This article considers certain aspects of the recent reform of the French Civil Code which have relevance to construction and infrastructure contracts, and compares them to similar provisions existing in UAE and Qatari law.
The reform of French law introduced by Ordinance No. 2016-131 dated 10 February 2016 applies to private construction contracts entered after 1 October 2016, although a number of procedural provisions will apply to contracts concluded before that date.
The reform is intended to modernise French contract law. It covers many aspects of contract law including the introduction of a requirement of good faith during pre-contract discussions and negotiations, as well as new provisions permitting the renegotiation or annulment of a contract in certain circumstances.
This article considers two aspects of the new law and their anticipated impact on construction and infrastructure contracts. First, the regulation of contractual imbalance and, second, the impact of the new hardship provisions. These new rights are compared in this article to similar provisions which exist in UAE and Qatari law.
They are rights which unlock remedies of interest to parties engaged in long term contracts where changes in economic conditions mean that disputes have arisen as the parties seek to adjust their contracts to reflect the changed circumstances.
Regulation of contractual imbalance
Whilst the general rule is that a court will not interfere with the contractual bargain reached by parties, there are two important exceptions to this rule that have now been codified. Although these two exceptions are not mandatory rights, and could be excluded by the parties by an express provision in their contract, such exclusion is in practice difficult to imagine except in cases of imbalanced bargaining positions of the parties.
The first exception, previously based on the controversial concept of ‘cause’, established in case law by the Cour de Cassation in 1996, has now been codified by Article 1170 which provides: “any contract terms which deprive a debtor’s essential obligation of its substance is deemed not written”.
This exception permits, in certain circumstances, the striking out of contractual provisions found to deny a party’s essential entitlement under a contract. The extent of the application of this remedy to construction contracts is yet to be seen, but it could theoretically extend to judicial interference with agreed contractual caps on liability and/or performance obligations that are held to be out of sync with the principal obligation under the contract in question.
The second exception, in Article 1171, provides that “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 not written”.This exception only concerns parties contracting on one or other’s standard terms and conditions (Article 1110 defines “standard form contract” as a contract “whose general conditions are determined in advance by one of the parties without negotiation”) and gives the French courts the power to nullify offending terms which are found to have created a significant imbalance in the parties’ rights and obligations.
In the construction industry, this second exception is likely to be most relevant to small businesses that have terms and conditions imposed on them by a larger business such that a contractual imbalance has arisen. It is possible that the effect of this Article may also extend to some private works contracts which are often marginally negotiated by the contractor - but it is not expected to affect larger or freely negotiated contracts.
UAE law takes a similar approach to these two new exceptions. The general rule is that the UAE courts will not interfere with parties’ contractual agreements, but Article 248 of the UAE Civil Code does provide some protection to parties who contract on the other party’s standard terms, referred to as a contract of adhesion.
In this connection Article 248 states: “if the contract is made by way of adhesion and contains unfair provisions, it shall be permissible for the judge to vary those provisions or to exempt the adhering party therefrom in accordance with the requirements of justice, and any agreement to the contrary shall be void”.
Article 248 accordingly allows a judge to vary or remove terms of the contract considered unfair to a party contracting on the other party’s standard terms. Parties cannot, for public policy reasons, exclude the effect of Article 248 from their contracts.
The second remedy considered by this article and brought into French law by the new Ordinance is the possibility for a party to seek the renegotiation or termination of a contract “where a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance exceedingly onerous for a party who had not accepted the risk of such a change”(Article 1195).
This is generally known as a “hardship provision” and is a remedy which applies where the party claiming hardship has not expressly taken the contractual risk of the event that leads to the changed circumstances. It is also non-mandatory and can therefore be excluded in full or part by clear contractual terms.
The remedy entitles an aggrieved party, for whom performance of a contract has been rendered excessively onerous by an unforeseeable change of circumstance, to seek the renegotiation of the contract with its counterpart. Both parties are required to continue to perform their contractual obligations during the renegotiation to provide certainty that the parties will continue to abide by their contractual obligations.
If the parties are unable to agree new terms, they may agree to terminate the contract on mutually acceptable terms. If the parties have been unable to agree terms, but do not wish to terminate the contract, then they can jointly ask the court to determine revised terms to reflect the changed circumstances.
Alternatively, if the parties do not agree to approach the court jointly, then a party acting within a reasonable time period, may itself request the court to revise the contract in light of the change of circumstance, or direct that the contract be terminated. It permits the court discretion to intervene in the parties’ contractual bargain and to ultimately impose a solution that had not been requested by the parties. This is a right of last resort and is expected to be exercised with caution by the courts.
The new Article 1195 has left it up to the French courts to determine what constitutes an “unforeseeable change” that can be said to have rendered the contract performance “excessively onerous”.
The impact of this remedy on construction and infrastructure contracts will have to be monitored once the Ordinance comes into force. Indeed, it is quite possible that it will have little discernible impact on contracts which typically contain agreed contractual mechanisms catering for unforeseeable events, such as force majeure provisions. Similarly the courts have shown a historical reluctance to order a higher price/additional costs in lump sum contracts on the ground of unforeseeable or disrupted market conditions. It seems more likely that the remedy will be used more often as an avenue to seek termination of the contract on the basis of an unforeseeable event.
In any event, we expect the construction industry to routinely exclude this remedy from construction contracts to limit judicial interference with the parties’ contractual agreement. Not least, as mentioned above, because construction contracts generally already include adequate mechanisms for responding to unforeseeable events. But also due to uncertainty as to the approach and interpretation likely to be taken and applied by the courts to the remedy.
Both UAE and Qatari law contain similar hardship provisions. However, unlike the new hardship provision introduced into the French Civil Code, the rights are mandatory and cannot be contracted out of by parties.
Article 171 Qatari Code, and Article 273 of UAE Code, both permit relief for financial hardship. The operation of this relief is, however, different between the two jurisdictions.
In terms of the applicable tests in relation to the notion of unforeseeability, Qatari law refers to “exceptional and unforeseen events” whereas UAE law determines the rights based on force majeure principles. The nature of the hardship is also determined by different tests – in Qatar it is required to be “excessively onerous” and under UAE law “impossible”.
The remedy available to the parties also differs. In Qatar, there is a focus on reasonable resolution by renegotiation, whilst under UAE law the remedy is rescission of the contract, either in whole or in part.
Whilst the introduction of codified hardship provisions under Article 1195 is likely to be welcomed by commercial parties, it is unlikely to have a major impact in the construction industry given that similar provisions can generally be found in the sophisticated contracts parties already in use. We therefore expect to see these provisions routinely expressly excluded from contracts subject to French law, whereas the equivalent rights cannot be contracted out of under UAE or Qatari law.
Similarly the new remedies introduced by Articles 1170 and 1171 to rectify contractual imbalance are also to be welcomed, and parties should be aware of these new codified remedies when negotiating terms which are out of sync with the primary obligations and/or if contracting on standard terms of business.