We sent out a client alert in April on the approaching entry into force of the new French civil code. We highlighted four innovations arising out of this major legal reform.
This alert focuses on the introduction of the new hardship provisions. French civil law was one of the rare civil systems not to provide for modification of contracts in case of hardship. The new provisions on hardship will be applicable to French law-governed contracts entered into or renewed after 1 October 2016. Legal advice may be necessary to assess the impact of the new hardship provisions or to contract out of or around this new legal regime.
Introduction In February 2015, while authorising the government to reform part of the civil code, the French requested the government to create the possibility for parties to adapt their contract to unforeseeable changes of circumstance.
A draft executive order was presented and put out to public consultation. Hardship was a hot topic: scholars and legal practitioners made many comments on the draft provisions, suggesting alternative drafting.
By executive order of 10 February 2016, the government adopted the final text of the reform. The final provisions on hardship go further than the original drafting.
The requirements and procedural steps to invoke hardship seek to balance the binding force of the contract against the need for contractual flexibility.
Discussion Article 1195 of the new civil code provides:
"Where a change of circumstances, unforeseeable at the time of signing the contract, renders performance excessively onerous for a party that had not accepted to assume the risk, that party may ask its co-contractor for renegotiation of the contract. It shall continue performing its obligations during the renegotiation.
In the event of refusal or failure of the renegotiation, the parties may agree to terminate the contract, at the date and on such conditions as they shall determine, or by mutual agreement ask the judge to proceed to its adjustment. In the absence of agreement within a reasonable time, the judge may, on one party's request, amend the contract or terminate it, at the date and on such conditions as he shall determine."
Thus, the cumulative requirements to invoke hardship are:
- A change of circumstance;
- Not foreseeable at the time of the contract;
- The risk of which the party seeking relief had not accepted to bear; and
- Performance of the contract becomes excessively onerous.
To avoid parties invoking hardship in order to excuse
non-performance, the new provision clearly states that the party
seeking relief must keep on performing the contract pending relief,
Invoking hardship is a three step process:
- A party must ask the other party to renegotiate the contract;
- If the other party refuses to renegotiate or if the renegotiations fail, and if the parties do not agree to terminate the contract, they can jointly ask the judge to adjust the contract;
- As a final resort, a party may unilaterally ask the court to either terminate or amend the contract
Comments It is the first time that French judges will be given the power by law to amend contracts in the event of changed circumstances.
The new provisions constitute a major change under French law where historically there has been mistrust regarding judicial interference in performance of contracts. The draft executive order did not provide for judicial revision of the contract at the request of one party. In the draft, the judge would only have been able to terminate the contract in such a case. The provision as enacted goes further and allows for a party to unilaterally request judicial amendment.
It is important to stress that these new provisions are not mandatory and parties may contract out or around them. However, if this is not done, the court will ultimately have potentially very broad power to alter the contractual bargain.
It is of course too early to say how civil judges will construe the new hardship provision and how they will exercise their power to amend contracts. Some questions arise:
- If the parties do not contract out of the legal regime, what timing is required between the three steps before taking the matter to court?
- To what does the "absence of agreement" in the last sentence of article 1195 make reference to?
- Can the judge choose to amend the contract where a party has only asked for termination and vice versa?
- If the parties choose to provide for hardship in their contract, can they move directly from step 1 to step 3 or is the judge's power to amend the contract conditioned on the parties fulfilling the three statutory procedural steps?
Given the above, parties would be wise to include in their contract, at a minimum, a definition of hardship and a timeframe applicable to renegotiations. Alternatively, they may choose to exclude the provisions entirely to retain the certainty of the law as it currently stands.
The executive order will be applicable to contracts entered into or renewed after 1 October 2016.
How Reed Smith can help you 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. Also, if it comes to invoking these provisions, Reed Smith can assist clients in implementation to maximise the likelihood of a positive outcome.