Post title
March 30, 2020
In the previous article we have analyzed whether force majeure can be a legitime justification used to suspend or terminate the performance of the contractual obligations due to the coronavirus outbreak. As demonstrated, the answer to that question depends on numerous factors, therefore, we will dedicate the second part of our article series to another mechanism introduced by 2016 reform [1] under the French law – l’imprévision.
Indeed, l’imprévision, known as hardship, could be used as a justification for contract non-performance in case of epidemic situations such as Covid-19.
To start with, we will explain the concept under the French law (I) that is supposedly governing the international commercial contract (II). Next, we will apply it in today’s context of coronavirus outbreak (III).
1. What is hardship (l’imprévision)?
French Civil code defines l’imprévision in its article 1195. Under the French law, a party to a contract entered into on or after October 1, 2016 may ask its co-contractor to renegotiate the terms of the contract if a change of circumstances, unforeseeable at the time of the conclusion of the contract (1), renders its performance excessively onerous (2) and if that party did not agree to bear the risks of such a change of circumstances (3). The above three conditions are thus necessary for hardship to produce its effects.
As opposed to force majeure, in case of hardship the contract performance does not become impossible for one of the parties, but the cost of such performance becomes excessively expensive.
It shall be noted, however, that contractual parties may also have specifically adapted the statutory hardship provision to their particular situation or may have agreed to set aside (have waived) statutory hardship provisions which would result in bearing the risks of an excessive cost of performance due to an unforeseeable change of circumstances.
Furthermore, as opposed to the force majeure which allows for suspension or termination of the contract, in case of hardship provision there are numerous possible outcomes, If the other party refuses the negotiation or if the discussion fails, then the parties may either terminate the contract at a date and under conditions that they agree on, or they can agree to request a judge to adapt the contract to the new circumstances. Moreover, if the parties do not reach an agreement within a reasonable period of time, then either party may request a judge to revise the terms of the contract or to terminate it, at a date and under conditions to be determined by the judge. However, it is essential that during the negotiation, the parties continue to perform the contract obligations.
2. Hardship in the context of international commercial contracts
Although the hardship provision has been introduced in French civil code just recently, it has already been used for some time in international commercial contracts. Article 6.2.2. of UNIDROIT principles [2] defines hardship as a situation where the occurrence of events fundamentally alters the equilibrium of the contract, provided that those events meet given requirements:
(a) the events occur or become known to the disadvantaged party after the conclusion of the contract;
(b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract;
(c) the events are beyond the control of the disadvantaged party; and
(d) the risk of the events was not assumed by the disadvantaged party.
The same definition is provided by the Principles of European Contract Law in its art 6.111.
As it was mentioned for force majeure, when French law is governing the contractual relationship and such concerns cross-border sale of goods, we shall refer to United Nations Convention on Contracts for the International Sale of Goods (CISG), always when its application was not explicitly excluded by the contracting parties. It appears, however, that the hardship provision is not covered by the scope of the CISG.
Although the French courts have not had a change to judge over CISG application in the context of international sales of goods yet, we can imagine their decision would be similar to the one of our Belgian neighbors. In Scafom Internatinoal case [3] from 2009, Belgian Supreme Court have applied article 79 [4] of CISG stating that: “Changed circumstances that were not reasonably foreseeable at the time of the conclusion of the contract and that are unequivocally of a nature to increase the burden of performance of the contract in a disproportionate manner, can, under circumstances, form an impediment in the sense of this provision of the treaty.”
Thus, it can be concluded that it is most probable that the French court would also include hardship in the scope of the article 79 of CISG, in order to follow the art. 7(a) of CISG and fill the gaps in a uniform manner with the general principles which govern the law of international trade.[5]
In any case, the probability of admitting hardship is strengthened by the fact that the only possible alternative to applying article 79 in international contracts of sale of goods would be justified by article 7(b) of CISG which calls for application of law applicable by virtue of the rules of private international law, or the one agreed on in the contract provision. Thus, in case of French law being applicable, we are back to beforementioned article 1195 of French Civil Code.
3. Hardship and coronavirus outbreak
In cases where the COVID-19 pandemic and subsequent measures do not meet the conditions to qualify as force majeureevents, but still make it more onerous for a party to perform its obligations under a contract, we believe that the party may be able to claim the benefit of the statutory hardship provision.
However, as little interpretation of the article 1195 of the French Civil code has been given, we lack clear guidance on the application of this provision. Thus, the wording of the contract is critical here: if the contract is silent on this point, then the judges will be free to interpret the terms of the art. 1195 of French Civil Code. Certain questions may concern the “unforseeability” – whether the COVID-19 pandemic and related preventive measures were “unforeseeable” to the parties to contracts entered into at a time when it was public knowledge that COVID-19 had started spreading, or whether the price is “excessively excessive”.
Giving the above, for companies that are considering issuing hardship notices as well as the companies that are receiving them, it is important to review the relevant agreement together with other contracts binding between the contracting parties. It is also reminded that in order to assess any contractual situation, a fact-specific analysis is required.
More practical aspects of reviewing an international contractual agreement in this critical situation of Coronavirus epidemic will be found in the third part of this article series. Meanwhile, Verne Legal Team is there to assist all companies on their contractual situation as well as other obligatory measures that apply to businesses having their businesses activity in France.
Verne Legal Team is there to assist all companies on their contractual situation as well as other obligatory measures that apply to businesses having their businesses activity in France.
Please be informed that Verne Legal is there to assist all companies having their commercial activity in France. Our team doubles its efforts in order to serve their clients in dealing with the current situation and its consequences.
To guarantee the health and security of our Team, we are available exclusively through phone/email/videoconference:
tel: + 33 (0) 4 30 05 09 04
email: info@vernelegal.com
Iga Kurowska Nicolas Renault
Verne Legal, Partner Verne Legal, Lawyer
Verne Legal provides a customized legal and tax advisory service to both French and foreign companies. It advises clients in running their business in France, offering strategic assistance enriched by multicultural sensitivity. For more information on the tax law in France, we invite you to download “Doing business in France” e-book and to contact our team at info@vernelegal.com.
[1] On October 1, 2016, Order n°2016-131 of February 10, 2016, modifying the French Civil Code provisions on contract law and the general regime and proof of obligations, entered into force.
[2] UNIDROIT Principles of International Commercial Contracts (UPICC)
[3] Belgium 19 June 2009 Court of Cassation [Supreme Court] (Scaform International BV v. Lorraine Tubes S.A.S.) [http://cisgw3.law.pace.edu/cases/090619b1.html].
[4] Under Article 79(1) [CISG], a party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. The same provision covers force majeure.
[5] Article 7(1) and 7(2) of CISG, such as commented by Harry M. Flechtner, in “The Exemption Provisions of the Sales Convention, Including Comments on “Hardship” Doctrine and the 19 June 2009 Decision of the Belgian Cassation Court” Belgrade Law Review, Year LIX (2011) available online at <http://cisgw3.law.pace.edu/cisg/biblio/flechtner10.html>