The COVID-19 epidemic currently affecting France disrupts companies’ day-to-day activities and therefore the performance of contracts. In this respect, the Minister of the Economy and Finance, Bruno Le Maire, stated on 28 February 2020 that coronavirus was deemed to constitute a case of force majeure for the State’s contracting parties, thus ensuring that penalties would not be applied in the event of late delivery, for example.
What about business relations between private entities? What is the impact of COVID 19 on contractual relations? The first issue is whether business partners can suspend the performance of their obligations by invoking a case of force majeure or whether they can rely on the concept of unforeseeability.
First of all, it is important to look at the law applicable to your contractual obligations. The following explanations of force majeure and unforeseeability only apply to contracts governed by French law.
FORCE MAJEURE
Force majeure is defined under Article 1218 of the French Civil Code, which refers to “An event beyond the control of the debtor, which could not reasonably be foreseen at the time of the conclusion of the contract was concluded and the effects of which cannot be avoided by appropriate measures.” This event must also have the effect of preventing the obligor from fulfilling its obligations.
An event therefore constitutes a case of force majeure if it is beyond the control of the debtor, unforeseeable and unavoidable.
There is a debate about whether the COVID-19 epidemic can, in and of itself, constitute a case of force majeure. Some consider that the epidemic was declared in France as of 29 February 2020 and that since that date, the epidemic can no longer be considered as a case of force majeure because it has ceased to be unforeseeable.
In reality, although the epidemic has been widely known since 29 February 2020, what remains beyond the control of companies, as well as unforeseeable and unavoidable, are the successive measures taken by the government, the timing of which could hardly be anticipated and which directly impact the activities of companies in France.
Therefore, in order to determine whether your company is justified in invoking a case of force majeure, you should first refer to the contract between you and the other party.
- If your contract includes a specific clause providing for and listing cases of force majeure, this clause applies to your contractual relations. This provision may:
– give a definition of force majeure that differs from the legal definition; and/or
– list specific events that constitute a case of force majeure.
If the epidemic or the government measures taken fall within either of these two cases, the party impacted thereby may suspend the performance of its contract on the grounds of force majeure.
- If your contract includes a standard clause that refers to force majeure as interpreted by the law and the courts, or in the absence of any contractual provisions:
You should refer to Article 1218 of the French Civil Code, stated above, to determine whether the government measures produce effects that cannot be avoided by appropriate measures and thus prevent the party who invokes force majeure from performing its obligations.
You will thus need to check how the contractual clause, or article of the Civil Code, on force majeure may applied. In effect, the impediment to the performance of a contractual obligation may be only partial. This is the case, for example, of a clause requiring prior notification by the party concerned in the event of refusal of delivery. While the force majeure event may effectively prevent the performance of the delivery obligation, it does not necessarily prevent the prior notification that may be required.
Furthermore, measures taken in the event of force majeure must be adapted, as the effects suffered may be permanent or temporary, depending on the contract in question. Thus, if the impediment is only temporary, the performance of the contract is simply suspended and must resume once the cause of the impediment has ended. On the other hand, if the impediment is permanent, the contract may be automatically terminated as provided for in Article 1218 of the French Civil Code: ‘if the impediment is permanent, the contract is automatically terminated and the parties are released from their obligations under the conditions provided for in Articles 1351 and 1351-1.’
Apart from merely complying with their contractual obligations, it should be noted that all entities must ensure they perform their obligations in ‘good faith’, a public policy principle under French law that must guide the performance of contracts in all circumstances. Contractual relations must be conducted in a spirit of collaboration, which implies prior notification of the other party prior to any measure likely to modify the performance of the contract as agreed between the parties.
Supplier-distributor relations: the specific case of the framework agreement
Supplier-distributor relations are particularly sensitive to the issue of force majeure with regard to the measures taken by the government regarding the closure of certain points of sale.
They are also symptomatic, as these contractual relationships are formed by a framework agreement concluded no later than 1 March, followed by a number of application contracts (sales contracts generated for each order, application contracts concerning the various services and ‘other obligations’, etc.). What constitutes force majeure for each of these contracts needs to be considered. The company concerned cannot simply consider itself released from the performance of its obligations because the epidemic or government measures constituted a case of force majeure at the time the framework agreement was concluded. It may therefore be necessary, for example, to continue to cancel any order that the supplier will be unable to deliver, or to issue general information in this regard. At the same time, it is important to assess the performance of the various commitments of distributors apart from purchase and sale (commercial cooperation services and other obligations) and the payment of invoices (generally involving payment in advance). The wording of contracts will be critical on this point.
UNFORESEEABILITY
If it is not possible to apply the rules relating to force majeure, is it possible to consider that the COVID-19 epidemic constitutes an unforeseeable situation?
Article 1195 of the French Civil Code provides: ‘If a change in circumstances that is unforeseeable when the contract is concluded renders performance excessively costly for a party that had not agreed to assume the risk, such party may request a renegotiation of the contract with the other party. It must continue to perform its obligations during the renegotiation.
‘In the event of refusal or failure of the renegotiations, the parties may agree to terminate the contract, on the date and under the conditions that they may determine, or mutually agree to ask the court to adapt it. In the absence of an agreement within a reasonable period of time, the court may revise the contract or terminate it at the request of either party, on the date and under the conditions that it determines.’
Here again, it is necessary to refer to the contractual provisions binding the parties because they may have agreed to exclude the application of this provision to their contractual relations.
If this is not the case, it may be accepted that the government measures taken to stem the epidemic were unforeseeable at the time the contract was concluded. If these measures make the performance of the contract excessively costly for one party, such party is entitled to ask the other party for an adjustment and therefore a renegotiation of the contract.
- The choice between invoking a case of force majeure or unforeseen circumstances will depend on the consequences of the government measures on the company’s business. In effect, these two concepts can be distinguished in that force majeure makes the performance of the contract impossible whereas unforeseen circumstances make it excessively costly.
- Furthermore, It is, important to note that while force majeure makes it possible to cease the performance of obligations, unforeseeable circumstances ‘only’ make it possible to renegotiate the contract or to refer the matter to court; until the contract has been modified, the parties must continue to perform their obligations.
- Both concepts may be invoked simultaneously for the same contractual relationship. If the force majeure event results in only a partial impediment, a renegotiation of the portion of the contract whose performance has not been rendered impossible but excessively costly is conceivable.
Supplier-distributor relations: the specific case of the framework agreement
In order to determine whether unforeseeable circumstances may be invoked to request a renegotiation of the contract, it is necessary to consider whether at the date the framework agreement was concluded, the change in circumstances due to the epidemic and government measures was unforeseeable.
POTENTIAL FUTURE ACTIONS BASED ON SIGNIFICANT IMBALANCE?
The provisions of the French Commercial Code relating to force majeure and unforeseeability are not public policy provisions. Their conditions of application may therefore be excluded or adjusted by contract.
On the other hand, the fact of contractually excluding the provisions relating to force majeure or unforeseeability may be sanctioned on the grounds of ‘significant imbalance’. It should be noted that the provisions that sanction subjecting a party to obligations creating a significant imbalance in the rights and obligations of the parties (Article L. 442-1 of the French Commercial Code) do constitute public policy provisions.
It is therefore possible that future legal action may be taken against a party that has ‘imposed’ or ‘attempted to impose’ the exclusion of the application of the rules relating to force majeure or unforeseeability on another other party.
In conclusion, the issue of asserting force majeure or unforeseeability depends on the existing situations (content of the contract, date of conclusion, impediment to fulfilment of all or part of the obligations, etc.). Companies have every interest in promptly reviewing their contract to ensure the lawfulness of the measures that have been taken or are planned. The impact of COVID 19 on contractual relations is therefore very strong.
Other tools also exist to adapt the performance of the contract to a change in circumstances or to terminate it. These may consist in contractual tools such as the cancellation clause (Article 1225 of the Civil Code), or legislative tools, as in the case of a contract becoming null and void (“caducité”) (Article 1186 of the French Civil Code), the defence of non-performance (Article 1219 of the Civil Code) or unilateral termination on the grounds of a material breach (Article 1226 of the Civil Code).
Finally, to end on a less ‘legal’ note, it is important to remember that we will emerge from the crisis according to how we have handled it. Therefore, it is necessary to minimise the harmful consequences for one’s partners as much as possible, in order to ensure their support once the end of the crisis is in sight, which we hope will come as soon as possible.
Take care!