Model contracts & clauses

A French revolution: Hardship finds its way into the Civil Code

  • 29 March 2016
International Court of Arbitration

The ICC-FIDIC Conference on International Contracts and Dispute Resolution begins today in Istanbul, Turkey.

Philippe Sarrailhe of Foley Hoag discusses an important French legal development with great significance for construction and infrastructure contracts and other related disputes in this guest column for the International Chamber of Commerce (ICC).

Given its relevance to the construction industry, the long overdue introduction of a hardship provision into the French civil code deserves attention.

Article 1195, which will apply to contracts concluded after 1 October 2016, provides as follows:

“Where a change of circumstances that was unforeseeable at the time of the contract’s conclusion renders performance exceedingly onerous for a party that had not accepted to assume such risk, the party may ask the other party to renegotiate the contract. It shall continue to perform its obligations during renegotiation.

In the event of refusal or failure of the renegotiation, the parties may agree to terminate the contract, on a date and on terms determined by them, or jointly apply to a judge to proceed with its adaptation. Failing agreement within a reasonable period of time, the judge may, upon a party’s request, revise the contract or terminate it, on the date and terms he decides.”

Following are five implications:

  1. The provision is not mandatory; accordingly, the parties will now need to consider from the outset of their contract negotiation whether they wish to exclude all or part of it. Alternatively, they may wish to insert additions or modifications. This will require careful drafting to avoid undesirable interplay or inconsistencies between the legal and any ad hoc contractual mechanisms or, even hypothetically, the legal regime of fixed price contracts.
  2. While in appearance closely related to the decades-old UNIDROIT Principles , the French definition stops short of referring to a fundamental alteration of ” the equilibrium of the contract. ” Rather, like the Italian Civil Code , it focuses on performance becoming ” exceedingly onerous ” for a party, seemingly narrowing the scope to a measure of the increase in cost of performance, unlike the UNIDROIT Principles which include the “decrease in value of the performance received,” although that may be debatable.
    At any rate, the judge looks free to disregard the contractual ” equilibrium ” of the contract and conduct an assessment based on the applicant’s subjective financial position.
  3. Equally important is the absence of any condition that events must have been ” beyond the control ” of the requesting party . Consistent with the Cour de Cassation ‘s most recent rulings in the context of force majeure , it implies that circumstances may be taken into account even if the relevant party had some degree of control over them.
  4. Regarding the condition that a party claiming hardship must not have assumed the risk of change in circumstances, Article 1195 adopts a protective stance by specifying that assumption of risk must have been “accepted,” probably excluding a “deemed assumption” approach.
  5. Turning to the effects and procedural aspects of the new provision, it imposes a somewhat protracted three-step procedure:
    • As a first step, the aggrieved party ” may ask the other party for a renegotiation .” Obviously, the option would have been available in any case, but the novelty comes with the requirement that the requesting party ” shall continue to perform its obligations during negotiation .”
    • The second step arises if the proposed negotiation fails, whereupon the parties ” may agree to terminate the contract ” on mutually acceptable terms. Again, an option which would always have been open to the parties, however the law now offers the parties the possibility of ” jointly applying to a judge for adaptation of the contract. ” It is doubtful, in practice, that parties unable to come to terms will be much more inclined to formulate a joint request to a judge to ” adapt the contract.
    • Thus, the third and final step is bound to be the most significant, allowing – failing agreement on the second step within a ” reasonable period of time ” – either party to request that the judge ” revise ” or “terminate ” the contract. One intriguing aspect is the semantical shift from ” adaptation ” to ” revision, ” the latter term suggesting a broader discretion to intervene in the contractual framework.
  6. Indeed, whether the judge is asked by the parties jointly to adapt the contract – perhaps implying that his role will be limited to bridging the gap between the parties’ respective submissions – or by one party seeking revision or termination in a contentious mode are quite different situations: in such case the judge appears empowered to order a remedy (be it revision or termination) on terms which were not even requested in the first place, possibly without considering the original bargain. A related question is the extent to which French judicial judges will be equipped to deal with such broad mission, involving an appreciation of highly sophisticated business and technical issues.
  7. Last, but not least, one may wonder how an appellate body will operate in a context involving inherently subjective decisions of a highly practical nature, based on economic, business and technical, rather than legal, considerations.

To conclude, Article 1195 appears to give broad discretionary powers to the judge to redefine the contractual bargain in the interest of protecting the weaker party against hardship rather than preserving or restoring the economic balance. Arbitral tribunals would be probably better suited to handle the resolution of the issues associated with this process.

©Foley Hoag 2016