COVID-19 outbreak: impact on the contracts enforcement and the role of the Judge
In response to the COVID-19 epidemic, France declared a state of public health emergency by a Law of March 23, 2020 , authorizing the Government to issue orders (ordonnances1) to address in particular the economic, financial, social or judicial repercussions of the epidemic and of the measures taken to battle it. These orders make temporary but substantial changes to French law.
On February 29, 2020, Bruno Le Maire, the French Minister for economic affairs and finance, had already indicated that, in his view, the COVID-19 epidemic constituted a "case of force majeure for companies", particularly in State public contracts, that would justify refraining from applying penalties should the performance of contractual obligations be delayed.
Does this mean that, in such circumstances, a party to a private law contract that would no longer be able to meet its contractual commitments could rely on the COVID-19 epidemic to rightfully suspend them, or totally disengage from its contract by invoking a case of force majeure, or even obtain a renegotiation of the contract by prevailing itself of the existence of unforeseeable circumstances (imprévision2)?
On the other hand, if its co-contractor invokes the COVID-19 epidemic as a reason for not performing its obligations when neither a case of force majeure nor of unforeseeability is established, what could it do against it? Those are the two questions that we will be addressing.
- First scenario: A party to a contract is no longer able to meet its contractual obligations - What can it do?
The answer will depend on whether that party is absolutely prevented from performing its obligation (permanently or temporarily) or whether it can still perform it, but under more constraining conditions?
a. Performance of the contractual obligation has become impossible
Pursuant to Article 1218 of the French Civil Code, an event will be qualified as a case of force majeure, allowing the party to a contract to suspend the performance of its obligations under the contract, or even to terminate it, if the following conditions are met:
- the event is beyond the debtor's control ;
- it can be considered as having been reasonably unforeseeable at the time the contract was formed;
- its effects cannot be avoided by appropriate measures.
If these conditions are met, the party invoking a case of force majeure may be entitled to suspend the performance of its contractual obligations if such impossibility is only temporary. If this impossibility to perform becomes permanent, each of the parties may, at its own initiative, terminate the contract. If the parties disagree on whether a case of force majeure is established, the issue will ruled upon in court and in the meantime, the party that took the initiative to terminate the contract is considered to have done so at the risk that the court rules against it and may be sanctioned by being ordered to pay damages to the other party to the contract in compensation for the harm suffered by the failure to perform.
Bruno Le Maire's statement describing COVID-19 epidemic as a "case of force majeure for companies" should not therefore be considered as a loophole for companies to avoid performing their obligations.
It is only when a debtor is actually prevented from performing its contractual obligation that it can prevail itself of the COVID-19 epidemic, established as being as a legitimate "case of force majeure". For instance, it would assumingly be the case for the hotel, restaurant or events industries. On the other hand, the COVID-19 outbreak should not be considered as rightfully preventing a debtor from performing a contractual obligation such as the obligation to pay an amount of money3. In such circumstances, the current COVID-19 epidemic, although unforeseeable and irresistible (i.e. beyond the debtor’s control), does not prevent the debtor from performing its obligation. It may eventually render performance of the obligation more burdensome, more constraining, if only because it no longer has any consideration or counterpart (e.g. rental of commercial premises that remain empty because of lockdown measures), but it does not make it possible either to suspend performance of the obligations is not rendered impossible, neither temporarily nor permanently, such that performance may not be suspended nor. Other contract law mechanisms may however be of some help for these debtors.
b. Performance of the contractual obligation has become excessively constraining
If in some circumstances the current epidemic should not be considered as a case of force majeure, it may nevertheless be regarded as unforeseeable circumstances that should allow the debtor of a contractual obligation that has become excessively constraining to perform – although not impossible - to renegotiate the contractual terms of its obligation, in accordance with Article 1195 of the French Civil Code.
For this to be the case, the debtor would have to prove that the epidemic, and its consequences, must be considered as an external change of circumstances, that it could not have reasonable foreseen. Considering the current circumstances, this should be relatively easy to establish considering the scale of the epidemic and the measures to battle it.
To establish that performance of the contractual obligation by the debtor has become excessively constraining, the debtor would need to show that performance would be possible only at great costs, With regard to As to the excessively onerous nature of the performance of the obligation by the debtor, it presupposes that the debtor proves that the performance of its obligation would result in exorbitant costs for it, other than a negative impact on its turnovers or additional costs.
In any event and because Article 11195 is not considered as being a provision of public policy and may be excluded by the parties, the courts will ensure that the parties did not include any provision in their contract, by which the parties agreed to bear the risk of a change in unforeseeable circumstances or contractually amended the conditions and effects of unforeseeability.
In the absence of any contractual stipulation excluding Article 1195 of the French Civil Code, the debtor of the obligation may therefore request that the contract be renegotiated.
If such renegotiation is refused, or fails, the parties may:
- mutually agree to terminate the contract; or
- mutually request the judge to readjust it.
If the parties fail to find an agreement within a reasonable period of time, either party may unilaterally ask the judge to revise or terminate the contract at a the date and under the conditions that the judge shall determine.
- Second scenario: A party to a contract ceases to perform its obligations by invoking the COVID-19 epidemic, even though neither the conditions of a case of force majeure nor those of unforeseeable circumstances are established - What can the other co-contractor do?
Assuming that neither a case of force majeure nor a case of unforeseeable circumstances can be established, the creditor of an obligation may take a number of sanctions against the defaulting other party. These sanctions may be non-judicial (i) or judicial (ii).
i - Non-judicial sanctions
The non-judicial sanctions available to the creditor are of three kinds: it may refuse to perform or suspend performance of its own contractual obligations (a), unilaterally terminate the contract (b) or request a that the price it has to pay be reduced (c).
a) Defence of non-performance
In case of non-performance by the debtor of its obligation, the creditor may in turn refuse to perform its own obligation, even if it is due, provided that the non-performance the creditor blames the debtor of is sufficiently serious (Article 1219 of the French Civil Code).
The creditor may also suspend performance of its own obligation, even if the debtor has not yet failed to perform its contractual obligation, if it is clear that it will (Article 1220 of the French Civil Code).
b) Unilateral termination of the contract
In the event of non-performance by the debtor, the creditor may terminate the agreement by enforcing a termination clause that would be contained in the agreement. In the absence of such a clause, the creditor may nevertheless terminate the contract by giving unilateral notice of termination to the debtor, provided that this failure to perform is sufficiently serious (Article 1224 of the French Civil ode) – such a unilateral termination would be “at its own risk”. In this respect, several courts have ruled that a creditor may unilaterally terminate the contract in such a manner, even though the contract contained a termination clause, provided that the conditions set at Article 1224 of the French Civil Code are met4.
If a party to chooses to enforce a termination clause that would be contained in its contract, it will nevertheless have to comply with the provisions of Article 4 of Ordinance n°2020-306 of March 25 2020 on the extension of the deadlines expiring during the duration of the public health emergency, declared by Law No 2020-290 of March 23, 2020. Under this provision, termination clauses that aim at "[imposing] penalties to sanction the failure to fulfil an obligation within a specified period of time5", are deemed not to have taken effect, if such specified period of time expired between March 12, 2020 and until one month from the date the public health emergency ended, i.e. currently until one month after May 24 2020 . These clauses will therefore take effect only after that date if the debtor has not performed its obligation by then.6
c) Price reduction
If the contractual obligation is not entirely performed, and if the creditor has not yet paid, either entirely or in part, the amount owed for the expected performance, the creditor may request that such price be reduced by giving notice to its debtor, as soon as possible, of its decision to reduce the price proportionately (Article 1223 of the French Civil Code). Acceptance by the debtor of the creditor's decision to reduce the price must be given in writing.
If the creditor already paid the contractual price and where the parties have not agreed on any reduction, the creditor request that the court order that the price be reduced.
The Courts seem rather hostile to the referral of such a request by way of summary judgment, since such a claim requires that the contract be interpreted, which can only be done by a trial judge7.
In order to prevent a further outbreak of the COVID-19, the Ministry for Justice announced that the courts would be closed as of March 16, 2020. Proceedings on the merits to review the price of a contractual obligation can therefore only be brought after the public health emergency has ended. However, should there be any emergency, the summary judge would have jurisdiction to hear the claim, that may be brought before the courts immediately, under the continuation plan that the courts have set up for “essential”8 litigation.
ii - Judicial sanctions
The creditor of a contractual obligation that has not been performed may as the court to order performance of such obligation (a), declare the contract terminated judicially (b) and/or award the creditor damages in compensation for the harm suffered as a result of the non-performance (c).
a) Forced performance
The creditor of the obligation may request that its debtor be forced to perform its obligation after giving it prior formal notice, unless such performance is impossible or if there is a clear lack of proportion between the burden placed on a debtor of good faith, and the benefit for the creditor (Article 1221 of the French Civil Code).
The creditor has the possibility, within a reasonable period of time and at reasonable cost, of either having the obligation performed directly, or, upon prior authorization by the court, or destroying what has been done in breach of the obligation (Article 1221 of the French Civil Code).
b) Judicial termination of the contract
Faced with its debtor’s failure to perform its obligation, the creditor has the possibility of requesting that a court declare the contract judicially terminated, provided that it shows the failure to perform is serious (Article 1227 of the French Civil Code).
In light of the available case-law, it seems that a claim for judicial termination of a contract on the grounds of a failure to perform would exceed the summary judge’s jurisdiction9, given that the subject-matter of such claim concerns substantive law. However, if a creditor merely seeks to have the court observe that the termination clause has been validly enforced and in the absence of any serious challenge, the summary judge would have jurisdiction10.
In the context of the COVID-19 outbreak, the French Courts have set up a continuation plan so that they may still hear disputed requiring emergency measures. This would be the case in particular for summary hearings before the President of the Judicial Court or the President of the Commercial Court11.
c) Requesting damages on the basis of the debtor’s contractual liability
The defaulting debtor will be held liable for any breach of contract on its part. Indeed, and if appropriate, the debtor shall be ordered to pay damages either to compensate its failure to perform its contractual obligation, or because of the delay it took to perform its obligation, if it cannot establish that performance was made impossible by a case of force majeure (Article 1231-1 of the French Civil Code).
However, such a liability claim may only be brought after the end of the public health emergency as it would not fall into the category of “essential” litigation for which the courts have set up the continuation plan.
1 Emergency Law No 2020-290 of March 23, 2020 concerning the COVID-19 epidemic.
2 Similar to the concept of “frustration” in Common-law.
3 The French courts have often refused to classify previous epidemics as cases of force majeure that would have enabled a party to justify its failure to pay the contractual price it owed. This was the case in the context of the H1N1 virus outbreak (Besançon Court of Appeal, January 8, 2014, No 12/02291), the Ebola virus (Paris Court of Appeal, March 29, 2016, No 15/12113) or the Chikungunya outbreak (Basse-Terre Court of Appeal, December 17, 2018, No 17/00739).
4 See in this respect: French Cour de cassation,com., February 4, 2004, No 99-21.480, RTD Civ. 2004, p. 731– French Cour de cassation, civ. 1, September 24, 2009, No 08-14.524, RDC 2010, p. 44, obs. Th.; see also: D. Bakouche, L’articulation des résolutions unilatérale et conventionnelle, JCP 2014, 414.
5 Ministerial note (circulaire) presenting Title I of the Order No 2020- 306 of March 25, 2020 on the extension of deadlines expiring during the public health emergency and the adjustment of procedures during the same period. https://aappe.fr/wp-content/uploads/2020/03/Circulaire-presentation-ordonnance-delais-definitive.pdf.
6 Article 4 of Order No 2020-306 of March 25, 2020 on extension of deadlines expiring during the public health emergency and the adjustment of procedures during the same period.
7 Riom Court of Appeal, October 26, 2015, No 15/01895, Amiens Court of Appeal, September 8, 2009, No 09/00726. However, the summary judge was considered to have jurisdiction for certain particular contracts, such as leases, to order that the rent be reduced, when the contract was very clear and did not require any interpretation by the judge (Nîmes Court of Appeal, January 5, 2017, No 16/02924).
8 In particular, the following litigation are considered essential: correctional hearings for pre-trial detention and judicial review measures, immediate court appearances, appearances before the investigating judge and the liberty and custody judge, hearings before the judge enforcing sentences, hearings before the juvenile court and the juvenile judge, hearings for emergencies, and public prosecutor's offices .https://www.justice.fr/info-coronavirus.
9 French Cour de cassation, com., October 13, 1998, No 96-15.062 : JurisData No 1998-003810, Colmar Court of Appeal, civ. 1, section A, May 14, 2014 – No 13/04821.
10 Poitiers Court of Appeal, civ. 2, January 31, 2017, No 16/02298, Bordeaux Court of Appeal, civ. 5, April 10, 2012, No 10/7639.
11 https://www.greffe-tc-paris.fr/actualites/covid-19-information#.
