The French Civil Code provides for the suspension of business contracts in the case of force majeure. The French legal system ruled out this principle during the Ebola and H1N1 epidemics, but companies could benefit from it this time around. Here are the recommendations of lawyers regarding the right way to go about matters.
On February 28th the French finance ministry raised the issue of force majeure regarding the Covid-19 epidemic. It was seen in some corners as a preemptive attempt to shield the Élysée Palace from late fees pertaining to government procurement.
This decision falls within the framework of the ministry’s business support plan. If it can be invoked for agreements concluded between the state and the private sector, can force majeure also be invoked in business contracts between companies? If so, under what conditions? What are the advantages and disadvantages of this measure… and, of course, the $64,000 question: can companies claim coronavirus constitutes force majeure? Here are some potential answers to these questions.
In French law, force majeure – a mechanism which makes it possible to suspend commitments on contractual services – is provided for by Article 1218 of the Civil Code.
A Per Case Basis
How and when can force majeure be invoked? There are two main situations: either the contract between the provider and the beneficiary includes a clause on the subject, or it does not mention it at all. "Companies must examine each of their contracts to check if it contains a force majeure clause and if it has been adapted," explains Patrice Grenier, founder of Grenier Avocats. It is then necessary to check whether this clause is extended, restricted or whether events constituting force majeure are listed, such as governmental measures or ailments. The agreement can indeed refer directly to epidemics or, on the contrary, exclude certain hazards. In France, the risks of strike, natural disasters and government orders which would lead to contract suspension are much more commonly cited than those in relation to a pandemic. If the contract does not contain a clause regarding this, then whether force majeure applies will be defined by the Civil Code.
It remains to be seen whether the Covid-19 pandemic falls within the scope of this mechanism. "The mere existence of an epidemic alone is not enough to constitute a case of force majeure," points out Jean-Pascal Bus, associate lawyer at Norton Rose Fulbright. Until now, French case-law has tended to rule out this qualification. This was the case for the H1N1 flu, the plague, the dengue virus and even the chikungunya virus.
"The judges' decision was very strongly influenced by the circumstances of the case," writes Aliénor Fevre and Xinyu Hu, respectively a lawyer and counsel at CMS Francis Lefebvre Avocats in a note published on the subject. "As an example, the judges considered that the H1N1 flu epidemic could not constitute a force majeure event since this epidemic had been widely announced and predicted, even before the implementation of the health regulations. With regard to the plague, it was deemed to be not sufficiently serious and thus no instructions had been given to airlines or travel agencies to avoid the given region (India). It has also been stated that either way protection against the risk of contagion could be guaranteed by taking preventive antibiotics."
There are several things to keep in mind with regard to the current pandemic. Contracts signed after the occurrence of the risk will not be affected. These include the contracts signed after mid-February, according to estimates by legal professionals. "The conditions of externality and unforeseeability seem to be met. There remains the issue of unavoidability to be dealt with in order to know if the effects could have been avoided by appropriate measures," said Jean-Pascal Bus. This will be decided on a per case basis. Do the construction sites that have been shut down, even though the government authorizes and encourages further work, fit into this category? "If it is not prohibited to send employees to work, force majeure becomes a subject for discussion. However, if it is the employees' desire not to work, then there is a good chance that force majeure will be qualified," analyzes the Norton Rose Fulbright lawyer.
There is another way that force majeure can be raised for discussion by contractors whose business is impacted by the epidemic. It is unforeseeability; a concept that entered the Civil Code in 2016. "In a contract, it can be expected that if an event occurs and significantly increases the cost of the service, as in the case of the virus, it becomes possible to renegotiate its price," explains Patrice Grenier. The increase in the price of steel, for example, could make the completion of projects more expensive and drive the provider to renegotiate the contract. In the case of an epidemic, the actions implemented to ensure that services can be honored despite confinement may carry substantial costs.
Are force majeure and unforeseeability currently able to be invoked by French companies? "In practice, the parties mainly try to negotiate around these two concepts," notes Jean-Pascal Bus. There is an unforeseen issue at hand with financial consequences and these consequences need to be addressed. A hydrocarbon company unable to deliver as much merchandise as expected could find common ground with its customer, who, in turn, may have lower needs due to the epidemic. Patrice Grenier talks about creative solutions to combat the effects of the crisis: for example, "providers anticipate a supply disruption. One can imagine pools of contractors from different countries all facing the same crisis, just not exactly at the same time. China would produce supplies for other countries that would, in turn, compensate China for what they previously lost and so on with other territories."
If the parties do not find an agreement and the judge considers that the epidemic is due to force majeure, the contract will be suspended for a limited period (usually three to six months if it is not provided for precisely in the agreements). "The suspension cannot allow the other party to cancel the contract, unless the cause of the suspension is final. This would mean that the epidemic will not end. If the beneficiary nevertheless terminates the contract, it is he/she who will have to make up for it at his/her expense,” continues Patrice Grenier. Unforeseeability does not provide for the suspension of services but it does provide for the renegotiation of service prices.
Chinese companies are starting to call force majeure and are supported by the authorities. As for the French, the ‘We are at war’ speech used by Emmanuel Macron should facilitate the process for French companies who would like to invoke this means, since war rhymes with unforeseeability and externality. However, legal professionals are mainly seeing renegotiations. Pragmatism is in the order of the day.