On 1 October 2016, the French contract law reform introduced by Ordinance No 2016-131 of 10 February 2016 took effect (the Reform). The government has mostly codified existing case law with the intention of simplifying and stabilising the law, to render it more accessible and to reinforce its attractiveness in international transactions. Nevertheless, it has also introduced a number of innovations which deserve a closer look.
The Reform applies to contracts entered into as from 1 October 2016, including amendment agreements, tacit renewals and novated contracts executed or occurring after such date. Hence, financial transactions concluded under the former law may (partially) fall within the scope of the Reform.
The key new provisions affect the formation and termination of contracts, and tripartite party arrangements transferring obligations.
‘Good faith’ and pre-contractual information
The contractual parties must negotiate, form and perform the contract in ‘good faith’.
During the negotiations, they must disclose all information that is critical to the other party’s consent. When approaching negotiations, it is important to bear in mind that: (i) the parties cannot limit or exclude this duty or waive their related rights, (ii) this duty applies where the other party is ‘legitimately’ unaware of relevant information or ‘trusts’ the disclosing party; and (iii) the disclosure obligation is wide-ranging, covering all information having a direct connection with the contract itself or the parties. Failure to disclose could result not only in liability, but also in the annulment of the contract.
In financing arrangements, the main impact of this duty will be to hold liable those lenders and obligors who fail to provide material information to their counterparties. Prior to the Reform, lenders were required to warn an unsophisticated borrower or guarantor of the consequences of its potential commitment, but this duty has been extended.
Damages would be the usual remedy, or even avoidance of the contract.
Rationale and contract formation
The rationale for a contract is the reason that each party has for entering into it.
After the Reform, the rationale is still required but for clarity, the legislator has set out the following specific requirements:
- any contract has to be lawful in both its stipulations and purpose
- there must be valuable consideration
- a contract might be invalidated if dependent on another void contract.
When documenting financing arrangements, consider including a provision to the effect that the annulment of one contract will not affect other contracts.
‘Significant imbalance’ and standard terms and conditions
The Reform introduced the notion of ‘significant imbalance’ (déséquilibre significatif).
Any term of a ‘standard form contract’ which creates a significant imbalance in the rights and obligations of the parties to the contract is deemed void. A ‘standard form’ contract is defined as one whose general conditions are determined in advance by one party without negotiation. The main subject-matter of the contract; and the adequacy of the price are not relevant conditions.
A facility agreement should not be caught within this net, being a document which is invariably negotiated.
The Reform has introduced the concept of ’hardship’ to the French Civil Code. If an unforeseeable change in circumstances occurs and renders the performance excessively onerous for a party, then that party has the right to ask the other to renegotiate the contact. The mechanism then entails further stages, which include the potential involvement of a judge who may revise, or even end, the contract in certain cases. The newly-introduced hardship provision will not prevent parties from trying to find a mutually acceptable solution in case of an unforeseen event, (e.g. such as a substantial change in the interest rate index or of an occurrence of a political risk that does not constitute a force majeure) to avoid the judge’s intervention.
However, parties should explicitly exclude the legal concept of ‘hardship’ in their financial documentation and insert either (i) a ‘no hardship’ provision (recommendation of the Loan Market Association in the standard contract for an investment grade loan); or (ii) a ‘contractual’ hardship provision such as the material adverse change (‘MAC’) or market material adverse change (‘Market MAC’) clause.
The Reform gives a party the right to suspend performance of its obligations as soon as it becomes obvious that the other party will be in a material breach of its own obligations. The performance default must be sufficiently serious; obvious (manifeste); and the non-breaching party must notify the other of the suspension as soon as possible.
This legitimises the notion of ‘potential event of default’ and will give leverage to lenders to impose clauses to that effect. The obvious case for its application is the facility agreement with successive drawdowns, in which the lender could now refuse a drawdown in the event of a potential event of default.
The Reform also introduced two articles which have a particular importance for intra-group loan agreements:
- Article 1161 (Representation)
A representative cannot act on behalf of both parties to a contract, nor can he contract on his own with the person whom he represents.
Where he does so, any act which is concluded is a nullity, unless legislation authorises it, or the person represented has authorised or ratified it.
It is therefore best practice to set out the authorisation in the previous power of attorney; or the signature bloc in the relevant agreement.
Article 1161 is also relevant to arms-length syndicated financing arrangements, where the facility agent is often also part of the syndicate of lenders. The terms of the authorisation permitting this should be set out in the loan agreement.
- Article 1145 (Capacity)
The capacity of a legal entity (civil or commercial company) is limited to acts useful for realising their purpose as defined by their statutes, and acts which are incidental to them, in accordance with the rules applicable to each of those entities. In case of a ‘cross-collateralisation’ or an ‘up-stream’ or ‘cross-stream’ guarantee or loan, a lender should check that the transaction is covered by the wording of the by-laws and that it does not exceed the financial capacity of the relevant company.
Assignments and transfers
- Assignment of receivables
The Reform restates the principle that an assignment of receivables is valid without the consent of the debtor, unless the right was stipulated to be non-assignable. The assignment must be effected in writing.
It will be enforceable against third parties as of the date of the signing and against the debtor, from the date of notification. If collateral securing the debt is also transferred, this will be enforceable against the party giving the security from the date of notification.
- Transfer of debt
A debtor may now transfer his debt to another person with the agreement of the creditor. If the creditor gave his agreement to the assignment in advance, he may enforce against the transferee, as from the day when he was notified of it. The original debtor may be discharged entirely, if the creditor expressly agreed to this. If the debtor (transferor) is not released, he and the new debtor are jointly and severally liable for the debt.
- Transfer of a contract
The Reform introduced rules governing the transfer of a contract, which is of particular importance with regards to ‘step-in rights’ in project finance documentation. Contracts can now be transferred with the agreement of the other party, which can be given in advance. The transfer must be in writing. The assigning party will in principle be held jointly and severally liable following the assignment unless its obligations are expressly discharged. The rights and obligations of the contracting party remain unchanged.
In facility agreements, the introduction of a new lender or facility agent may be considered as a transfer if a contract (and/or a transfer of debt for the undrawn part of such participation). The consent of the borrower to future assignments of the contract (and/or debt) should be set out in the facility agreement, thus simplifying future mechanics. On a simple notification an assignment becomes effective, and the same applies to a lender or agent being released from their respective obligations under the facility agreement.
The parties may agree that the borrower’s consent is conditional e.g. on the creditworthiness of the new lender. If third party guarantees are part of the deal, the security documentation should state that security interests continue post such novation/ assignment.