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3 June 2020
Since the beginning of 2020, the coronavirus (Covid-19) has progressively spread throughout the world and reached France abruptly in March.
On 30 January 2020, the World Health Organization (WHO) declared the emergence of this new coronavirus to be a public health emergency of international concern. On 14 March 2020, France moved onto Stage 3 in the management of the epidemic and new containment measures were announced on 16 March and have been progressively strengthened.
On 23 March 2020, the Emergency Law No. 2020-290 to deal with the Covid-19 epidemic which was published, and amended on 11 May 2020, declaring a "state of public health emergency" for a period extending, at the time of writing, from 24 March to 10 July 2020 (hereinafter the "Emergency Period").
The state of emergency essentially involves two types of authorizations:
The elements below are of a general nature and will have to be systematically refined on a case-by-case basis, depending on the type of contract in question and the impact of Covid-19. They will also have to be adapted according to future state or administrative measures.
On 25 March 2020, 25 Ordinances were issued by the Government to address the consequences of the Covid-19 outbreak under the Emergency Act.
The main Ordinances providing for measures that have a direct impact on business relations and business activities are the following:
Ordinance No. 2020-306 of 25 March 2020 relating to the extension of expired deadlines during the health emergency period and the adaptation of procedures during this same period[2], amended by Ordinance No. 2020-427 of 15 April 2020 and Ordinance No. 2020-560 of 13 May 2020.
Article 1 of the Ordinance first of all establishes a "legally protected period" extending between 12 March 2020 and 23 June 2020 inclusive[3].
Article 2 of the Ordinance provides that any act (appeal, legal action, formality, registration, declaration, notification or publication) prescribed by law or regulation which should have been carried out during the legally protected period and which is finally carried out within the legally prescribed period for taking action, calculated from the end of that period and within a limit of two months, shall be deemed to have been properly made.
This article applies only where failure to act within the time limit for taking action results in a penalty or forfeiture of a right. The ordinance is therefore not intended to apply "to the periods of reflection, withdrawal or renunciation provided for by law or regulation, nor to the periods provided for the reimbursement of sums of money in the event of the exercise of these rights" (such as, for example, in the case of distance selling, for the consumer's withdrawal period provided for in Article L.221-18 of the French Consumer Code).
Article 4 of the Ordinance organizes mechanisms for "freezing" periodic penalty payments and penalty, termination or forfeiture clauses, when their purpose is to punish failure to fulfil an obligation within a specified period. It is provided that these are deemed not to have taken effect or come into effect if the agreed period has expired during the legally protected period.
Arrangements are also provided for in the case of periodic penalty payments and clauses intended to sanction the non-performance of an obligation, other than sums of money, the period of which expires after the legally protected period, or in the case of periodic penalty payments and penalty clauses the course or application of which took effect before 12 March 2020.
Thus, if the debtor does not perform its obligation within the period initially agreed, the course of the penalty payment or the effect of the clause concerned will be neutralized and its postponement will be calculated, after the end of the legally protected period, on the basis of the period of performance of the contract which has been impacted by the measures resulting from the state of health emergency (for further details on Article 4, refer to part 2.1. below).
Article 5 of the Ordinance also provides for an extension of two months after the legally protected period to terminate or denounce a convention which could not be terminated or denounced during that period.
This Ordinance modifies the obligations of tourism professionals, whether organizers or retailers, to enable them to offer their customers, for a fixed and limited period of time (after 1 March and before 15 September 2020 inclusive), a refund of their trip or stay in the form of an identical or equivalent service offer, or in the form of a credit note valid for eighteen months.
This Ordinance makes it possible to defer or stagger the payment of rents, water, gas and electricity bills relating to the premises and to waive the consequences likely to be applied in the event of non-payment of bills (financial penalties, suspensions, interruptions or reductions in supplies), to the benefit of small businesses (whose eligibility criteria were set by decree).
On 7 May 2020, Ordinance No. 2020-538 was adopted on the financial conditions for the termination of certain contracts in the event of force majeure in the culture and sports sectors.
This Ordinance provides for a mechanism similar to Ordinance No. 2020-315 for live entertainment contractors (theatres, festivals), organisers of sporting events and private sports halls.
Thus, spectators of an artistic performance cancelled between 12 March and 15 September 2020 may receive a credit note for the 2020-2021 season. Similarly, festival-goers of a cancelled 2020 edition may receive a credit for the 2021 edition of the same festival, and spectators of a cancelled sports event will be offered a credit note valid for 18 months. Lastly, sports establishments may, in case of contract cancellation, offer a credit note valid for 6 months.
In all cases, at the end of the credit note validity period, the customer may choose to receive a full refund.
In the current situation, many companies are facing a drastic decrease or a total shutdown of their activity, affecting their business relations with their usual partners. These events generate new questions regarding the sharing of responsibilities and the treatment of losses incurred or to be anticipated.
In this context, business partners may seek to adjust their contractual framework in order to improve visibility in the continuation of their relationship and better control business flows. The impact of covid-19 on commercial relations raises many legal questions, the most important of which are the possible exonerating causes related to the covid-19 pandemic in contracts governed by French law, as well as the consequences of State measures restricting freedom and activity.
A first mechanism is provided for in Article 4(1) and (2) of Ordinance No. 2020-306. It allows the neutralisation of the application of periodic penalty payments and penalty, termination or forfeiture clauses when their purpose is to punish the non-performance of an obligation, including sums of money, within a specified period, if this period has expired during the legally protected period. The course of periodic penalty payments and the application of penalty clauses which took effect before 12 March 2020 shall also be suspended during that period.
This first mechanism thus postpones the date on which these contractual penalty mechanisms will take their course or effect, if the debtor does not comply by the end of the legally protected period.
A second mechanism is provided for in Article 4(3) of the aforementioned Ordinance, again allowing the course and effect of the said penalty mechanisms to be postponed, but this time when they are intended to punish failure to perform an obligation, other than a sum of money, within a specified period, if that period expires on a date later than the legally protected period.
According to the Report to the President accompanying Ordinance No. 2020-427, the exclusion of monetary obligations from this second mechanism is justified by the fact that "the impact of the measures resulting from the state of health emergency on the possibility of fulfilling monetary obligations is only indirect and, after the legally protected period, the financial difficulties of debtors should be taken into account by the rules of ordinary law (grace periods, collective proceedings, over indebtedness)". It is therefore possible to deduct, in return, that the first system also applies to obligations for sums of money.
With regard to the method of calculation provided for the postponement of the period initially agreed, the date on which the periodic penalty payments take effect and the aforementioned clauses take effect shall be postponed by a period equal to the time elapsed:
Consequently, in the event that one or other of these mechanisms should apply, the performance by the debtor of his obligation within the period calculated in accordance with Article 4 of that Ordinance cannot be considered late and give rise to the implementation of a penalty clause or any other contractual sanction mechanism referred to in that provision, without it being necessary to invoke other provisions of ordinary law (such as force majeure).
The parties to the contract remain nevertheless free to exclude the application of this article by specific provisions in the contract, in particular if they decide to take into account differently the impact of the health crisis on the performance conditions of the contract. They may also decide to waive the provisions of this article.
While we obviously have no indication at this stage as to how judges will assess these exceptional derogation measures, their implementation should be assessed in the light of the obligation of good faith which governs the contractual relations between the parties.
In other words, as soon as possible, there should be a detailed justification by objective reasons for the failure to perform the obligation within the contractually agreed time-limit or, at the very least, for not having exceeded that time-limit for the sole purpose of evading, without any legitimate reason, the performance of contractual obligations, so as to avoid any subsequent challenge on the ground of bad faith.
Finally, the benefit of the "freezing" of contractual sanction mechanisms does not exclude the possibility of invoking ordinary law provisions such as force majeure and unforeseen circumstances.
Article 1218 of the French Civil Code provides that, except where contractual provisions amend the conditions of force majeure, an event that qualifies as force majeure must be:
In any event, the unpredictability must be analysed on a case-by-case basis according to the date the contract was signed, the activity in question and the impact that each of the State measures may have on the activities concerned;
Please note: as case-law currently stands, with regard only to payment obligations, force majeure cannot in principle be invoked - unless the general principle of good faith can be invoked in view of the exceptional circumstances of the situation
In the event of a case of force majeure, the company may either suspend the obligation for the duration of the event (except in the case of excessively long duration) or terminate the contract in the event of definitive impediment. Firms are strongly advised to carry out a thorough analysis of each contractual situation and to give preference to suspending contracts whenever possible.
Future contracts: for contracts under negotiation and future contracts, it would be advisable to provide for a force majeure clause recognising the Covid-19 pandemic and all its consequences that may not have been anticipated by the parties as an event of force majeure.
Unless contractually provided otherwise, Article 1195 of the French Civil Code provides for contracts entered into after 1 October 2016 (entry into force of the reform of contract law) an option for renegotiation in the event of unforeseen circumstances, i.e., a change of circumstances that was unforeseeable at the time of conclusion of the contract which makes performance "excessively onerous" (and not only "less profitable"). Again, the existence of a contingency situation must be analysed on a case-by-case basis and will depend on the nature of the contractual relationship and the impact of the pandemic on it.
In the event of unforeseen circumstances, the company concerned may ask its co-contractor to renegotiate the terms of the contract to reduce the financial impact of the impediment. If the negotiations fail, the parties may then decide to terminate the contract or refer the matter to a judge to amend it.
Please note: if the parties are able to waive the benefit of hardship and/or force majeure, such clauses could, if they are not reciprocal and/or if they are accompanied by other unbalanced clauses, constitute a significant imbalance between the rights and obligations of the parties, sanctioned by Article L.442-1 of the French Commercial Code or, if they are included in pre-formulated contracts be deemed non-binding.
The objective of continuing the flow of business under the aegis of good faith
One may reasonably anticipate the development of business litigation related to the possibly aggressive behavior adopted by the various economic players in response to the Covid-19 pandemic.
It is therefore advisable to avoid any abrupt disruptive position and to give priority as far as possible to transparency and discussions in good faith, with a view to the effective continuation and/or resumption of business relations if they were to be suspended.
Many companies will be forced to extend their payment terms from those initially agreed in order to be able to pay their commercial partners. Such measures could lead them to fail to comply with the provisions of the French Commercial Code on payment terms[4].
In particular, Emergency Law No. 2020-290 authorized the Government to take measures "modifying, with due regard for reciprocal rights, the obligations of legal persons exercising an economic activity with regard to their customers and suppliers and of cooperatives with regard to their member-cooperators, in particular in terms of payment terms and penalties and the nature of the consideration to be given [...]".
In view of the Emergency Law and the exceptional circumstances currently faced by companies, one might have expected the Government to take certain measures to ease the regulation of payment terms.
Nevertheless, none of the 25 Ordinances adopted on 25 March 2020 include such measures.
On the contrary, the Report made to the President of the Republic relating to Ordinance No. 2020-306 of 25 March 2020 provides that the extension of certain expired deadlines "excludes acts provided for by contractual stipulations. Payment of contractual obligations must always take place on the date provided for in the contract. With regard to contracts, however, the provisions of ordinary law remain applicable if their conditions are met, for example the suspension of the limitation period for impossibility to act pursuant to Article 2224 of the French Civil Code, or the force majeure provided for by Article 1218 of the French Civil Code".
In this context, apart from the provisions of general law and unless new Ordinances are adopted on the matter, no operator will therefore be able to invoke the situation linked solely to the measures decided by the Government to set aside the legal provisions relating to payment terms.
Moreover, recent statements by the French Ministry of Economy show that the administration will pay particular attention to compliance with payment terms during this period with regard to companies which had sufficient cash flow to cope with the situation.
The French Ministry of Economy has thus indicated that companies, particularly the largest, which do not meet their obligations in regard to payment terms will not have access to the State guarantee for bank loans to companies set up by the Government.
The French Ministry of Economy nevertheless announced on 23 March 2020 the creation of a crisis committee to deal with the worsening situation of payment terms, with the aim of responding to the most difficult cases and defusing a trend towards cessation or late payment.
The mission of this crisis committee, which will be held in the form of conference calls under the supervision of the Mediator of Enterprises and the Credit Mediator and will involve the business federations (AFEP, CPME, MEDEF, U2P), the consular chambers as well as the DGCCRF, will be, first of all, to identify the extent of the deterioration of payment terms and, secondly, to put an end to critical situations by intervening with companies whose behavior is deemed abnormal.
Article 5 of Ordinance No. 2020-306 of 25 March 2020 grants a party that had the possibility of terminating or opposing the renewal of its contract within a period expiring during the legally protected period an additional period of time to do so.
Indeed, this Article provides that where a convention can be terminated only during a specified period or renewed in the absence of denunciation within a specified period and these periods expire during the legally protected period, these periods will be extended by two months after the end of that period.
On 15 March, the French Minister for Justice announced that, as of the following day, the courts would be closed, except for essential litigation, in particular in criminal matters and for proceedings of extreme urgency.
Following this announcement, the Paris Commercial Court announced on Monday 16 March that all hearings on the merits of the Commercial Court would be cancelled until further notice. On 18 May 2020, the Paris Commercial Court announced that investigative and trial hearings will be held either by videoconference or on the court's premises.
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[1] Law No. 2020-290, article 11.
[2] Certain matters are expressly excluded from the scope of Ordinance No. 2020-306, such as time limits and measures resulting from the application of rules of criminal law and procedure, time limits concerning the enactment and implementation of measures involving deprivation of liberty, financial obligations and related guarantees mentioned in Articles L. 211-36 et seq. of the Monetary and Financial Code, as well as any time limits and measures that have been subject to other specific adaptations by Law No. 2020-290 (Article 1 of the Ordinance).
[3] According to Article 4 of Law No. 2020-290, the state of health emergency extends from 24 March to 10 July 2020. Article 1 of Ordinance No. 2020-306 provides for the extension of the deadlines that expire between 12 March 2020 and 23 June 2020. The Report to the President accompanying Ordinance No. 2020-427 specifies in this respect that: "as announced in the report on Ordinance 2020-427 of 15 April 2020, it now appears necessary to re-examine the relevance of the sliding reference to the end of the state of public health emergency. Insofar as economic activity will resume as of 11 May, and that the easing of lockdown will enable economic operators to carry out the acts and formalities prescribed by law, this reference based on the end of the state of public health emergency can now be replaced by a fixed date in the ordinance that adapted the deadlines to the health crisis".
[4] Articles L. 441-10 et seq. of the French Commercial Code.
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The partners of Gide's Competition & International Trade practice group are on hand to answer any questions you may have in this regard. You may also get in touch with your usual contact at the firm.
This legal update is intended for non-exhaustive general information. It is not intended to be and should not be construed as providing legal advice from Gide.
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