Performance Relief, Contract Enforcement and Business Rescue: Key Differences between Common Law and Civil Law
The global economy is being shaken by the combination of the COVID-19 outbreak, governments' responses to it, the oil price collapse that followed the Saudi Arabia-Russia oil price war and, in large parts of the world, the rise of the US dollar.
These events have led a number of businesses to: (i) face a collapse in demand and margins, supply chain disruptions and liquidity issues; (ii) engage with their creditors, debtors and shareholders and consider their portfolios and assets; and (iii) review their long term commitments and contracts for extension, price adjustment, set-off, renegotiation and termination rights. This is particularly the case in sectors that are particularly exposed (e.g. the oil and gas sector) and in jurisdictions that are considered higher risk.
Performance relief, contract enforcement and business rescue rules in civil law jurisdictions include a number of specific features that may be unfamiliar to common law lawyers.
The tables below sets out a high-level summary of some of these differences, using English law and French law as proxies for common law and civil law systems respectively but also highlighting examples from other jurisdictions where appropriate, noting that:
- there are differences between civil law jurisdictions, as there are between common law jurisdictions, so what follows is indicative only; and
- these differences should be considered in conjunction with any specific rules that may apply depending on the nature of the contract (e.g. a construction contract, a sale contract or an outsourcing contract), and the various recent COVID-19 regulations adopted in a number of jurisdictions.
PERFORMANCE RELIEF: FORCE MAJEURE AND HARDSHIP
| English law
- Contracts are generally discharged by performance, agreement or breaches which are sufficiently significant.
- Equitable remedies generally require a breach.
- Few performance relief mechanisms available at law, absent a breach.
- No doctrine of 'force majeure' or 'hardship' at law - the parties must specifically address these contractually for them to apply.
- Doctrine of frustration (which automatically discharges a contract) of limited application generally - performance must be impossible or the obligation transformed radically.
- A number of performance relief mechanisms are available at law, under the Civil Code, absent any breach: force majeure and hardship as defined at law will apply if your contract is silent; and may be used by courts/arbitral tribunals to address gaps in contract drafting.
- At law, force majeure is generally triggered if an event is:
- external (i.e. beyond the control of the party seeking relief); and
- unavoidable (such that it becomes impossible to perform the obligations at stake).
- At law, hardship is generally triggered if an event:
- is unforeseeable; and
- makes performance 'excessively onerous' given the contemplated balance of risks.
- In practice, parties often include a bespoke force majeure clause in their contract and generally exclude the application of any hardship mechanism available at law, when the counterparty is not the State or a state entity.
- Other considerations may apply:
- there may be sector-specific provisions which take precedence over general provisions of law: e.g. the Guinean Petroleum Code and the DRC Mining Code contain specific force majeure provisions, which supersede the general definition applicable under each country's respective Civil Code; and
- in respect of public procurement contracts and concessions contracts entered into with the State or a state entity, counterparties under hardship can be compensated of up to 95% of the additional costs incurred.