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Changes to French contract law – key points for negotiators and drafters

This article discusses key changes in French contract law and highlights issues to be considered by parties in their future negotiations of French law contracts. The French Government recently published a much-awaited order implementing the reform of contract law (the Reform). This new regime is scheduled to become effective for contracts concluded after 1 October 20161 and mostly codifies precedents set by the French Supreme Court. It includes changes regarding (1) negotiation, (2) performance, and (3) breach of contract.

Negotiation

Duty to disclose essential information – broadened

The Reform states that a party is under a duty to disclose any information which is "essential" for the other contracting party, except for information on the value of the subject matter of the contract. The new provision2 specifies that such a duty to disclose is only applicable if the other contracting party is not aware of the "essential" piece of information or "trusts" its contracting party.

In addition to damages, a judge may declare a contract null and void, where there was an intention to mislead.

French statutory law already provided for such a duty to inform in particular areas of law (eg consumer, insurance). Case law had developed in parallel a similar duty on some contracting parties, in particular professionals. The Reform broadens this principle to any contract.

Duty of good faith – no major change

The duty of good faith is extended to the phases of negotiation and conclusion of the contract. The current Civil Code states only that the contract shall be performed in good faith. The duty of good faith during the negotiation phase had already been established by case law, as had a right to damages against another contracting party negotiating in bad faith (ie damages covering incurred losses but excluding loss of profits expected from the contract).

Revocation – strengthens unilateral promises

The Reform overturns pre-existing case law regarding revocation rules on unilateral promises to conclude a contract and clarifies it on the revocation of an offer. Currently, if a revocation of a unilateral promise occurs within the period to opt for the conclusion of the contract, the beneficiary may only seek damages, whereas there are ongoing debates on whether the beneficiary of an offer could be entitled to request the conclusion of the contract when the offer is revoked during its validity period. The Reform overturns the principle for unilateral promises to conclude a contract: contrary to current case law, the beneficiary will not only be entitled to seek damages but may instead request the judge to order the promisor to enter into the contract which has been agreed pursuant to the promise. With regard to the offer, the Reform clarifies that the beneficiary of an offer will only be entitled to seek damages in case of revocation within such period. This new solution appears to be more logical and strengthens the effectiveness of unilateral promises.

Price of the contract

The Reform codifies pre-existing case law about how a party may unilaterally set the price of a contract, although the codification applies only to framework agreements ("contrat cadre"). The Reform provides that: (i) in the event of a dispute, the party which unilaterally determined the price has a duty to justify its amount; and (ii) in case of an abuse, the judge may order such a party to pay damages and/or terminate the contract. This principle also applies to service agreements, although an abuse in the determination of the price may give rise only to the termination of a service contract.

Performance

Revision of the contract in case of hardship – new, but not mandatory

This provision was highlighted as one of the most important innovations of the Reform because it overturns a core principle of French contract law, which currently excludes the renegotiation or termination of a private-law contract in case of hardship (a different rule applies to administrative contracts). However, it should not raise many issues since: (i) this provision will not be mandatory; and (ii) business agreements often include a hardship provision.

According to the Reform,3 if a circumstance was unforeseeable at the time of conclusion of the contract and has rendered the performance of the contract excessively onerous for a party, this party may ask its contracting party to renegotiate or terminate the contract. If no agreement is reached, one party may request the judge to amend or terminate the contract.

Contracting parties may expressly derogate from this provision or define the notion of unforeseeable circumstances.

Significant imbalance of a standard form contract

A standard form contract ("contrat d'adhésion"), is defined in the Reform as a contract where the general conditions are not negotiated but determined in advance by one of the parties.4 Regarding such a contract, the judge may rule that a clause creating a significant imbalance between the parties is void ("reputée non écrite"). The clauses on the primary obligation of the contract and the adequacy of the price in comparison to the subject matter are excluded from this rule.

The impact of this provision may be limited, as similar provisions already exist in consumer and commercial law. However, it may entitle a business to claim that a clause is void, whereas the Commercial Code currently allows a party to seek damages only where a clause creates a significant imbalance.

This new provision is mandatory. There are likely to be disputes about where the line is drawn between standard form contracts and negotiated contracts. The courts will also have to clarify the test for a "significant imbalance", although there are precedents in consumer and commercial law.

Breach

The Reform codifies the remedies for breach of contract as previously set by case law.

Unilateral remedies

Unless otherwise agreed by the parties, a unilateral termination is possible only in case of a serious breach of the contract. The Reform allows a party to suspend in advance the performance of its obligation if it is obvious that the other party will not perform its own obligation and that such non-performance will be serious enough.

The Reform allows the innocent party to reduce the price stated in the contract in case of partial performance, whereas the current provisions of the Civil Code allows it to do so only for specific types of contracts.5

The Reform requires a formal notice to be issued prior to each of these remedies. However, it is not clear whether these are mandatory.

Specific performance

The Reform introduces an exception to the principle of specific performance of the contract, which shall not be applied if the interest of one party is disproportionate in comparison to the cost for the other party.

Conclusion

The Reform should not drastically modify French contract law: three-quarters of it codifies pre-existing case law. Only a quarter implements changes from which the parties may mostly derogate. The Reform simply appears to bring the Civil Code up to date with the current practice of the courts and therefore provides an easier access to the applicable rules. However, parties contemplating French law as the governing law of their contract should carefully address the Reform – for example, as to whether any new derogation wording is required, or as to any imbalanced clauses in standard form contracts.

Footnotes

1. The order's provisions will enter into force on 1 October 2016 provided that a Bill of law ratifying the order is introduced before the Parliament by August 2016. It should be noted that the content of the Reform could in theory be amended by the Parliament during this ratification process.
2. Article 1112-1 of the order.
3. Article 1195 of the Order.
4. Article 1110 of the Order.
5. Article 1223 of the Order

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