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29 October 2020
The COVID-19 pandemic has undeniably disrupted the performance of contracts. Although the Paris Commercial Court has ruled the pandemic to be a force majeure event in a commercial contract,(1) this characterisation may not be retained in all contractual situations. Parties to a contract must therefore analyse the specific circumstances of their case and the jurisdiction involved.
This article provides helpful tips to keep in mind when analysing a contractual situation, in light of French law specificities that might be unknown to foreign companies or counsel involved in arbitration proceedings to which French law applies. In particular, parties should be aware that their termination rights in case of non-performance by their counterparty might be affected by measures taken by the French government in relation to the COVID-19 pandemic. Parties whose contractual performance is affected by the pandemic should be aware of their options, which include the possibility of invoking force majeure or hardship.
Knowing these tips should help companies to reduce risks while navigating murky legal waters.
Parties to contracts governed by French law should be mindful that their rights to terminate the contract might be affected by measures taken by the French government to mitigate the effects of the pandemic. In particular, Order 2020-306 of 25 March 2020 adjusted the application of termination clauses and related mechanisms meant to sanction the non-performance of contractual obligations by establishing a legally protected period which ran from 12 March 2020 to 23 June 2020.(2)
Under this order, the application of termination clauses triggered by non-performance of a party's obligations during the legally protected period was postponed.(3) Termination clauses relating to obligations due after the legally protected period – other than monetary payments – were also postponed, in order to take into account delays that could occur during the legally protected period. Terminating a contract without taking into account these new rules could put the party at risk of the termination being invalid, which would trigger all of the consequences that that entails in terms of dispute strategy. For instance, a party that terminates a contract and starts arbitration proceedings in violation of these rules could face a stay of the proceedings.
Although the French Ministry of Justice issued guidelines to interpret Order 2020-306,(4) arbitral tribunals are likely to settle some questions that have arisen in practice. For instance, the order seems to provide for a postponement of termination clauses and similar mechanisms anytime that a party fails to perform its contractual obligations during or after the legally protected period and not only when this non-performance is attributable to the COVID-19 pandemic. Parties to contracts may nevertheless try to argue before arbitral tribunals that this is irrelevant when the pandemic had not affected the contract. As arbitral tribunals tend to apply the law less strictly than state courts, it will be interesting to see how they will interpret these governmental provisions compared with the courts.
The first step for a party to a contract which believes that it might be affected by the COVID-19 pandemic is to verify the existence of a clause detailing the conditions and effects of the existence of a force majeure event. These terms will prevail over the legal regime of force majeure set out in the Civil Code, including the terms by which a party is contractually committed to bear the consequences of a force majeure event.
In the absence of a force majeure clause, an arbitral tribunal will assess the characterisation of the COVID-19 pandemic as a force majeure event with respect to the legal criteria – namely, that:
These legal criteria are also relevant to analyse the meaning of contractual criteria for force majeure, which are often identical or very similar.
On the unforeseeability requirement of force majeure, more than arguing that the COVID-19 pandemic was an unforeseeable event in and of itself, the parties must determine that the pandemic and its effects were unforeseeable in their particular situation at the time of their contract's conclusion. They will have to analyse this requirement in light of key dates, such as 11 March 2020, when the World Health Organisation declared COVID-19 a pandemic, or the specific measures taken in France if relevant to the case. For example, the prohibition of gatherings of more than 5,000 people on 4 March 2020(6) or the lists of businesses authorised to operate as of 14 March 2020(7) might play a part in determining whether the effects of the COVID-19 pandemic were foreseeable in particular contractual relationships.
When deciding whether to excuse a party for non-performance of its contractual obligations on the ground of force majeure, French arbitral tribunals construe the unavoidability requirement strictly and require that performance be impossible and not merely more onerous.(8)
The fact that performance became excessively onerous due to an unforeseeable event at the time of a contract's conclusion is covered by the legal remedy of hardship. It is possible to invoke hardship in contracts concluded after 1 October 2016 under Article 1195 of the Civil Code, unless contractually excluded, or in contracts which were concluded before 1 October 2016 and contain a hardship clause.(9) There is little doubt that French arbitral tribunals will be requested to adjudicate many disputes where performance was not impossible but excessively onerous.
Another French specificity to keep in mind is that the failure to make monetary payments cannot be excused by the occurrence of a force majeure event as it is not considered to be unavoidable.(10)
As it is too early for any arbitral decisions to have been rendered on the impact of the COVID-19 pandemic on contracts, it remains to be seen how French tribunals will deal with the specific measures and tailor classic French law mechanisms to this global crisis.
For further information on this topic please contact Camille Teynier at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56) or email (firstname.lastname@example.org). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
(2) Order 2020-306 of 25 March 2020. This order specifically targets penalty payments, penalty clauses, termination clauses and forfeitures clauses. On 17 October 2020 the state of emergency was reinstated, which will likely give rise to new orders from the French government.
(3) Order 2020-306 of 25 March 2020, modified by Order 2020-427 of 15 April 2020, Article 4, Paragraph 2.
(6) Order of 4 March 2020 containing various measures relating to the fight against the spread of Covid-19, Article 1, available here.
(7) Order of 14 March 2020 containing various measures relating to the fight against the spread of COVID-19, Article 1, avaliable here. Order of 15 March 2020 supplementing the Order of 14 March 2020 containing various measures relating to the fight against the spread of COVID-19, Article 1, avaliable here. Order of 16 March 2020 supplementing the Order of 14 March 2020 containing various measures relating to the fight against the spread of COVID-19, Article 1, avaliable here.
(9) A 2016 reform of French contract law made hardship a legal remedy applicable unless contractually excluded by the parties. This legal remedy is not applicable to contracts entered into before 1 October 2016, unless provided otherwise.
(10) Cass Com, 16 September 2014, 13-20306; Final Award in International Chamber of Commerce Case 15814 in 2010, in JDI n°3, October 2019, chron. 5: "Force majeure does not even include economic impossibility."
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