory act of government) and constitute a specific application of force majeure, since it is not possible to circumvent these prohibitions. In the current situation, the mandatory measures imposed by public authorities under penalty, in particular the shops’ closure from 14 March 2020 and then containment measures from 17 March 17 2020, could be qualified as “fait du prince” and constitute a case of force majeure allowing the debtor to be released from its duties, at least temporarily.
- What are the effects of force majeure?
If the qualification of force majeure is retained, specifically “fait du prince”, the effects will be as follows:
- In the case of temporary impediment, the enforcement of the agreement will be suspended (unless the delay resulting from this suspension justifies the termination of the contract). The execution of the contract will therefore have to resume as soon as the force majeure is no longer characterized, it is thus of high importance to monitor the evolution of the situation.
- In the event of a permanent impediment, the agreement will be automatically terminated and the parties will be released from their obligations. However, under the terms of Article 1351 of the French Civil Code, the debtor is released from performance of its obligations only to the extent of the impossibility encountered; force majeure does not therefore automatically release it from all the obligations under the contract.
In any event, the good faith of the contracting party is required as far as the force majeure is concerned. Thus, in order to be able to benefit from its effects, it will be necessary to have acted appropriately in such a way as to limit the damaging consequences of its non-performance, and in particular to inform its commercial partner as soon as possible of the impossibility of performing its commitments. The exonerating effect of force majeure may be set aside in the event of negligence or bad faith of the debtor who raises it.
Thus, after analyzing the provisions of the contract and, in particular, any clause relating to the conditions, terms and effects of force majeure, a company wishing to suspend the performance of its obligations or terminate its contract will have to demonstrate the following:
- it was not possible to anticipate the current health crisis, nor the restrictions imposed and their consequences on the contract;
- no alternative solution was possible, regardless of the cost; and
- there is a causal link between the inability to perform contractual obligations and the measures taken to combat the COVID-19 pandemic.
It is only in this hypothesis that force majeure will be able to play its exonerating role. In all other cases, it is the adaptation and renegotiation of the contract that will enable companies to limit the consequences of the COVID-19 crisis in terms of liability.
If you face contractual enforcement issues, you should first refer to the contract and specifically to the accurate provisions.
We are available to help you analyze and assess your rights and duties in order to adopt strategic decision and safeguard your rights in case of litigation.
For more information on the global impact of Coronavirus COVID-19 please see our COVID-19 Business Impact page.
1) Except in case of amendment, the state of health emergency shall end on 24 May 2020
2) Article 2 of Order No. 2020-306 relating to the extension of deadlines that expire during the period of the state of health emergency and to the procedural adjustment of proceedings during that same period
3) Article 4 of Order No. 2020-306 relating to the extension of deadlines that expire during the period of the state of health emergency and to the procedural adjustment of proceedings during that same period
4) French Supreme Court, Full Court, 14 April 2006, n°02-11.168
5) Court of Appeal of Toulouse, 3 October 2019, n°19/01579 ; Court of Appeal of Besançon, 8 January 2014, n°12/02291
6) Court of Appeal of Paris, 17 March 2016, n°15/04263
7) Court of Appeal of Basse-Terre, 17 December 2018 n°17/00739
8) Court of Appeal of Basse-Terre, 17 December 2018 n°17/00739
9) Court of Appeal of Colmar, 12 March 2020, n°20/01098