On March 12, 2020, we set out a note considering how force majeure provisions in commercial contracts and the related common law doctrine of frustration may be engaged in the context of the COVID-19 pandemic. This analysis focused on contracts governed by English law and PRC law. We also suggested steps that parties may take to safeguard their positions given the evolving situation.
The COVID-19 pandemic and the measures taken by governments to deal with it continue to impact businesses substantially. This note supplements our March 12, 2020 analysis and recommendations with a short assessment of force majeure and the doctrine of imprévision under French law.
Force majeure relates to the objective impossibility for an affected party to perform its obligations under a contract. Force majeure excludes a party’s contractual liability.
Even though the concept has long been recognized by the French courts, force majeure was introduced in French statutory law only in 2016, following a substantial contract law reform. Today, force majeure is defined in Article 1218 of the French Civil Code as an event beyond the control of the affected party that 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.
Unless the parties have agreed otherwise, for an event to qualify as force majeure under French law three requirements must be met:
The COVID-19 pandemic or any measures related to the pandemic would need to be examined under these criteria. COVID-19 itself will be beyond a party’s control and may be considered as an unforeseeable event, depending on the circumstances and timing of the contract. The key issue is likely to be whether the performance of a party’s obligations under a contract was impossible. The assessment of whether knock-on measures/events related to COVID-19 meet the three conditions and qualify as force majeure will need to be done on a case-by-case basis.
Under Article 1218 of the French Civil Code, if the inability to perform is temporary, the performance of the obligations by the affected party is suspended unless the delay is such that it justifies the termination of the contract. If the prevention is permanent, the contract is terminated by operation of law, i.e., without prior notice or any intervention of a judge. The parties are then deemed to have discharged their obligations under the conditions in Articles 1351 and 1351-1 of the French Civil Code.
Under the doctrine of imprévision, relief may be granted if the circumstances in a given situation change in such a way that the performance of the contract would become excessively burdensome for one party.
Until the 2016 French contract law reform, based on the pacta sunt servanda principle, French civil courts refused to apply the théorie de l’imprévision to commercial contracts in the absence of specific agreement between the parties to the contract. Since October 1, 2016, imprévision is governed by Article 1195 of the French Civil Code:
For a party to avail itself of the doctrine of imprévision under French law, the relevant contract must have been concluded after October 1, 2016. At the same time, the parties to a contract are free to exclude or adjust the regime of imprévision.
COVID-19 could be characterized as an unforeseeable change of circumstances. Whether the ensuing measures or events would also qualify is a matter of assessment in each case. In any event, a crucial requirement in either scenario would be to demonstrate that the economic imbalance between the parties is excessive. In this respect, in a 2015 decision on economic hardship as defined in the UNIDROIT Principles, the French Cour de cassation upheld a ruling according to which the fact that the suppliers of the affected party had increased their prices between 4% and 16%, which resulted in the reduction of the affected party’s gross margin by nearly 60%, did not constitute an event that fundamentally altered the equilibrium of the contract.
In our note of March 12, 2020 on force majeure, we outlined practical suggestions for parties making or receiving notices of force majeure. Those considerations apply also in the context of French law contracts. In addition: