French contract law Reform: what’s new?

Holman Fenwick Willan LLP

Soraya Salem and Perrine Bertrand

The French Government has, by Ordinance n° 2016-131 of 10 February 2016, amended the French Civil Code regarding contract law that had previously remained unchanged since 1804 (the Reform). This historical Reform is intended to enhance the attractiveness of France in a highly competitive international landscape especially by comparison with the Common Law system.

French contract law has not, of course, remained frozen for over 200 years and the French Supreme Court (Cour de cassation) has ensured the modernisation of the Civil Code by adopting innovative solutions.

The goal of the Reform is not fundamentally to modify French contract law, but rather to codify the changes introduced by case law. Some new provisions are nevertheless slightly different from the legislation in existence and may entail some important changes, which are detailed below.

Provisions relating to contractual liability have not been amended. The existing provisions are however entirely renumbered.

Entry into force

A major part of the Reform will enter into force on 1 October 2016 for contracts concluded or renewed after this date. Some complex situations (such as Framework Agreements and Application Agreements) will therefore be governed partly by the old provisions of the Civil Code and partly by the new ones. Likewise, judicial proceedings initiated before that date remain subject to the old regime.

A few procedural provisions will however apply immediately as from 1 October 2016 to contracts concluded before that date. These new provisions relate to circumstances when a contract is voidable (for example, because an essential element for its formation does not exist), in that event the contractual counterparty will be able to chose either to “confirm” the contract or to take further steps to declare the contract void.

The “Introductory Provisions”

The first three new articles incorporated into the Civil Code are intended to facilitate the interpretation of the rules as a whole, and to fill in gaps where necessary.

1. Freedom first
The central aspect of the Reform is the freedom of parties to opt out of those new provisions that are not mandatory, subject to compliance with French public policy (new Article 1162). The “contractual freedom”, which exists in English law, is defined as freedom to enter into a contract, to choose a contracting party and also to determine the content of the contract.

2. Binding force of the contract
The new Article 1103 reaffirms that that the contract represents the “law between the parties” as was already provided by the previous Article 1134. By way of comparison, contracts in English law are legally binding and enforceable by law.

3. Good faith
Despite the absence of an express definition of the term “good faith” in the new Article 1103, the principle itself, which did exist in practice prior to the Reform, will continue to be a ground upon which parties can claim for contractual remedies. The reaffirmation of this principle is a main difference with English law, which does not recognise an implied duty of good faith even though there has been some case law which might suggest a shift towards recognising the principle in long-term contracts.

Notable new Provisions

Key aspects of the Reform include:

1. Negotiations

• A mandatory duty to provide pre-contractual information
  Anybody “who knows information which is of decisive importance for the consent of the other [party], must inform him of it where the latter legitimately does not know the information or relies on the contracting party”. Any breach of such an obligation may lead to the nullity of the contract and/or to damages (new Article 1112-1). This duty does not exist under English law.
• Express confirmation that the principle of “good faith” is applicable at all stages of the contract
  This will now include the negotiations stage (new Article 1104).
• A duty of confidentiality
  Anyone who “without permission makes use of or discloses confidential information obtained in the course of negotiations incurs liability” (new Article 1112-2). English law does not recognise such principle unless a term of the contract is especially stated to be confidential.

2. Preferential contracts

• Regulation of preferential agreements (conferring preferential rights on another party)
  Where a contract has been concluded with a third party in breach of a preferential agreement, the beneficiary of such agreement may obtain compensation for the loss he has suffered.
  
  He may also sue for nullity of the contract concluded and ask the court to order its substitution for the third party, provided that the third party (i) knew the existence of the preferential agreement and (ii) the intention of its beneficiary to rely on it (new Article 1123).
• Regulation of unilateral promises to contract
  Courts traditionally award damages in case of breach of unilateral promises refusing specific performance (exécution forcée) of the contract. The Reform puts an end to this controversial solution. Henceforth, the revocation of a unilateral promise, by the promisor, during the period allowed to the beneficiary to exercise the option will not preclude the formation of the contract. Moreover, a contract concluded with a third party who knew the existence of the promise is null (new Article 1124).

3. Content and validity the contract

• The abandonment of the controversial concept of “cause”
  Where functions aiming at ensuring a certain equilibrium in the contract are separately codified. For instance, any clause which “deprives a debtor’s essential obligation of its substance is deemed not written” (new Article 1170). A contract is null if the obligation of one party is “illusory or derisory” in comparison with the agreed counter-performance (new Article 1169).
• The codification of the concept of “abuse of a state of dependence” already accepted by the courts
  A contract may be null if it is proven that a party has abused of any state of dependence (moral and/or economic dependence) of its contracting party in order to secure a “manifestly excessive advantage”. Such a behaviour is deemed to be a case of duress as recognised in English law (new Article 1143).
• The prohibition of any clause that creates “a significant imbalance in the rights and obligations of the parties to the contract”
  Under the new Article 1171, this rule is limited to contracts whose general conditions have not been subject to negotiation or which have been established unilaterally and in advance by the other party(contrat d’adhésion). However, this category encompasses many types of contracts and many clauses may be thus threatened. Where such a clause exists, it will be invalid and unenforceable and the contract should be read as if it had never been included.

4. Performance of the contract

• The possibility of adapting the contract in the event of an “unforeseeable change of circumstances”
  Namely circumstances which render the performance of the contract “excessively onerous for one party who had not accepted the risk of such a change”. That party may seek a renegotiation of the contract. If the renegotiation is unsuccessful the parties may decide to terminate the contract by mutual agreement or ask the court to set about its adaptation. Finally, as a last resort, the court seized by either party may revise the contract or terminate this (new Article 1195). This new principle in French private law is recognised in English law under the doctrine of frustration, which allows contracts to be set aside where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering into the contract.

5. Consequences of failure to satisfy contract validity conditions

• Possibility for the parties to decide by mutual agreement to annul the contract without having to resort to the judge (new Article 1178).
• The introduction of “caducité”
  A contract ends if “one of its essential aspects disappears”and if its performance is rendered impossible due to the disappearance of another contract to which it is closely linked (new Article 1189).

6. Remedies for non-performance of the contract

• Possibility for a creditor to suspend the performance of its obligations “as soon as it becomes evident that his contracting partner will not perform his obligation when it becomes due and that the consequences of this non-performance are sufficiently serious for him.”
  Under the new Article 1220, this is a cost-effective remedy saving time, however care should be exercised to collect evidence before suspending performance, otherwise this may be considered a breach of contract.
• Specific performance becomes the principle compared to damages
  This remedy is however forbidden when it is materially impossible but also when there is a “manifest disproportion between its cost to the debtor and its interest for the creditor” (new Article 1221).
• Possibility of terminating a contract by unilateral decision of a creditor “at his own risk”
  No condition needs to be fulfilled except sending of a formal notice to the debtor requiring performance of the contract (new Article 1226).
• New remedy
  If the performance of the contract is different from what was expected by a creditor, he may accept “a proportionate reduction of the price” (new Article 1223). This solution is of course in conflict with the binding force of the contract (which is now a Guiding Principle – see above).

Immediate need to review your contracts

If you are, or will be, party to a contract governed by French law, the following questions should be considered before its renewal or its signature. If the contract remains silent on these questions, the above mentioned provisions may be enforced.

• Adapt vocabulary: use the new terminology.
• Have all provisions (including general conditions) been negotiated or have all parties had the opportunity to discuss them?
• Does the contract form part of a more global operation? If so, is it necessary to bind the fate of all contracts participating in the whole operation?
• Who will bear the risk of an unforeseeable change of circumstances during the life of the contract? Do the parties accept to seize the court in case of disagreement? A hardship clause or MAC clause may be preferable.
• Do the parties accept a price reduction as compensation for imperfect performance of the contract? Who will determine the price reduction?
• Even if there is a legal obligation of confidentiality, a confidentiality agreement may be preferable to avoid any misunderstanding on what information is confidential.
• Consider preparing amendments to your contracts making the more favourable provisions under the new regime applicable.

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