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2016 reform of French contract law: What’s at stake?

On October 1, 2016, the new French law governing contracts will come into effect, pursuant to new ordinance No. 2016-131 adopted by the French government on February 10, 2016. The Act will govern contracts entered into from October 1, 2016 onwards (with very few procedural exceptions).

The reform of the contract law, the general regime and the proof of obligations of the civil code has two main objectives: reinforce the legal security of transactions and make the French contract law more attractive to stakeholders. A public consultation of legal practitioners and academics was launched to provide feedback and identify key challenges, and to ensure the law would be adapted to today’s competitive business environment.

All kind of contracts are impacted by the new law, B2B and B2C contracts alike (e.g. professional services contracts, M&A, IT contracts, supply contracts, leases, etc)… as it reaffirms the principle of party autonomy tempered by the traditional principle of contractual justice.

Merely reading the provisions of the original version of the Civil Code cannot provide a true image of the state of contract law in France, as most of the provisions of the Napoleonic Code concerning contract law had not been modified since 1804, save and except for a few texts transposing the directives of the European Union. In contrast, positive law has significantly evolved, French courts having established important case law that takes into account the evolution of technology and business practices. But case law is difficult to access, hard to grasp and can be overturned at any time. This lack of predictability does not make for an attractive law when parties to a contract are to choose which law should govern their agreement.

Key principles reaffirmed and codification of case-law

The more than 300 new provisions do not totally depart from current positive law, since it is essentially a work of codification, with about one-fourth of the Act introducing new measures.

The principle of contractual liberty still rules the forming of the contract and parties determine the equilibrium of their respective services. The obligation of the parties to negotiate in good faith has been reinforced, as good faith should prevail not only at the time of the performance of the contract, as it is the case as of today, but also in the formation stage of the contract, such as the pre-contractual negotiations (thus impacting instruments such as the term sheet, letter of intent, memorandum of understanding, unilateral offer …). A party who does not act in good faith and, as a result, breaks off negotiations, may be liable to pay damages to the other party for compensation of damages and harm (such as costs incurred for due diligence). Good faith has been enshrined as a public policy principle.

Focused on modernizing contract law and improving legal security, Articles 1123 and 1124 offer a new legal framework to pre-contracts: the protection of the beneficiaries of a unilateral promise (promesse unilatérale) to sell or a preferential agreement (pacte de préférence) is now clearly reinforced as promisors have to respect their commitment to enter into a contractual relationship when their beneficiaries exercise their option to do so. Prior case law has been overturned to give beneficiaries the right to require the forced execution of the sale, or to substitute for the third party who knew about the preferential agreement but executed the agreement anyway.

In a sale agreement, the assignor is subject to the general duty (article 1112-1) to provide the potential buyer with information that is critical for them to make an informed decision. In a commercial deal, this means the assignor will have to grant the buyer access to a data room and keep track of all information sent electronically or by any other means. Failure to provide such information to the buyer can lead to the nullity of the contract. Likewise, the act of intentionally concealing information from the potential buyers that is essential to make an informed decision can lead to the nullity of the contract.

Introduction of new rules

What follows are a few examples of new rules that seek to enable contractual justice by making adjustments to the contract if an imbalance between the parties' obligations is identified.

Article 1171 sets out that if a clause creates a significant imbalance between the rights and obligations of the parties to a standard contract (contrat d’adhésion), it will be considered abusive, and the judge will have the power to remove it on the request of the party that has been prejudiced (but price and object of the contract are not part of the potential imbalance’s assessment).

Striving for economic efficiency, in case of non-performance of the contract, dissatisfied creditors are granted some prerogatives aiming at encouraging the contract performance. Art. 1217 grants the party whom obligation has not been performed a set of remedies to either compel specific performance, even when there is only a clear risk of non-performance (exceptio timoris), refuse to execute her own obligations, ask for a price reduction or the resolution of the contract and/or ask for indemnification.

Finally, taking into account the economic aspects of the contract, the new law introduces the concept of unforeseeability (imprévision – article 1195), in an effort to harmonize French law with that of other European countries: in the event of unforeseeable circumstances rendering its performance excessively onerous, the parties, should they refuse or fail to renegotiate the contract to their liking, may bring the matter before a judge, who will have the authority to revise the terms of the contract or terminate it. In practice, this provision addresses rare situations that practitioners already provide for by inserting hardship clauses into agreements.

Critics of the reform argue that too much power has been mechanically given to the judge: broad concepts like “unforeseen circumstances”, “significant imbalance”, and “economic violence” will need to be defined by courts. This may well introduce a factor of insecurity into business transactions since case law is by nature unpredictable. But keep in mind that most of the statutory provisions are waivable by the parties (dispositions supplétives) who, if they don’t see them as useful to their purpose, may stipulate their own standards and remedies. But at last, perhaps the overall goal is to incite parties to push harder to find a common ground before going to the judge.

The new law embraces new technologies with a modernized law of evidence: faithful and long-lasting copies shall have the same force of proof as the originals without the need to keep those originals.

A soft revolution

This short note sets out only a few of the key features of the long overdue reform of French contract law. By codifying a large chunk of the existing case law, and introducing some new concepts, the reform does not create great upheaval in the area of contract law. It attempts to add more security and predictability into business transactions, even if some concepts will clearly need to be substantiated by French courts.

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