Reform of the French Civil Code on contract law and the general regime and proof of obligations

On October 1, 2016, Order n°2016-131 of February 10, 2016, modifying the French Civil Code provisions on contract law and the general regime and proof of obligations, entered into force. The Order codified principles which have emerged from the case law of the French courts but also created a number of new rules applicable to pre-contractual and contractual relationships.

Pre-contractual relations

New article 1104 provides that contracts must be negotiated, concluded and performed in good faith¹ (previously the implied obligation of good faith applied only to performance) and failure to comply with such obligation can not only trigger the payment of damages, but also result in the nullification of the contract. New article 1112-1 provides specifically that if one party to the contractual negotiations is aware of information the significance of which would be determinative for the consent of the other party (except for information relating to the estimation of the value of services to be provided under the contract), it must inform such other party thereof if such other party is legitimately unaware of such information or relies on the first party.

New articles 1115 and 1116 provide that contractual offers² may be retracted if they have not yet reached the offeree, but they may not be retracted prior to any period for acceptance stated in the offer (or, if no such period is stated, a reasonable period). Offers retracted in violation of such rule but prior to acceptance prevent the conclusion of the contract; in such case the only remedy is damages, and such damages are limited to the costs and expenses resulting from the non-conclusion (and not anticipated profits). Conversely, new article 1118 provides that acceptance of the offer may be freely retracted as long as it has not been received by the offeror.

New article 1119 provides that general conditions invoked by a party have no effect against the other party unless they have been made known to such other party and accepted by it. In the event of a “battle of the forms” between two series of general condition (e.g., general sales conditions and general purchase conditions), those conditions which conflict are without effect.

Preference pacts and unilateral promises

Under new article 1123, if the undertaking party in a preference pact enters into an agreement in violation of this preference pact, the original beneficiary may obtain damages, and, if the new counterparty knew of the existence of the preference pact and the intention of the beneficiary to benefit thereby, the beneficiary may bring an action to have the offending contract declared null or request the judge to have the beneficiary substituted for the offending party in the contract. A third party may request in writing that the beneficiary of a preference pact confirm, within a reasonable period specified in the written request, whether or not there is a preference pact in force and if the beneficiary intends to rely thereupon. If no response is made to the request, the beneficiary of the preference pact may no longer request to be substituted for the requesting party or to have the contract declared null and void.

Contradicting previous decisions of French courts, new article 1124 provides that a contract concluded in violation of a unilateral promise with a third party which knew of the existence thereof is null and void.

Economic violence and unequal clauses

New article 1143 provides that violence exists when a party, abusing the state of dependency in which its co-contracting party finds itself, obtains from such co-contracting party an undertaking which such co-contracting party would not have otherwise agreed to in the absence of such constraint, and benefits thereby from a manifestly excessive advantage. The requirement to obtain a manifestly excessive advantage was added just prior to promulgation in order to limit the scope of this provision to particularly egregious situations.

Under new article 1171, in standard form agreements imposed by one party on another³ (contrats d’adhésion), contractual clauses (other than those dealing with the principal object of the contract or with the price of the service provided) which create a significant imbalance (déséquilibre significatif) between the rights and obligations of the parties to the contract can be deleted by the judge at the request of the contracting party to the detriment of which it was stipulated. The limitation of this principle to “adhesion contracts” was added prior to promulgation of the Order, again in order to limit the scope of the provision to circumstances in which the party suffering from the “significant imbalance” had no opportunity to negotiate the contract.

Interpretation and nullification of contracts

French law has historically provided that a court interpreting an ambiguous contractual provision must determine the parties’ actual subjective intention rather than simply construing the actual words of the contract in an objective manner. This has been traditionally opposed to the Anglo-American principle of interpreting ambiguous provisions in the manner a “reasonable person” would understand them. However, under new article 1188, if the mutual intention of the parties cannot be determined, the contract is to be interpreted according to the sense that a reasonable person placed in the same situation would give to it. In standard form agreements (contrats d’adhésion), new article 1190 provides that, in the case of doubt, the contract is to be interpreted against the party who proposed the contract.

New article 1179 distinguishes between absolute nullity (in the case of contracts which violate a provision of law which protects the general interest), which can be requested by any person who can demonstrate an interest as well as by the public prosecutor, and relative nullity, which can be requested only by the person which the law is intended to protect. A party may request in writing to a person who would be entitled to claim the nullity of a contract either to confirm the validity of the contract or to bring an action to nullify the contract within six months, failing which the person will be foreclosed from alleging the nullity. If an action in nullity is not brought within six months, the contract will be deemed to have been confirmed. Under new article 1186, a contract validly formed may also become lapsed (caduc) if one of its essential components disappears. If the performance of several contracts is necessary for the realisation of the same transaction and one of such contracts disappears, all of the contracts the performance of which is rendered impossible by such disappearance, and all those for which the performance of the contract which disappeared was a determining condition of the consent of a party are also rendered caduc; however, this only occurs if the contracting party against which such caducité is invoked was aware of the existence of the entire transaction when it consented to the contract to which it is a party.

Hardship and force majeure

New article 1195 provides that if a change in circumstances which could not have been predicted at the time the contract was entered into renders performance of the contract excessively onerous for a contractual party who had not assumed such risk, such party may request its counterparty to renegotiate the contract. The requesting party must continue to perform its obligations during the renegotiation. In the event of refusal of the other party to renegotiate or in the event that the renegotiation is not successful, the parties may agree to terminate the contract on the date and on the conditions determined by the parties, or mutually request the judge to adapt the contract. Without an agreement within a reasonable time period, the judge may, at the request of a party, revise the contract or terminate it. Because the article expressly states that it does not apply to a party who has assumed the relevant risk, it is likely that parties to French law contracts will henceforth include language specifically stating that risk of “hardship” is assumed; the Loan Market Association has for example recommended such an approach to loan agreements.

Force majeure is defined by new article 1218 as the occurrence of an event which is beyond the control of the obligor, which could not have been reasonably foreseen at the time of the entry into of the contract and the effects of which cannot be avoided by appropriate measures and which prevents performance of its obligation by the obligor. If the effects are temporary, the performance of the obligation is suspended unless the delay resulting therefrom justifies termination of the contract. If the effects are definitive, the contract is automatically terminated and the parties are discharged of their obligations (without damages being due).

Transfer of contracts, rights and obligations

New article 1216 provides that a contracting party may, with the consent of its co-contracting party, assign its position as party to a contract; such an “assignment of contract” (cession de contrat) will simplify considerably the manner in which contractual transfer occurs under French law. Such consent may be given in advance, including in the contract entered into between the future assignor and assigned party, in which case the assignment enters into force with respect to the assigned party when the contract concluded between the assignor and the assignee is notified to the assigned party or when the assigned party so acknowledges. The assignment must be made in writing or it is null and void. If the assigned party so expressly consents, the assignment of the contract liberates the assignor for obligations arising after the assignment; otherwise the assignor remains jointly and severally liable for the performance of the contract. If the assignor is not discharged by the assigned party, any security interests previously granted remain in force. Otherwise, security interests granted by third parties remain in force only with their agreement. If the assignor is discharged, any joint and several co-obligors remain liable, after deducting the share of the assignor in the obligations.

Assignment of receivables no longer requires to be effective as against the obligor of the receivable to be served on such obligor by huissier de justice (signification); under new article 1324, simple notice to or acknowledgement by the obligor is sufficient, and even this is not necessary if the obligor has given advance consent to such assignment. The assignment of receivables must be made in writing or it is null and void.

Assignment of debts (cession de dettes) is specifically permitted under new article 1327, as long as it is consented to or acknowledged by the creditor, including by the giving of advance consent. If the creditor so consents, the original obligor is discharged of its obligation; otherwise it is jointly and severally liable for payment of the debt. If the original debtor is not discharged of its obligation then the security interests which were originally granted survive; otherwise security interests granted by third parties only survive with the agreement of the persons having granted such security interests. If the assignor is discharged, any other jointly and severally liable co-obligors remain liable after deduction of the assignor’s portion of the debt.

Remedies for non-performance (new article 1217)

As revised, the Civil Code now sets out several different remedies for contractual non-performance:

• Refusal of the performing party to perform its own obligations or suspension of such performance (exception d’inexécution), not only when the other party is already failing to perform, but also when it is manifestly clear that the other party will not perform on the date performance is contractually required and if the consequences of such non-performance are sufficiently serious for the otherwise performing party.
• Specific performance (exécution forcée), after serving formal notice on the non-performing party to perform (mise en demeure) and unless such performance is impossible or if there exists manifest disproportion between the cost of performing for the obligor and the interest in performance for the obligee. It is also possible for the obligee, following the giving of a mise en demeure, to perform the obligation itself or cause it to be performed, with a reasonable time period and at a reasonable cost, or, following receipt of prior authorisation by the judge, destroy anything done in violation thereof. The obligee may request the obligor to reimburse sums paid by the obligee for such purpose, and may also file a motion before the court asking the obligor to advance to the obligee the amounts necessary for such performance or such destruction. This new remedy is a substantial departure from previous practice, under which specific performance was rarely permitted.
• Accept imperfect performance and request a proportional reduction in price, following a mise en demeure.
• Termination of the contract, after a mise en demeure. A clause résolutoire in a contract must specify those obligations the non-performance of which will trigger the termination of the contract. If the contract does not contain a clause résolutoire, the obligee may terminate the contract in the event of a sufficiently serious case of non-performance by simple notification but at its risk. The obligee is always entitled to request the court to terminate the contract; in such case, the judge may either acknowledge or order the termination of the contract or order the non-performing party to perform either immediately or within a period fixed by the court, or simply order the payment of damages.
• In addition, damages, after a mise en demeure, can always be claimed, either alone or in conjunction with the other remedies.