The coronavirus COVID-19 crisis and its economic consequences (experts are anticipating an economic downturn) require today a different response than in previous crises, not only because French law has significantly changed since 2008. This alert outlines a practical scaled approach that needs to be differentiated according to the variety of possible situations, but needs to be made in a timely manner.
The coronavirus crisis and its economic consequences (experts are anticipating an economic downturn) require today a different response than in previous crises, not only because French law has significantly changed since 2008:
- While COVID-19 may be classified as a Force Majeure event, there are important legal exceptions.
- A change in economic conditions is now officially recognised by French contract law:
- Impact on a potential termination
- Impact on a contract renegotiation
- As opposed to many other legal systems, the opening of insolvency proceedings in France does not allow one to escape from a contractual relationship – waiting for insolvency to happen is not an exit strategy.
- The coming weeks will therefore be crucial in terms of evaluating and anticipating the legal tools that can be implemented to address each situation.
Force Majeure (for agreements concluded before 30 January 2020)
Why before 30 January 2020?
The element of unpredictability of Force Majeure is assessed at the time of the conclusion of the agreement. Thus, (a) although the COVID-19 epidemic may be considered as a Force Majeure event - subject to a detailed analysis - for contracts predating the epidemic, (b) it is unlikely to be regarded as any longer an exonerating event for contracts concluded after 30 January 2020 (that is the date the WHO defined COVID-19 as an epidemic), including purchase orders.
- In principle, COVID-19 should constitute a Force Majeure event for contracts subject to French law: on 28 February 2020, the Minister of the Economy indicated that the French Government would retain the existence of a Force Majeure event in the context of the execution of public contracts. In the context of private contracts however, the WHO guidance of 30 January 2020 is likely to help French judges to define the occurrence of COVID-19 as a Force Majeure.
- Exceptions to the classification as Force Majeure event: a detailed analysis of the contractual relationship is necessary to assess the characterisation of the event.
- However, there are exceptions: for example, payment obligations cannot be exempted by a Force Majeure event.
- Situations of partial impossibility must also be determined: only contractual obligations affected by Force Majeure will be exempted, therefore a total impossibility is not automatic.
- The exempting effect of Force Majeure on contractual obligations shall also be assessed on the basis of the temporary or permanent nature of the impossibility.
Anticipating exceptional circumstances
In the event of a post COVID-19 economic downturn, the Force Majeure defense may not be applicable as it will be diluted in many other factors. In any event, for all contracts post 30 January 2020, COVID-19 may no longer be unpredictable.
How can economic contingency be managed in this context?
Managing the unforeseen requires answering the following issues:
- Existence or absence of a Hardship clause, and
- Application of the new legal regime provided by French contract law (Article 1195 et seq. of the French Civil Code) which allows either the opening of a renegotiation of the agreement, or its termination.
Preparing a scaled response
What are the obstacles to a quick response?
- Many different contractual Terms and Conditions
- A variety of operative situations
- Lack of immediate visibility
- Probably no application of Force Majeure to any contract starting from 31 January 2020
- Urgent actions to be implemented immediately, before any contractual audit: Preventing contractual default, or conversely, taking steps in order to fall under that qualification
- Issuing Contractual notices
- Immediate review of insurance policies
- Preparing a calibrated response
- Audit of contracts and T&Cs
- Setting up a monitoring strategy of the commercial relationships (termination/re-negotiation)
- Preventing future short-term risks
- Implementation of contractual corrective measures
Caution: French Supply Agreements (“Convention unique”) should be reviewed in urgency for 2020.
Legally speaking, the COVID-19 virus is a contractual event.
Its consequences however need to be anticipated and prevented in a differentiated, but timely manner.