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Coronavirus and international commercial contracts: French law perspective (III) - Verne Legal

Coronavirus and international commercial contracts: French law perspective (III)

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June 9, 2020

In the two previous articles, we considered whether force majeure or l ‘imprévision could be a legitimate justification to suspend or terminate contractual obligation due to the coronavirus pandemic.

In the third and last part of the series “Coronavirus and international commercial contracts: French law perspective” we define a basic action plan, i.e. a set of practical guidelines for companies encountering problems in the performance of contractual obligations as a consequence of the current Covid-19 crisis.

Our experience shows that in this difficult for everyone period, negotiations, mediation and compromise are the key to reaching amical agreements that protect trade relations from possible court proceedings.

For this reason, we believe that the right strategic approach could minimize the potential negative effects of the epidemic on trade agreements, such as reduced productivity or costs, liability for damages or premature contractual termination.

Review of the binding agreement and risk assessment

As indicated in previous publications, the first step before any reaction is to carefully revise the terms : the rights and obligations, of the binding agreement. Needless to say, this applies to contracts concluded between the parties before the advent of Covid-19: for France before February 28, 2020 (the day the French Ministry of Economy and Finance qualified the coronavirus as a force majeure event in the context of public procurement).

First of all, it is strongly recommended to check force majeure and hardship clauses. In addition, it is also necessary to examine the provisions regarding anticipatory breach, or other exceptional situations where non-performance or improper performance may be justified by special circumstances, as well as revise criminal clauses, forfeiture clauses or exclusion clauses. What is more, the contracting party should review the mechanisms related to the possible delay in obligation performance (an option period, use of the GAP, etc.), the use of termination clauses and default clauses.

Finally, it is necessary to reread the contractual provisions concerning mediation, as well as those relating to dispute resolution, including the applicable law clause and the jurisdiction clause.

Verification of the content of the contract, and its exact wording, is crucial as in many cases, it contains information provisions and details on the notice requirements related to various legal mechanisms that we could potentially use. Respecting such obligations, even though they relate mainly to the form (e.g. notice period – usually delivered “quickly”, a mean of communication used or elements of content to include in the notice) is as important as the choice and proper justification of the legal provision on which we base our action.

The consequences of any contract termination or contract breach should also be evaluated.

Search for alternatives and flexibility

Experience has already shown that the Covid-19 pandemic impacts the businesses both in a short and in a long term. Therefore, in the event of experiencing difficulties in fulfilling an obligation, and before considering terminating it, it is recommended to examine all possible alternatives to meet our contractual engagement. The purpose and importance of this verification lies in maintaining a supply chain continuity. It is also important to remember that the epidemic is not just having consequences on one individual activity; on the contrary, it is a global phenomenon. Thus, the activity of your clients may also be paralyzed, as a result of which your failure to deliver will possibly have an insignificant impact on their business and will not cause them harm.

Communication and consideration of national regulatory frameworks

Communication is a key element in well-functioning business relationships, especially in critical situations such as the one we are currently experiencing. It should be recalled that in international trade, cultural differences should also be taken into account.

In addition, it should be remembered that even within the European Union, each country has its own activities and limitations associated with the coronavirus crisis. Therefore, the measures taken in France do not necessarily relate to, for example, the activities of Polish companies. A coherent approach and understanding of local regulations related to restrictions and emergency measures are very important when developing a strategic plan in times of the current crisis.

The legal framework adapts to the pandemic situation of each country, which is constantly changing. That is why it remains crucial to regularly review legal updates and consult them with the national directives related to their application, in order to understand the legal nuances of each jurisdiction.

In France, art. 11 of the Act adopted on March 23, 2020 allows the government to adopt by June 24, in the form of ordinances, certain measures that previously had to be reviewed and voted by the legislative body[1]. A number of actions have already been taken, including a regulation regarding the non-payment of rents for commercial premises, water and electricity bills by companies experiencing difficulties due to the epidemic. Article 4 of the Regulation provides that companies that have not paid leases for commercial premises and other charges resulting therefrom will not be fined or charged with the late payment interest. The provision applies to payments that were due between March 12 and two months after the announcement of the state health threat by the French government[2]. However, it should be noted that overdue payments are not canceled, but only postponed. Also, these rules only apply to very small companies (less than 10 employees), significantly affected by the crisis, and meeting strictly determined criteria.

Evidence collection and insurance cover

We recommend our clients to obtain and keep all relevant evidence regarding events that have affected the performance of commercial contracts during this period. The causal event may also be important to determine the possible legal justification for the breach of contract, as described in our previous articles about force majeure and hardship. For more information please read our previous publications.

We remind you that every detail of evidence is valuable, as the burden of proof lies on the party who fails to fulfill their obligation.

In addition to reviewing the binding agreement, Verne Legal reminds the importance of the evaluation of available insurance coverage. The effectiveness of a claim often depends on its reactivity. However, reporting dates differ for each insurance policy. The scope of insurance may also vary; some may provide protection in the event of business interruption, while others may cover force majeure events or political risk.

It should be noted that most policies require direct physical loss of ownership, customers or suppliers. However, specific provisions are set out in the general terms of use and insurance notice, which should be carefully considered. By an interim order issued on May 22, 2020, a Commercial Court in Paris ordered an insurance provider to compensate a restaurant owner for operating losses resulting from the sanitary crisis related to the coronavirus.

In relation to the above, it should be recalled that in order to assess each contractual situation, a detailed factual analysis is necessary. 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. For daily updates, follow us on LinkedIn.

 

Iga Kurowska                                                               Ewa Kaluzinska
Verne Legal, Partner                                                     Verne Legal, Partner

 

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 business and 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] Art.11 of Act No. 2020-290 of March 23, 2020 a state of emergency aimed at tackling the Covid-19 epidemic (published in the Journal of Laws on March 24)

[2] Art. 4 of Regulation 2020-316 of 25 March 2020 “relating to the payment of rents, water, gas and electricity bills related to the professional premises of companies whose activities are affected by the spread of the COVID-19 epidemic”

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