Following a ruling by the French Supreme Court (Cour de cassation) on 20 June 2012, a master agreement covering “subcontracting guarantees” that it is firm and binding now has the value of a payment guarantee within the meaning of Article 14 of Law No. 75-1334 of 31 December 1975 on subcontracting (the “Law of 31 December 1975”).

In this much-awaited decision, the Supreme Court has reversed its practice. When a private contract for work is subcontracted, the payment of all amounts owed by the main contractor to his subcontractor must, on penalty of the subcontract’s invalidity, be secured by a personal and joint guarantee obtained from a qualified establishment (Article 14 of the Law of 31 December 1975).

So as to meet this requirement and in view of simplifying matters, many main contractors have long chosen to have all of their subcontracts guaranteed by a single “floating guarantee”, whereby a bank grants them a bonding facility guaranteeing, for a 1-year period and a specified amount, payment of the amounts owed to their future subcontractors, with the subcontracts then referring to this global guarantee.

The Court had previously consistently refused to recognize the validity of such “floating guarantees”. With a clear focus on protecting subcontractors, it effectively considered that the payment guarantee provided under Article 14 of the Law of 31 December 1975 had to be “personal”, meaning that it had to indicate the name of the subcontractor and the amount of the guaranteed contract (Cass.civ. 3ème, 11 October 1989, 88-11960). Accordingly, case law had found subcontracts to be invalid absent the delivery of a guarantee in compliance with the law upon the conclusion of the subcontract (Cass. civ. 3ème, 7 February 2001, 98-19937).

This case-law solution indirectly served to achieve the objective of some subcontractors, which was to obtain a declaration of the invalidity of the guarantee in the sole aim of obtaining the cancellation of the subcontract and, by extension, of its lump-sum provision. Highly prejudicial to the interests of main contractors and clients, the Court’s position in this respect drew strong criticism from legal theorists.

In this departure from previous case law, the Court found in this ruling that the guarantee given by the main contractor under the master agreement entered into with a bank satisfied the requirement of a payment guarantee under Article 14 of the Law of 31 December 1975.

In this case, what was involved was a master agreement covering guarantees of payment of all amounts owed to subcontractors pursuant to certificates (“cautions de sous-traitance par attestations”) that provided for the delivery of a certificate of guarantee in the name of the subcontractor within three business days of receipt by the bank of the notification of the subcontract by the main contractor. In accordance with the provisions of that master agreement and of the subcontract referring thereto, the bank had duly received notification of the subcontract from the main contractor, while a certificate of guarantee individually naming the subcontractors had been issued to the latter.

The two subcontractors nonetheless asserted the invalidity of their subcontract on the basis that the main contractor had not provided them with a personal and joint guarantee from a qualified establishment. In support of their claim, they argued that the master agreement between the instructing party and the bank did not have the value of a guarantee since it failed to state either the name of the subcontractor, or the amount of the guaranteed contract. This argument failed before the Court of Appeal, which considered that the guarantee had been provided before the subcontract had been entered into, since the master agreement was firm and did not give the guarantor any possibility of refusing to provide a guarantee.

The Supreme Court upheld this position and found the subcontract valid. This decision has the merit of legitimating this widespread practice of granting “floating guarantees” in the framework of private contracts for works and putting an end to the legal uncertainty surrounding this type of guarantee.