Covid-19: Impact on commercial contracts – France
How is the applicable law determined by the courts in case of commercial contracts?
In international cases, the governing law is determined in accordance with the EU Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”). Under Rome I, the general rule for B2B international contracts is that parties can choose the governing law even if it has no connection with the contract. The validity of choice-of-law clauses is governed by Articles 10, 11 and 13 Rome I, which set out the form requirements for choice-of-law clauses.
The choice of law is limited in the following cases:
- Domestic contracts: If the parties choose a foreign law as applicable to the contract, whilst all of them and all other elements pertaining to the contract are located in France, Article 3 Rome I specifies that their choice shall not prejudice the application of those provisions of the “domestic” law which cannot be derogated from by agreement.
- Intra-EU contracts: Similarly, in contracts where all elements other than the choice of law are related to one or more EU Member States, the parties’ choice of law will not prejudice the application of provisions of EU law which cannot be derogated from by agreement.
Further restrictions apply in case of consumer, insurance and employment contracts.
In the absence of an express choice-of-law clause, Article 4 Rome I provides default rules which aim at designating the law which bears the “closest connection” to the contract at issue.
France is also a member of the 1955 Hague Convention on the Law Applicable to International Sales of Goods (“1955 Hague Convention”), which prevails over the Rome I Regulation for contracts falling within its scope of application. Under the 1955 Hague Convention, the law applicable to commercial contracts is also determined by reference to the parties’ intention or, in the absence of an express or implicit choice of law, by reference to default rules which designate the law bearing the closest connection to the contract.
Are there any statutory provisions relating to force majeure?
As regards contractual obligations, the concept of force majeure, which was initially judge-made, is now enshrined in Article 1218 of the French Civil Code, which provides that “[i]n contractual matters, there is force majeure where 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”. As such, three cumulative criteria must be met:
- The event must be beyond the control of the party invoking force majeure: French courts will consider whether the event can be attributed to that party. For instance, a compulsory lockdown ordered by the local government would generally be deemed beyond the control of the party invoking force majeure.
- It must be an event which was not reasonably foreseeable at the time of the conclusion of the contract: as French courts proceed on a case-by-case basis, a similar event may be held to be unforeseeable in some circumstances but not in others. For instance, a recurring epidemic, like dengue fever in the French West Indies, may not be considered to be unforeseeable.
- The event must prevent the performance of its obligation by the party invoking force majeure: however, the fact that an obligation has become more onerous or difficult to perform will generally not be sufficient to qualify as a force majeure event. For instance, if the outbreak of a disease merely makes production more difficult or expensive, it would most likely not be considered an impediment preventing the performance of contractual obligations.
Under the former judge-made regime and prior to the enactment of Article 1218 in 2016, the same three cumulative conditions also had to be met for an event to qualify as force majeure: the event had to be (i) unforeseeable, (ii) exterior (i.e., beyond the control of the party invoking force majeure), and (iii) irresistible (i.e. making it impossible to perform the obligations at stake).
The burden of proving that a given event qualifies as force majeure rests on the party invoking it.
Pursuant to Article 1218 of the Civil Code, two outcomes are possible, if a party successfully demonstrates that it was prevented from performing its contractual obligations because of a force majeure event:
- if the prevention is temporary, performance of the obligation will only be suspended, unless the resulting delay is sufficient to justify the termination of the contract (Article 1218(2));
- if the prevention is permanent, the contract will be terminated and the parties will be discharged from their obligations (subject to limited exceptions, cf. Article 1351).
Article 1231(1) of the Civil Code further specifies that a party will not be liable for damages if the non-performance or late performance of its obligation is due to force majeure.
Overall, French courts have tended to adopt a rather strict approach regarding the force majeure criteria. This is illustrated by the few past decisions rendered by French courts in cases where an epidemic was invoked as a force majeure event. For instance:
- In a decision dated 29 June 2006, the Paris Court of Appeal rejected a claim for the reimbursement of the costs of a trip to Thailand which the claimants had cancelled due to the SARS epidemic of 2003 (n° 04/09052). The court noted that (i) at the date of the planned trip, no cases of SARS had been recorded in Thailand and travel was discouraged only to Hong Kong and mainland China, and that (ii) the measures implemented by Thai authorities (medical control upon entry into the territory and wearing a mask for the following two weeks), if unpleasant, were not sufficient of such nature as to constitute a force majeure event.
- In a similar situation concerning the cancellation of a planned trip, the Nancy Court of Appeal ruled, in a decision dated 22 November 2010 (n° 09/00003), that the 2007 dengue fever epidemic in Martinique was not a force majeure event since (i) it was not unforeseeable, as this type of epidemic is known as a recurring phenomenon affecting the region, and (ii) it did not prevent the performance of the contract (the court argued that since dengue fever only affects 5% of the population, protection measures against mosquito bites can be taken, and the symptoms of the illness which are high fever and headaches, pain and fatigue, do not lead to any complications in most cases).
- In a case concerning the cancellation of a hotel reservation, the Basse-Terre Court of Appeal, in a decision dated 17 December 2018 (n° 17/00739), similarly rejected a claim that the chikungunya epidemic in Saint Barthélemy amounted to force majeure. The court particularly underlined that the event did not prevent the performance of the contract, since (i) the illness is generally surmountable with painkillers (the claimants had not claimed that they had any particular medical conditions), and (ii) the hotel could still have performed its contractual obligations during that time period.
However, several recent decisions have characterised the current Covid-19 epidemic as a force majeure event:
- In several decisions from March 2020, the Douai Court of Appeal ruled that the cancellation of flights by the Italian authorities due to the Covid-19 sanitary crisis constituted a force majeure event for the French authorities (4 March 2020, n° 20/00395; 5 March 2020, n° 20/00400 and 20/00401);
- In a decision dated 12 March 2020 (n° 20/01098), the Colmar Court of Appeal considered that the current Covid-19 epidemic was a force majeure event preventing a person held in administrative detention from appearing before the court, as another person held in the same detention center had been tested positive for Covid-19. The same Court of Appeal adopted a similar solution in several subsequent decisions, even in the absence of a direct link between the detainees and infected persons (16 March 2020, n° 20/01142 and 20/01143; 23 March 2020, n° 20/01206 and 20/01207).
While these recent cases have been rendered in the specific context of administrative detentions, they provide a first insight into how French courts may approach the characterisation of Covid-19 and its classification as force majeure in case of a commercial contract. In light of the scale and rapidity of Covid-19’s propagation and its potential for serious consequences on human health, as well as the strict and unprecedented measures adopted by many countries and the pandemic’s impact on the global economy, it seems likely that French courts will be open to taking into account the difficulties encountered by the parties whose commercial contract has been affected by the current sanitary crisis (subject of course to each case’s specific circumstances).
How are force majeure clauses in commercial contracts applied and interpreted in practice?
The interpretation and application of force majeure clauses by French courts is made on a case-by-case basis and depends heavily on the wording of the contractual clause under consideration and the specific facts of the case. Thus, it should be noted that, under French law, parties drafting a force majeure clause can deviate from the statutory definition in Article 1218. They may, for instance, (i) choose to widen or narrow the definition of what constitutes force majeure (e.g., by agreeing to forego the requirement of lack of foreseeability), (ii) decide to include a list of events which will automatically be considered as force majeure events regardless of whether or not they fulfil the criteria of Article 1218, or (iii) modify the effects of the force majeure (e.g., by introducing a duty to renegotiate the agreement).
The question of whether an event such as an epidemic or a global pandemic will qualify as force majeure mainly depends on the wording of the force majeure clause in question. If the clause does not expressly mention pandemics or epidemics as covered events (or, alternatively, does not exclude them), French courts will look at whether the event otherwise falls within the contractual definition of force majeure provided by the parties. If the contract does not include a definition of force majeure, French courts will turn to the statutory definition provided at Article 1218 of the Civil Code (see question 2 above).
It should be noted that while force majeure clauses are in principle valid under French law, they may be voided in specific cases where they introduce a significant imbalance between the parties’ rights and obligations. This particularly applies to consumer contracts (Article L.212-1 of the French Consumer Code), but may also be the case in contracts concluded between professionals (Article L.442-1 of the French Commercial Code) or in pre-formulated standard contracts (Article 1171 of the French Civil Code). A party could also attempt to challenge a force majeure clause on the basis of Article 1170 of the Civil Code, pursuant to which a contractual provision will be deemed unwritten if it deprives a party’s essential obligation of its substance.
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
The concept of hardship (imprévision) has been introduced into French law with the 2016 reform of French contract law. Article 1195 of the French Civil Code – applicable to contracts entered into as from 1 October 2016 – now provides that:
“If a change of circumstances which was unforeseeable at the time of conclusion of the contract renders performance excessively onerous for a party which had not accepted to bear that risk, that party may request its co-contracting party to renegotiate the contract. The requesting party shall continue to perform its obligations throughout the renegotiations.
In case of a refusal or failure of the renegotiations, the parties may agree to terminate the contract on the date and under the conditions which they determine, or jointly request the court to adapt the contract. In the absence of an agreement within a reasonable time period, the court may, at the request of a party, revise the contract or terminate it on the date and under the conditions which it sets”.
As a preliminary remark, it should be noted that, in line with its supplementary nature, the application of Article 1195 may be excluded with respect to certain types of contracts if a competing, specific, legal regime already exists. For example, the Versailles Court of Appeal declined to apply Article 1195 in a matter concerning a commercial lease, noting that there are specific French rules governing commercial leases which already contain provisions regarding the revision of the lease agreement (Versailles Court of Appeal, 12 December 2019, No. 18/07183). Furthermore, pursuant to Article L.211-40-1 of the French Monetary and Financial Code, Article 1195 of the Civil Code does not apply to “obligations resulting from operations on financial contracts and securities”.
Under the statutory definition of hardship, three cumulative conditions must be met for Article 1195 to apply:
- There must be a change of circumstances which was unforeseeable at the time when the contract was concluded: as the text is silent regarding the nature of the change of circumstances which is required, Article 1195 may cover a change of circumstances of any kind, for instance of economic (sudden increase in the price of raw materials), legal (new public policies), technological (development of new technology that makes an object obsolete), or environmental (natural disasters) nature. As with force majeure, French courts are likely to proceed on a case-by-case analysis.
- This change of circumstances must make performance excessively onerous for a party: this condition introduces a lower threshold than force majeure (which, as noted above, requires that a party is prevented from performing its obligation), and draws the boundary between the two concepts. That being said, it must be shown that performance of the contract has become economically unbearable for the aggrieved party, and not merely more difficult. This could result not only from an excessive increase in the costs of performance, but also from an excessive reduction in the value of the consideration received.
- Said party must not have accepted to bear that risk: a party’s acceptance may be implied, for example, by reference to the speculative nature of the contract, for instance a swap agreement (Paris Court of Appeal, 16 February 2018, No. 16/08968) or a fixed-price construction contract (Douai Court of Appeal, 23 January 2020, No. 19/01718).
The burden of proving that a given change of circumstances qualifies as hardship rests on the party invoking it.
Given that the statutory test for hardship is somewhat less onerous than that for force majeure, there might be a real chance of the Covid-19 situation being found, in certain cases, to meet the standard. Depending on the degree of propagation of the virus and the factors particular to the contract and the contracting party’s performance, its performance could potentially be impacted by changes of circumstances of multiple types. However, we are not aware of French court decisions to date applying Article 1195 in the case of an epidemic or a pandemic, which likely owes in part to the fact that this provision is only applicable to contracts concluded as from 1 October 2016.
Article 1195 provides for a phased approach in presence of hardship, favouring an amicable solution rather than a judicial one. Thus,
- Article 1195 provides that a party suffering from a hardship within the meaning of that text may first request its co-contracting party to renegotiate the contract;
- as a second step,“in case of a refusal or failure of the renegotiations”, the parties may jointly agree to either terminate their contract, or request the judge to adapt such contract;
- finally, only in the absence of an agreement within a reasonable time period one of the parties can seize the court and request that it revises or terminates the contract.
It should be noted that, in the context of the current sanitary crisis, French courts may only be seized of “essential” matters, which concerns notably certain criminal procedures, insolvency proceedings, and emergency interim proceedings in civil and commercial matters. As the interim judge does not have jurisdiction over the revision of contracts on the basis of hardship (see, e.g., Paris Court of Appeal, 13 December 2017, n° 17/11076), the first steps of Article 1195 favouring an amicable approach are of particular importance in the current context. Correlatively, this temporary suspension of non-essential proceedings before French courts also underlines the added attractiveness of arbitral proceedings in times of Covid-19 (see our alert “International arbitration in times of Covid-19”).
It should be specified that, in any event, the aggrieved party is required to continue to perform its obligations, irrespective of the consequences, during the renegotiations with the other party (as well as during the potential subsequent procedure, whether before state courts or an arbitral tribunal).
As in the case of force majeure, parties may also choose to include hardship clauses in their contracts which vary from the above definition, or to exclude the applicability of hardship altogether. Therefore, the interpretation and application of hardship clauses by French courts will likely depend heavily on their wording, on a case-by-case basis.
Further information on the concept of hardship may be found in our cross-border guide on hardship, which also includes a French chapter.
Paralysis of certain contractual clauses
In the context of the current sanitary crisis, the French government has enacted Ordinance n° 2020-306 of 25 March 2020 which, inter alia, contains provisions intended to temporarily “paralyse” the operation of contractual clauses aimed at “penalising the non-performance of an obligation within a given time-period”, such as cancellation clauses, liquidated damages clauses or acceleration clauses.
Under this Ordinance:
- a “protected period” is instituted, from 12 March 2020 to one month following the lifting of the state of sanitary emergency currently in force in France;
- cancellation clauses, liquidated damages clauses or acceleration clauses which should have produced their effects during the protected period will only take effect one month after the expiry of this protected period, in the event the debtor has not performed his/her obligation in the meantime;
- the application of liquidated damages clauses which started running prior to 12 March 2020 is suspended for the duration of the protected period, and will resume on the day following the expiry of said protected period;
- in the case of contracts which can only be terminated during a given period, or which are automatically renewed if no notice to the contrary is given within a certain time limit, that period or that time limit will be extended by two months from the end of the protected period if it would normally have expired during the protected period.
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Mitigation of loss
There is no recognised general duty to mitigate one’s losses under French law, including cases of force majeure or hardship. Parties may however choose to provide for such a duty, either by reference to a law or body of rules where it is recognised (such as, for example, the 1980 United Nations Convention on Contracts for the International Sale of Goods, see our separate CISG chapter), or by including a contractual clause to that effect.
It should be specified that a contractually agreed duty to mitigate one’s losses will not necessarily be included directly in the force majeure and/or hardship clauses which the contract may other-wise contain. Accordingly, a holistic analysis of the contract should be carried out to identify any areas of interplay between contractual arrangements and provisions agreed upon by the parties.
The statutory provisions of French law regarding force majeure do not provide for a specific duty to notify the other party of the occurrence of a force majeure event. Here too, parties may agree to include such a duty of notification in their contract. The way this duty of notification is framed by the parties will vary from case to case, and close attention should accordingly be paid to the exact terms of the contract at issue (e.g., is there a specific time limit within which to send the notice? What must the notice contain? Does the contract provide for any sanctions in case these requirements are not met?)
Pursuant to Article 1104 of the French Civil Code, “contracts must be negotiated, formed and performed in good faith. This provision is a matter of public policy”. Accordingly, parties to an agreement governed by French law should be very mindful of this overarching principle of French contract law, in particular when considering issues such as which information must be disclosed to the other party, how far does the cooperation with the other party extend, must advance be warning be given if difficulties in performing the contract are envisioned, must timely notice be given, if these difficulties come to pass, etc.
In addition, as the principle of good faith in contractual dealings is expressly enshrined as a matter of public policy, it cannot be excluded that a French court would apply this principle in the case of a foreign law-governed contract, if such contract bears particularly close ties with France.