Will French contract law soon govern international business transactions?

This was the question at the heart of the debate organised by the French Chamber of Commerce at the London office of the law firm Bryan Cave on 26 January 2017 (more details of the event can be found on the ccfgb website). The panel included a French lawyer from Bryan Cave, the Head of the LLM Course in International Commercial Law at Westminster Law School, an English solicitor from Bryan Cave and an English in-house counsel. The moderator was a well-known arbitrator.

The subject of the debate stemmed from the introduction of the new French Ordinance n°2016-131 of 10 February 2016 that came into force on 1 October 2016. This ordinance amends the general regime of obligations and proof of obligations under French law (Title III of Book III of the French Civil Code).

The arguments put forward during this lively debate are presented below in the form of a table and have been grouped around the four main concepts discussed. For the sake of completeness, I have also added a short background explanation for each concept, as well as replicating the original French articles (published on Legifrance) and the official English translations of these (available on http://www.textes.justice.gouv.fr).

Arguments against (English law will remain the preferred governing law of international contracts) Arguments in favour (French law will become the preferred governing law)
General
  • No substantial changes to existing law – the reform merely codifies the case law from the past few years.

 

  • French have “l’art de la réforme”.

 

 

  • The new law is very concise (56 pages). It brings French contract law up to date and enshrines two principles: economic efficiency and fairness in contracts. The Cour de cassation judgments are very concise (2 to 3 pages).
  • English law is essentially based on case-law developments, and as such is unpredictable, a source of legal uncertainty and, for non-legal practitioners, sometimes difficult to grasp, if not incomprehensible. Court judgments are very long (100 pages is standard, and it is not unusual to find 300 pages).
Article 1188 – Interpretation
French Article:

Le contrat s’interprète d’après la commune intention des parties plutôt qu’en s’arrêtant au sens littéral de ses termes. Lorsque cette intention ne peut être décelée, le contrat s’interprète selon le sens que lui donnerait une personne raisonnable placée dans la même situation.

English translation:

A contract is to be interpreted according to the common intention of the parties rather than stopping at the literal meaning of its terms. Where this intention cannot be discerned, a contract is to be interpreted in the sense that a reasonable person placed in the same situation would give to it.

  •  English law provides certainty as judges strictly follow the literal meaning of the words (even though case law has recognised that business common sense will apply if there is a lack of clarity).
  • Interpretation based on the intention of the parties may trump the literal meaning of the words. In addition, the general principle seems to contradict Art 1192 (“On ne peut interpréter les clauses claires et précises à peine de dénaturation.” /  ”Clear and unambiguous terms are not subject to interpretation as doing so risks their distortion”).
  • Under French law, the common intention of the parties at the signing of the contract is important. In the event of uncertainty, the courts will look at what a reasonable person would have agreed to.
  • French arbitrators decide on the basis of their own common sense, to avoid absurd decisions.
Article 1104 – Duty of Good faith
French Article:

Les contrats doivent être négociés, formés et exécutés de bonne foi. Cette disposition est d’ordre public.

English translation:

Contracts must be negotiated, formed and performed in good faith. This provision is a matter of public policy.

Background:

The principle of good faith already existed in the Civil Code (performance in good faith). This duty is now extended, in line with existing case law, to cover the pre-contractual negotiations and their termination. Breach of this duty creates the right to damages for losses incurred during negotiations, but does not include loss of opportunity and loss of profit.

  • The English courts have repeatedly reaffirmed that there is no implied duty to act in good faith. Parties are free to subject themselves expressly to such a duty in the contract but the courts are usually reluctant to imply this duty (as a judge said: “it is trite law that a party does not have to exercise its contractual rights, once properly ascertained. If he has rights, the law will not concern itself with the motivation or rationale lying behind his exercise of them”).

 

  • French law makes international lawyers nervous as it adds a level of complexity and uncertainty even if the aim is morality. (Ex. In an acquisition deal, a key term for the purchaser was to retain two very important people. These two individuals left shortly before completion and when they tried to walk away, the seller threatened to sue the purchaser for breach of the duty of good faith).

 

  • In the case of Yam Seng Pte Ltd v International Trade Corpn Ltd [2013], Mr Justice Leggatt clearly stated: “There is nothing unduly vague or unworkable about the concept. Its application involves no more uncertainty than is inherent in the process of contractual interpretation.”
  • This is a positive norm of conduct (honesty, integrity and reasonableness), which limits contractual excesses and dishonesty.
  • It is an incentive to play fair and cooperate to fulfil the contract. This holds the parties accountable.
  • The best negotiations are collaborative and based on trust (as stated in the book Getting to Yes, Negotiating an agreement without giving in by R. Fisher and W. Ury).
  • Judicial interference is overplayed – French judges use it sparingly (only to police the conduct of the parties, not to alter the rights and obligations under the contract.
Article 1112-1  – duty to disclose essential information
French Article:

Celle des parties qui connaît une information dont l’importance est déterminante pour le consentement de l’autre doit l’en informer dès lors que, légitimement, cette dernière ignore cette information ou fait confiance à son cocontractant. […]

Les parties ne peuvent ni limiter, ni exclure ce devoir.

Outre la responsabilité de celui qui en était tenu, le manquement à ce devoir d’information peut entraîner l’annulation du contrat dans les conditions prévues aux articles 1130 et suivants.

English Translation:

The party who knows information which is of decisive importance for the consent of the other, must inform him of it where the latter legitimately does not know the information or relies on the contracting party. […]

The parties may neither limit nor exclude this duty.

In addition to imposing liability on the party who had the duty to inform, his failure to fulfil the duty may lead to annulment of the contract under the conditions provided by articles 1130 and following.

Background:

This duty is not new. It already existed in consumer contracts and insurance contracts, for example. It was also applied to some contracting parties, in particular to professionals. The February 2016 reform broadens the principle to any contract.

  • English law has strict rules on evidence (negotiations and documents generated after the contract are not admissible).
  • The effect of French law would increase archiving costs and space as all previous drafts and correspondence would need to be carefully stored. In addition, lawyers would need more layers of NDAs, with carefully drafted definitions of confidential information.
  • This duty is fundamental to business relationships, in order to assess the intention of the parties. Duty to disclose only relates to all vital information (not cost information).
  • The obligation to make proper enquiries remains (like the duty of transparency).
Article 1171 – Sanction in case of abusive clauses and the concept of significant imbalance between the rights and obligations of contractual parties.
French Article:

Dans un contrat d’adhésion, toute clause qui crée un déséquilibre significatif entre les droits et obligations des parties au contrat est réputée non écrite.

L’appréciation du déséquilibre significatif ne porte ni sur l’objet principal du contrat ni sur l’adéquation du prix à la prestation.

English translation:

Any term of a standard form contract which creates a significant imbalance in the rights and obligations of the parties to the contract is deemed not written.

The assessment of significant imbalance must not concern either the main subject- matter of the contract nor the adequacy of the price in relation to the act of performance.

Background:

This is an innovation under contract law (although this concept already existed in the French Consumer Code and Commercial Code). The scope of such abusive clauses is, however, limited to “standard-form” contracts (defined by new Article 1110 as contracts whose general terms and conditions are not subject to negotiation and are determined by one of the parties in advance). There is no express list of clauses presumed to create a “significant imbalance”, but the courts are likely to follow precedents in consumer and commercial law. This provision is a public policy provision since such clauses are deemed unwritten (i.e. void).

  • Under English law, public policy has no effect on contracts, which provides more certainty for the parties.
Article 1195 – Hardship
French Article:

Si un changement de circonstances imprévisible lors de la conclusion du contrat rend l’exécution excessivement onéreuse pour une partie qui n’avait pas accepté d’en assumer le risque, celle-ci peut demander une renégociation du contrat à son cocontractant. Elle continue à exécuter ses obligations durant la renégociation.

En cas de refus ou d’échec de la renégociation, les parties peuvent convenir de la résolution du contrat, à la date et aux conditions qu’elles déterminent, ou demander d’un commun accord au juge de procéder à son adaptation. A défaut d’accord dans un délai raisonnable, le juge peut, à la demande d’une partie, réviser le contrat ou y mettre fin, à la date et aux conditions qu’il fixe.

English translation:

If a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract. The first party must continue to perform his obligations during renegotiation.

In the case of refusal or the failure of renegotiations, the parties may agree to terminate the contract from the date and on the conditions, which they determine, or by a common agreement ask the court to set about its adaptation. In the absence of an agreement within a reasonable time, the court may, on the request of a party, revise the contract or put an end to it, from a date and subject to such conditions as it shall determine.

Background

This is one of the most important innovations and one of the most criticized. This concept was already used by administrative courts as the Government may provide the option to its contractual party to adapt a contract in the event of an unforeseeable change of circumstances. However, private law always refused to recognize this concept and excluded the renegotiation or termination of a private-law contract in case of hardship. By extending this concept to all contracts, the legislators want to fight against contractual imbalances that occur during the performance of the contracts (objective of contractual justice)

  • It is unclear how this will it work in practice.

 

  • In any case, it is not mandatory and parties can expressly derogate from it so it is likely that this will not differ from the position under English contracts, as all important international contracts are likely to derogate from it.

 

  • English law has the notion of frustration.

 

 

  • The aim of this clause is conciliatory. It is more efficient economically as it helps parties renegotiate the terms to try and save the contract (which had been signed after a costly and time-consuming process).
  • This only applies when performance becomes excessively onerous for a party in unforeseen circumstances.
  • The request for renegotiation does not relieve the party from the obligation to perform its obligations during the renegotiation process. If this set of negotiations fall through, the parties will only be relieved when the judge rules on the subsequent request for revision.
Articles 1123 & 1124 – Unilateral promises
French Articles:

Art. 1123: […] Lorsqu’un contrat est conclu avec un tiers en violation d’un pacte de préférence, le bénéficiaire peut obtenir la réparation du préjudice subi. Lorsque le tiers connaissait l’existence du pacte et l’intention du bénéficiaire de s’en prévaloir, ce dernier peut également agir en nullité ou demander au juge de le substituer au tiers dans le contrat conclu. Le tiers peut demander par écrit au bénéficiaire de confirmer dans un délai qu’il fixe et qui doit être raisonnable, l’existence d’un pacte de préférence et s’il entend s’en prévaloir. L’écrit mentionne qu’à défaut de réponse dans ce délai, le bénéficiaire du pacte ne pourra plus solliciter sa substitution au contrat conclu avec le tiers ou la nullité du contrat.

Art. 1124: […] La révocation de la promesse [unilatérale] pendant le temps laissé au bénéficiaire pour opter n’empêche pas la formation du contrat promis. Le contrat conclu en violation de la promesse unilatérale avec un tiers qui en connaissait l’existence est nul.

English translation:

Art. 1123: […] Where a contract has been concluded with a third party in breach of a pre-emption agreement, the beneficiary of that agreement may obtain reparation of the loss that he has suffered. Where the third party knew of the existence of the pre-emption agreement and of the beneficiary’s intention to take advantage of it, the beneficiary may also sue for nullity or may ask the court to substitute him for the third party in the contract that has been concluded.

The third party may give written notice to the beneficiary requiring him to confirm, within a period which the former fixes and which must be reasonable, the existence of a pre-emption agreement and whether he intends to take advantage of it. Such a written notice must state that if he does not reply within that period, the beneficiary of the pre-emption agreement will no longer have the right to claim either to be substituted in any contract concluded with the third party, or nullity of the contract.

Art. 1124. – […] Revocation of the [unilateral] promise during the period allowed to the beneficiary to exercise the option does not prevent the formation of the contract which was promised. A contract concluded in breach of a unilateral promise with a third party who knew of its existence, is a nullity.

Background

Before the reform, if a unilateral promise was revoked within the period before the final contract is concluded, the beneficiary could only seek damages. Following the new 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.

  • It is unclear how this can work in practice. Is this a right of first refusal? Is it a preference right? How will the third party know who to contact to clarify the existence of an offer or how will a third party even become aware of the existing rights?
  • This solution is a very useful tool and strengthens the effectiveness of unilateral promises. It will be very relevant to real estate transactions or shareholder agreements and will ensure the buyer can seek specific performance or indemnity.
  • This is better than the position in England, where, for example, a seller can pull out of the contract after exchange, which makes the process onerous and uncertain.
Other comments and references
  • With Brexit looming, French law offers a great alternative for international contracts, with a code that makes the law more accessible and predictable in order to guarantee modernity and legal certainty.

 

  • According to a French proverb: ”ce qui est dit est dit, ce qui est dit est dû” (what has been said is said and therefore owed).

 

At the end of the debate, the audience was asked to vote on whether French contract law would soon govern international business transactions.  Unsurprisingly, the overwhelming majority of those present voted against the motion.

Click here to download a pdf of the Article as published in Au Courant (publication from ITI French network).

Share

Leave comment