Offer and acceptance
On February 10 2016 the long-awaited reform of the law of obligations was finally published.(1) The reform is expected to come into force on October 1 2016 and aims to simplify and stabilise the law. Although most of the changes merely codify existing case law, some of them deserve a closer look.
Any contracts that are already in force on October 1 2016 will continue to be subject to the former legal regime, as will any legal action filed before the reform came into force (including appeals to the courts of appeal or the Supreme Court). Contracts that are entered into or renewed or tacitly renewed after October 1 2016 will be subject to the new regime. However, certain provisions will apply immediately, including those relating to an inquiry action (action interrogatoire) aimed at giving more security to contractual relations. An 'inquiry action' allows a party to:
- obtain confirmation of the existence of a right of pre-emption and whether its beneficiary intends to enforce it;(2)
- obtain confirmation of a representative's powers by the person represented, where the former derives its powers from an agreement;(3) and
- force the other party to choose between confirming the agreement and bringing proceedings to have the agreement declared invalid, within a period of six months. If no such action is brought, the agreement is deemed to be valid.(4)
Article 1104 introduces a general requirement of good faith, which applies both at the pre-contractual stage and during the performance of the contract.
Good faith is also reinforced by Article 1112-1, which imposes on each party a pre-contractual duty to disclose information to the other party. This covers information that is decisive in securing the other party's willingness to enter into the contract. The duty applies to information that is within the knowledge of the obligor but not that of the other party, and that cannot be excluded or limited.
A breach of this duty of information can give rise to damages. The contract can even be cancelled if the information is intentionally withheld.
Offer and acceptance are now dealt with in the Civil Code.(5) An 'offer' is defined as a party's willingness to be legally bound and must contain the essential terms of the contract.(6) An offer can be withdrawn at will provided that it has not reached the offeree.(7)
The withdrawal of an offer gives rise to damages when it is made before the end of the offer period set by the offeror or before the end of a period that is deemed to be reasonable.(8)
'Acceptance' is defined as a party's willingness to be bound by the terms of the offer.(9) An acceptance that does not comply strictly with the terms of the offer will constitute a new offer.
Parties can provide for a 'cooling-off' period (ie, the offeree can give notice of its acceptance only at the end of an agreed period), or a revocation period (ie, the offeree can withdraw its acceptance during an agreed period).
The rules on the formation of a valid agreement remain largely unchanged. Under Article 1128, a contract is 'valid' if the requirements on consent, capacity and content are observed.
The rules regarding consent are as follows:
- Consent may be vitiated on the grounds of error, fraud or violence. Any vitiated factor must be decisive, and is assessed in relation to the person concerned and the circumstances in question.(10)
- Consent is sanctioned by relative invalidity – only the contracting party can claim the invalidity of the contract.(11)
- The limitation period for error and fraud starts at the moment they are discovered; for violence, the limitation period starts as soon as the violence has ceased.(12)
The concept of economic violence is enshrined in Article 1143 of the new Civil Code. Three conditions must be met for economic violence to be recognised:
- There must be a state of dependency between one party and the other;
- The dependent party must not have entered into the agreement in the absence of that dependence; and
- The other contracting party must have obtained a manifestly excessive advantage from the situation.
Article 1145 introduces a definition of the 'capacity' of legal entities, stating that it is limited to actions that are necessary to implement the company's purpose, as defined in its by-laws (and ancillary actions) subject to rules applicable to each type of company. Given the absence of a legal definition of actions that are necessary, legal entities may encounter difficulties in determining which actions are within their capacity.
Article 1161 clarifies the rules on conflicts of interest by invalidating any documents signed by the same representative on behalf of both parties to a contract, or if the representative contracts on his or her own behalf with the represented party. However, there is no invalidity in cases where the conflict is permitted by law or authorised or ratified by the represented person. Such conflicts often arise in arrangements between companies that belong to the same group and have the same legal representative.
The content of the contract must not be contrary to public policy, and its essential obligation must relate to "a present or future service" that is determined or determinable.(13) The contract will be invalid if the content is neither lawful nor certain.
Article 1195 introduces the defence of 'hardship', which enables a contract to be amended or terminated if:
- there is a change in circumstances that was unforeseeable at the time that the contract was entered into;
- the change renders performance of the contract too onerous for the party claiming hardship; and
- the party did not agree to accept the risk of that change.
The party claiming hardship is entitled to ask the other party to renegotiate the contract, but must nevertheless continue to perform its obligations during the renegotiation. If the negotiation fails, the parties may agree to:
- terminate the contract on whatever terms they decide; or
- ask the court to change the contract.
If no agreement is reached within a reasonable timeframe, either party may refer the matter to the court to decide whether to amend or terminate the agreement (under terms that are decided by the court).
Article 1195 is not mandatory and therefore may be excluded or limited by contract.
The concept of anticipatory non-performance is enshrined in Article 1220. If a party knows in advance that the other party will not perform the contract, it is entitled not to perform its own obligations. However, this right is subject to strict conditions – only sufficiently serious breaches entitle a party to invoke Article 1220. Unless the matter is urgent, the party claiming anticipatory non-performance must first formally demand that the other party perform the contract. If the non-performance persists, the claiming party can end the contract.
The reform also gives priority to the remedy of specific performance over damages.(14) Damages will be the preferred remedy only if specific performance is impossible or is disproportionately costly. Under Article 1222, a party may also remedy the non-performance by performing the other party's obligations, even without the court's permission.
Even though the reform is mostly a codification of existing case law, it introduces a number of innovations such as hardship and anticipatory non-performance. Legal advisers should pay close attention to the changes introduced by the reform when drafting, interpreting or enforcing contracts.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email ([email protected] or g[email protected]). The Cabinet Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).
(1) Ministerial Order 2016-131 of February 10 2016.
(2) Articles 1123 (3) and (4) of the reformed Civil Code.