As of October 1st, 2016, France underwent a substantial reform in view to modernizing the field of contract law under the French Civil Code which had largely been untouched since the 19th century.
Among the numerous revisions, this note presents three key aspects for the negotiation of long term supply agreements:
- First, the introduction of a hardship provision into the French civil code,
- Second, the pre-contractual liability regime has been strengthened, and
- Third, certain new price revision rights have been recognized.
Hardship and new judicial powers to alter the parties’ agreement
Clauses calling on re-negotiation of terms in the event of unforeseeable circumstances, known as hardship clauses, have been introduced within contracts and upheld by case law. Although allowed, such clauses have not been interpreted to allow courts to revise parties’ agreements or impose new obligations on parties in their performance.
Until this reform, French courts resisted attempts to admit hardship provisions as a matter of law in connection with contractual performance. French courts have steadfastly refused to intervene to alter the terms of agreements in place in the absence of express contractual clauses allowing them to do so.
However, the new Article 1195 of the French Civil Code expressly allows, upon the request of a contractual party, a Court to intervene and alter the terms of a contract or order contract termination in the event that unforeseeable circumstances appear which make performance of the agreement “excessively onerous” for a party “who did not assume such risk”. This code provision does not allow a party to terminate the contract unilaterally for hardship without a court decision.
The reform constitutes a fundamental break from the past and opens the door to lawsuits for amending agreements in changed circumstances, particularly in long term agreements where future conditions are rarely foreseeable. The question of “excessively onerous” obligations and whether the risk was foreseeable or assumed will be subject to debate.
The new regime of pre-contractual obligations
Although contractual freedom is a basic principle governing contract law and especially pre-contractual negotiations, it is not without limit. Indeed, France Supreme Court established a tortious liability regime allowing for damages in the event that one party is abusive in the exercise of his right to unilaterally break off pre-contractual negotiations.
The reform captures this case law under the new Article 1112 of the Civil Code, imposing on parties engaged in pre-contractual negotiations an obligation to act in good faith as of their commencement and in relation to the breaking off of the negotiations.
The reform goes further. The new Article 1112-1 of the Civil Code stipulates a duty by which each party must disclose all relevant information pertinent to the other party in connection with the formation of an agreement. A party who fails or omits to disclose relevant information which could be deemed to affect the other party’s consent may be deemed liable for a breach of duty. In the event a duty towards the other exists regarding certain information, the party having the duty must prove he indeed disclosed such information. If a breach is established, the contract may be terminated and the defaulting party held liable for ensuing damages.
The express call for liability on a party arising from mere silence in negotiation without intent to deceive constitutes a step into unexplored legal terrain.
The application of this new provision may not be excluded or disclaimed by agreement.
New provisions concerning price revision
First, the reform introduces under Article 1217 the right of a party to seek a proportionate reduction in price where the co-contractor fails to perform an obligation subject to prior notice and acceptance of the incomplete performance. Such remedy exists primarily for public bodies in public procurement agreements and is now made available to parties generally via the reform.
Second, framework agreements are identified expressly under the reform as agreements in which parties agree on the general terms and conditions to be applicable to their future contracts, and specific provisions shall be applicable to such contracts including price revision.
In connection with framework or service agreements, the reform expressly allows one party to have the right, in the absence of an agreed price prior to performance, to set the price for such performance unilaterally subject to an obligation to justify the price in case of objection. A court claim may be introduced for termination of the contract and compensation in damages in case of abuse.
With the exception of the pre-contractual liability mentioned above, the foregoing provisions may be varied or excluded by contractual agreement. Contracts concluded prior to October 1, 2016 remain governed by the previous civil code provisions.
In light of these aspects of the reform and other notable changes to the code, companies may consider certain revisions of standard terms and conditions to ensure predictability. For instance, if a seller intends to preclude any possible revision of the sale price for deliveries with minor defects, then the new code provisions must be expressly excluded in the contract of sale.