France: Legal Revolution In France – Civil Law Reforms (Or Napoleon's Second Coming)

Executive Summary This alert draws attention to the approaching entry into force of the new French civil code. This will be of interest to all parties with French law-governed agreements or that do business in France – especially regarding contracts that are due for renewal after 1 October 2016. Terms and conditions should be reviewed and, where necessary, legal advice taken on some of the innovations under the new law.

Introduction For over 200 years, the core provisions of the French civil code concerning contract and tort have remained essentially unchanged. A French civil lawyer from the immediate post-Napoleonic age, wielding his civil code from that time, would not feel out of place today arguing a claim for breach of contract or advancing a general tort claim.

But from 1 October 2016, the putative Napoleonic lawyer will no longer be able to cite the long-trusted articles in the civil code fashioned by his peers. Even where the articles still exist, they will have a different number. Were he to return in October 2016, the Napoleonic lawyer would first need to return to school.

This is because on 10 February 2016, by executive order, a new civil code was passed into law which contains a complete reworking of the provisions of general contract law. In a second phase, those parts of the civil code addressed to torts will also be reworked.

In principle, the new civil code introduces but few innovations, while at the same time enshrining certain case law principles developed by the courts and otherwise maintaining the legal acquis from the old civil code. In theory, the new code should not overly disturb the legal status quo. But the devil will be in the detail. And account will need to be taken of the innovations introduced by the new code. Some of which are of potentially broad reach.

As a result, those contracting under French law or with French counterparties will be well advised to assess the potential impact of this legislative change in advance of 1 October 2016, when the new civil code comes into force. This will apply in particular for contracts due to be renewed after that date.

Discussion Those following developments in this area have broken down the provisions of the new civil code into three categories – (i) innovations, (ii) enshrining of case law into statute law and (iii) maintaining of the status quo. In this alert, we highlight some examples of the innovations introduced by the new civil code.

(a) Good faith: Under the old civil code, good faith was always an obligation imposed on contracting parties in the performance of their contract. Under article 1104, contracts must now be "negotiated, concluded and performed in good faith". The requirement of good faith in the formation of contracts is new. Article 1104 is also one of the relatively few provisions that is specifically stated to be mandatory ("d'ordre public"). It cannot be contracted out of.

(b) Hardship provisions: French law has long been held up as an example of an exceptional civil law country that adheres to strict application of contracts. No quarter is given for unforeseen events that might render performance of a contract significantly more onerous for one party. Thus, unless contractual provision is made through use of a hardship clause, or performance becomes impossible in circumstances where force majeure applies, the parties are bound to perform, irrespective of any hardship caused.

This feature of French law, some argue, is evidence that 'hardship' is not a general principle of international law, despite it featuring in the UNIDROIT Principles of International Contracts.

That argument will now be weakened. In a complete break with past tradition, the new code introduces the notion of "imprévision" into civil law (article 1195).

Under the new imprévision approach, if circumstances that were unforeseeable at the time of the contract make performance of the contract "excessively onerous" for a party, and that party had not assumed risk for the same, then the judge may revise or terminate the contract at the request of that party.

There was considerable, and at times heated, debate as to whether the notion of imprévision should be allowed into the new civil code and, if so, in what form. The wording which was finally adopted changed from the final draft. In the final draft, the contract could be terminated upon demand of a party, but not revised. Article 1195, as enacted, provides not only for termination but also for judge-ordered revision of the contract, upon demand of a single party, and only after an obligatory (and necessarily failed) negotiation stage.

It should be noted that the new imprévision provisions are not mandatory. Parties can therefore agree to exclude them.

(c) Standard form contract ("contrat d'adhésion"): The new civil code defines the notion of a "standard form" contract (article 1110). It is defined as a contract where the "general conditions, removed from negotiations, are determined in advance by one of the parties". Any clause in such a contract that creates a "significant imbalance" between the rights and obligations of the contractual parties shall be deemed to be of no effect (article 1171).

Thus where a contract is found to be a contrat d'adhésion, individual clauses in that contract are vulnerable to censure by the courts where they are found to create a "significant imbalance".

The power of the court to censure clauses already exists, and continues to exist, for consumer contracts. In the consumer context, the law is derived from EC Directive 93/13/EEC on unfair terms in consumer contracts.

The innovation here is that the court's right to censure individual clauses, where such clauses create a "significant imbalance", will now extend to business-to-business contrats d'adhesion.

Comments The new civil code is a welcome development. It should make French law more accessible and transparent. One of the drivers for reform was international competitiveness. There is little doubt that the significant work put into the new civil code will assist in that regard. The choice of legislative process, via executive order rather than the usual parliamentary legislative process, has given the drafters the very best chance of achieving overall coherence in this wholesale reformulation process.

On the other hand, the enshrining of case law principles perhaps goes too far by introducing inflexibility. It is fair to say that there is much enshrining in the new civil code, and clear choices have been made. When one carries out wholesale reformulation of the civil code every 200 years, is it wise to enshrine case law into statute law in this way? This is a real question, particularly within a legal tradition where stare decisis, in theory, does not apply and where judges are required to apply statute, in theory, without interpretative gloss.

In practical terms, and if only because of the three innovations described in this alert, commercial parties with French affairs should be reviewing their general terms and contracting practices, in anticipation of the 1 October 2016 entry into force of the new civil code.

Should a party be contracting out of the new hardship provisions? Will current contracting practices lead to a party's contracts being classified as contrats d'adhésion? If so, are any clauses in the general terms and conditions vulnerable because they create a "significant imbalance"? These and other questions need to be asked if unpleasant surprises are to be avoided or, at least, foreseen and minimized.

Over the coming years, the courts and users of French law will need to feel their way in this new environment. How French judges react to their new found powers to revise contracts will be an area of special interest, particularly given that the area of remedies under French law is not traditionally one where flexibility abounds. Overseas and arbitral precedent may be useful here to help guide the courts in formulating a hopefully principled approach.

For now, the starter gun is firmly loaded on what will undoubtedly be a new and interesting lease of life for Napoleon's long-lasting legal legacy – the civil code. For those who practice in former French colonies, the French civil code is about to become a less familiar friend and guide. For those who wish to survive and thrive in this new legal landscape, it is time to sharpen the pencils and prepare for the second coming of the Napoleonic Code.

How Reed Smith can assist Reed Smith can assist clients through this transition and, for example, adapt their general conditions of business to accommodate and address the new legal landscape in advance of its entry into force on 1 October 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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