COVID-19 | How to avoid future litigation in France with your commercial partners?
Published on 23rd Mar 2020
Following the French government’s declarations relating to the COVID-19 epidemic, guidance is needed to manage your commercial relationships with the aim of preventing future litigation.
French government’s statements relating to the COVID-19
In a statement given on 28 February 2020, French Finance Minister Bruno Le Maire said that the coronavirus will be considered as “a case of force majeure” for all public contracts.
Later, by his statement of 16 March 2020, French President Emmanuel Macron decided to adopt strong measures to contain the outbreak. A containment system was set up throughout the country from Tuesday 17 March at noon, for a minimum of fifteen days. Any travel is prohibited except in very restricted circumstances.
At the same time, the government closed several categories of establishments until 15 April 2020 (restaurants, drinking places, shopping centres, museums, meeting halls, dance halls, games rooms, libraries and sport facilities). Only those which are essential to “the life of the Nation” may stay open, namely food markets and food shops (including food drives), pharmacies, gas stations, banks, tobacco shops and press distribution. Public services also remain open, including those providing transport services.
How to react if you are prevented by the government’s decisions from performing your contractual obligations?
Do the above statements mean that you are entitled to consider the outbreak as force majeure in order to suspend or terminate your contractual obligations towards your commercial partners?
The legal effects will differ depending on the following criteria.
First, you should review your commercial contracts and find whether or not they contain a force majeure clause. For those that do, you should carefully examine how the clause is drafted and how it may be construed by judges. Indeed, although French law provides a general definition of force majeure, the parties are free to adapt, extend or reduce it contractually. Therefore, if the contracts use terms such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”, you may be in a position to invoke the force majeure clause.
Second, if there is no force majeure clause in the agreement, you can still rely on French general provisions to qualify the current COVID-19 outbreak as such when preventing from performing your contractual obligations.
Under Article 1218 of the French Civil Code, a force majeure occurs when “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 the effects of which cannot be avoided by appropriate measures, prevents performance of the obligation by the debtor”.
In these cases, in order to mitigate the risk of any future litigation, you should notify your commercial partners in relation to the force majeure event - indicating that you are prevented from performing the contractual obligations - in due time.
How to react if you are not prevented from performing your contractual obligations by government’s decisions?
In the event government’s actions do not affect your business, you must comply with your contractual commitments and inform your commercial partners that contractual provisions still apply.
If your commercial partner sends a notification suspending the performance of services/deliveries (which prevents your company from performing the agreement) and you have entered into a contract with a sub-contractor in consideration of the performance of this main agreement, you may invoke the theory of contractual interdependence (“l’interdépendance contractuelle” in French).
Again, a notification to your own sub-contractors indicating that you are preventing from performing your contractual obligations is necessary.
Another ground to suspend or renegotiate the agreement may be the hardship clause provided for in agreements in case of “a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change” (article 1195 of the French Civil Code).
This provision will involve to show how production or services trigger high costs in the COVID-19 circumstances.
What happens if you have no choice but terminating negotiations ?
Under Article 1112 of the French Civil Code, the termination of pre-contractual negotiations must be made in good faith. As a consequence, any company abruptly terminating negotiations may be held liable under article 1240 of the French Civil Code and ordered to compensate the damage resulting from this termination.
The fault here consists in disappointing, without legitimate reason, the trust that a commercial partner could legitimately had in the successful conclusion of the negotiations.
Therefore, French courts will tend to consider that when negotiations started a long time ago, a legitimate ground need to be demonstrated.
It is highly recommended to justify any termination of pre-contractual termination by any legitimate reason such as the closure of an establishment considered by the government as “not essential to the life of the Nation”, or any other legitimate ground such as labour shortage, sub-contractors refusing to perform because of force majeure, etc.
In the current circumstances, be pro-active in considering the factors and actions discussed above, in order to maintain good relationships with your business partners and mitigate any risk of litigation.