The legal mechanisms to protect your contractual relations

March 30th 2020

The health crisis that we are currently encountering has caused chaos to our lives and companies’ activities. The repercussions are endless and whilst dealing with the labor law issues that have arisen, the companies are required to draft an exhaustive list of the agreements or commercial relations currently in force with suppliers or clients, to envisage the impact of a cessation or decline of current economic activity. The agreements are not automatically suspended and the provisions of the health emergency law dated
March 22, 2020 or the government orders dated March 25, 2020 do not provide for private agreements, with the exception of lease, gas and electricity agreements for micro-enterprises (less than 10 employees and less than 2 million euros in turnover). 

Some guidelines are mentioned below.

 

IDENTIFY THE APPLICABLE AGREEMENTS

 

IDENTIFY THE LAW APPLICABLE TO THE AGREEMENT

For the commercial relations referred to as “open” (performed on the basis of accepted orders) which are not governed by a written framework agreement but which include an extraneous element (one of the partners is foreign or is based abroad, a service or part of the service is performed abroad), in order to define the law applicable to the agreement, the following must be considered:

  • define the place of performance of the relevant service
  • identify whether the general terms and conditions of sale (GTSs) or purchase (GTPs) are applicable, and identify the provisions, in particular, relating to Force Majeure.

 

NOTIFY THE SUSPENSION OF THE AGREEMENT FOR FORCE MAJEURE

a. Definition of force majeure

To be defined as a force majeure, an event must comply with 3 conditions according to Article 1218 of the French Civil Code, applicable in the absence of any stipulation to the contrary in the agreement:

  1.           it must be beyond the debtor’s control (extraneous),
  2.          it could not be reasonably anticipated by the parties upon the conclusion of the agreement (unpredictability),
  3.         its effects may not reasonably be avoided (unforeseeability).

The force majeure may be asserted to request the suspension of the agreement if, and only if:

  • appropriate measures are unable to be taken (even if these measures would be costly for the company) to perform its contractual obligations.
  • the date of conclusion of the agreement to verify whether the force majeure event could be foresee.

Taking into account the current situation,

  • if the company is still able to continue its activity, the unforeseeability could be contested,
  • if the agreement was entered into at the end of February, beginning of March, the unpredictability could be contested.

The judge shall decide in the event of a disagreement between the parties concerning the qualification of force majeure (the contracting party may contest the qualification of force majeure). For example, French case law has already pronounced and refused to recognize the force majeure for the flu epidemic H1N1.

 

b. Effects of the force majeure

When the force majeure prevents the performance of the agreement temporarily, the debtor’s obligation shall be suspended. Upon the disappearance of the force majeure event, the agreement may be continued.

The notification of the force majeure enables the protection of the contractual relations.

If the suspension of the agreement results in a substantial delay or if the temporary impediment becomes final, the total or partial termination of the agreement may be envisaged.

 

c. Notification of force majeure

The debtor of a contractual obligation who is prevented from the performance thereof shall notify in writing the occurrence of the force majeure event and solicit the suspension of the agreement.

This notification shall be made by registered letter with acknowledgment of receipt in addition to any other standard written means of communication used by the contracting parties to provide evidence.

 

REQUEST THE RENEGOTIATION OF THE AGREEMENT FOR UNPREDICTABILITY

If:

  • the party to the agreement contests the qualification of force majeure and requests the performance of the agreement whereas it is unable to perform such agreement or the performance thereof has been made unduly difficult or imbalanced,
  • upon the outcome of the force majeure event, if the performance of the agreement proves to be too difficult or more onerous than foreseen due to the economic imbalance of the agreement,

 it is possible to contact the other party to request the renegotiation of the contractual conditions on the basis of Article 1195 of the French Civil Code.

 

a. Prior verifications

  • If there is an agreement or GTSs or GTPs, verify the stipulations since:

- a "hardship" or "unpredictability" clause may exist with the specific terms of implementation

- the agreement may exclude any renegotiation.

  • The date of conclusion or renewal of the agreement as Article 1195 of the French Civil Code is only applicable to the agreement entered into of renewed after October 1, 2016; for the previous agreements, the renegotiation may be requested on the basis of good faith under the agreement.

 

b. Conditions of unpredictability

In order to duly request the renegotiation of the agreement on the basis of unpredictability, the following conditions must be met:

  • prove a change of circumstances, unpredictable upon the signature of the agreement (for the identification of a force majeure event, the date of signature of the agreement is of particular importance)
  • that renders the performance of the agreement particularly onerous (the performance must generate a prejudice for the obliging party)
  • prove that there was a risk that had not been accepted by the obliging party (which explains the importance of the prior verification of the contractual stipulations).

The renegotiation may be refused by the contracting party and in the event of refusal or failure of the renegotiation within a reasonable time period, the parties may:

  • agree upon the termination of the agreement, on a date and under conditions at its discretion,
  • refer the matter before the court, which shall amend or annul the agreement accordingly.

 

c. Effects of the unpredictability

Be careful, during the renegotiation period, the contractual obligations shall not be suspended. The unsuccessful party must continue to perform its obligations, which explains the importance of notifying a force majeure event at first if the conditions are met., Otherwise, the obliging party must be subject to indemnifying the other party for non performance if it has not notified a force majeure event and has not performed its obligation.

 

THE TERMINATION OF THE AGREEMENT

The termination of the agreement is also an option to consider if the suspension of the agreement is too long, eliminates the benefit or added value which was expected under the agreement or if the performance of the services is rendered impossible.

 

a. Prior verifications

The agreements, GTSs or GTPs include clauses stipulating the cases and conditions of termination.

Verify whether the agreement is of a fixed or an indefinite duration.

Verify the duration of the commercial relations and the importance thereof for the other party.

 

b. Notification of termination

Caution should be taken in the event of the absence of contractual stipulations, and each termination must be made as a written notification of termination by registered letter with acknowledgment of receipt and justified by the impossibility to perform the obligations for force majeure or unpredictability and if no renegotiation is possible.

The termination shall not have retroactive effect and shall not call into question any previous performance thereof.

 

CONCLUSION

To have a level-headed vision of the contractual relations in the current turmoil, it is important to be aware of the applicable stipulations and to be fully informed.

Emphasis should also be placed on discussions with the other party to examine their current and subsequent contractual relations.

 

Ydès will always be there to assist you.