Coronavirus and commercial contracts
Jacques Bouyssou and Karadeg Coeffic
Since January 2020, the COVID-19 spread around the world, killing thousands of people and affecting massively business and trade.
This crisis has a major impact on global economy, as many affected countries issued strict lockdown measures for several weeks.
As with previous epidemics, the question will arise whether or not the criteria of Force Majeure are met for contracts subject to French law.
Under French contract law, the legal regime of Force Majeure is a default rule governed by the Civil Code and case law. Moreover, the contracting parties may adjust or exclude it.
The criteria of Force Majeure under French law
The COVID-19 and the issues it generates (illness, lockdown, administrative police measures, etc.) cannot be automatically considered as Force Majeure.
Article 1218 of the French Civil Code defines Force Majeure 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, an event may be considered as Force Majeure if the following three criteria are met:
• The event is beyond the control of the debtor (external criterion);
• The event could not reasonably be foreseen at the time of the conclusion of the contract (unforeseeable criterion). Parties who have recently entered into a contract may face difficulties to claim force majeure because of this criterion;
• The effects of the event could not be avoided by appropriate measures (irresistible criterion). For instance, the search for a new service provider, or a new supplier.
Case law on epidemics in France
A review of French case law shows that Courts generally refuse to consider epidemics as Force Majeure.
In the past, Courts considered that:
• The epidemic of Dengue fever was recurrent and therefore predictable (Court of appeal of Nancy, 22 November 2010, RG nº 09/00003) ;
• The Ebola virus made the performance of contractual obligations more complex and difficult, but not impossible (Court of appeal of Paris, 29 March 2016, RG nº 15/05607) ;
• The Chikungunya virus was not irresistible since it was generally curable (Court of appeal of Basse-Terre,17 December 2018– n° 17/00739).
However, the current situation may be considered as different from previous crisis, because it affects all countries and international trade, in addition to which large-scale lockdown measures have been enforced by several Governments, including the French one.
It is worth noting that if the introductory report to the Order dated March 25, 2020 (Order n° 2020-306 of March 25, 2020 on the extension of time limits during the period of public health emergency and the adaptation of procedures during the same period) states that "Payment of contractual obligations must still be done on the date stipulated in the contract", the Order also specifies that ordinary law provisions such as Force Majeure "remain applicable where appropriate if their conditions are met".
In any case, Courts will decide on a case-by-case basis if the debtor has been unable to perform his contractual obligations due to the COVID-19 and its consequences.
The consequencesof force majeure
If the criteria of Force Majeure are met, Article 1218 of the French Civil Code offers two options:
• If the Force Majeure event is temporary, performance of the obligation is suspended for the duration of that event, unless if that delay justifies termination of the contract.
• If the Force Majeure event is permanent, the contract is terminated by operation of law and the parties are discharged from their obligations. In that case, difficulties may arise if the contract was already partially performed (for example, the supplier incurred costs or the customer has made a down payment).
Parties to a contract may exclude or adjust the effects of Force Majeure on their contractual relationships.
One has to examine in detail, whether and to which extent a particular contractual obligation is concerned and its fulfillment impeded. There may be options to be considered, which could mitigate the impacts on the contract.
We therefore advise:
• To check if the contract includes a Force Majeure clause or excludes such a mechanism. If nothing is mentioned, the legal mechanism of the Civil Code is applicable;
• To check if the legal or contractual criteria are met;
• To identify if the contractual Force Majeure clause includes a mandatory formality that shall be complied with in order to enforce it.
The Hardship mechanism
Even if the Force Majeure mechanism cannot be applied to every cases, the French Civil Code provides a right to renegotiate the contract in case of change of circumstances (the equivalent of a legal hardship provision).
In order to benefit from this mechanism, it must be evidenced that a change of circumstances - that was unforeseeable at the time of the conclusion of the contract – makes the performance of the contract excessively onerous for a party who had not accepted the risk of such a change.
In accordance with Article 1195 of the French Civil Code, that party may request the other party to renegotiate the contract.
In the meantime, that first party shall continue to perform his obligations during renegotiation.
Again, contractors may adjust or exclude this mechanism in the contract. The opt-out clause may concern all contractors or only one of them.
The new mechanisms introduced by the Order of March 25, 2020
On March 25, 2020, the French government issued an Order to protect debtors from the consequences of an unfulfilled contractual obligation.
Article 4 of that Order limits the creditor’s use of several contractual mechanisms (periodic penalties payments, penalty clauses, termination clauses) where they sanction the breach of an obligation that should have been met between March 12, and June 24, 2020 (the date of June 24, 2020 may be postponed if the duration of the health emergency measures is extended in France).
These contractual mechanisms will resume, and be enforceable again, one month after the end of the above period of time if the debtor did not performed his obligation within that time limit.
Article 4 also mentions that periodic penalty payments and penalty clauses which were enforced before March 12, 2020, are suspended between that date and June 24, 2020.
In case of difficulties to meet contractual obligations, we advise analyzing which legal or contractual mechanism (Force Majeure clause, Hardship clause or application of Order dated March 25, 2020) is the most appropriate.
Frédéric Saffroy, Partner in the Commercial Law department.