Trade tariffs - overview from a contractual standpoint - Public and private contracts under French law

This briefing note presents briefly whether changes to applicable trade tariffs (if any), impacting significantly the economics of a contract, could, from a French contractual law perspective, qualify under a specific legal regime. 

Impact on existing French public procurement contracts 

The force majeure theory

The French theory of force majeure refers to an unforeseeable external event that makes it impossible to perform the contract. The event must be irresistible, unforeseeable and beyond the control of the parties. The concept of force majeure applied by the French Conseil d'État to public procurement contracts is based on the observation that a disturbance of the economic balance of the contract (which is likely to be considered as an unforeseeable event under the hardship theory, as long as it is temporary) is capable, because of its extent and duration, of justifying its termination (Conseil d'Etat, 26 April 2018, opinion no. 394398; Conseil d'Etat, 9 December 1932, Cie des tramways de Cherbourg, no. 8965; Conseil d'Etat, 14 June 2000, Commune de Staffelfelden, no. 184722).

Claiming the force majeure theory has two inconvenient in the context of increased costs or supply chain disruptions caused by changes to applicable trade tariffs. First, claiming the force majeure theory requires the contractor to justify that it has become impossible to perform the contract, which may be difficult to demonstrate in practice in the context of new trade tariffs, unless it leads to the company becoming so loss-making that the contractor can no longer meet its contractual obligations. Secondly, the force majeure, if evidenced, results in the termination of the contract. Although it generally entitles the contractor to compensation for such termination, it is usually not the intention of the contractor to terminate the contract as such action is irreversible.

The "imprévision" (hardship) theory

Pursuant to French public law, hardship (which is codified in Article L. 6, 3° of the French Code de la commande publique) allows a contractor to seek compensation in the event that unforeseen circumstances disrupt the economic balance of a contract. To claim hardship, the contractor must demonstrate that (i) the event was unforeseeable at the time of contract was entered into, (ii) the event was beyond the control of the parties, and (iii) the event substantially and temporarily disrupted the economic balance of the contract ('bouleversement de l'économie du contrat').

The applicability of hardship depends on the contractor's ability to demonstrate, on a case by case basis, that the alleged unforeseen events significantly escalated the cost and price of the goods and/or services provided under a public procurement contract, thereby disturbing the economic balance of the contract. In practice, establishing such a disturbance can be difficult and is rarely upheld by French case law.

French (public) case law further implies that compensation for hardship is never awarded in full. As a result, claiming hardship in the context of a change in trade tariffs may not fully mitigate the additional costs incurred by the contractor. Therefore, alternative remedies should be considered to compensate for any additional costs.

Unforeseen circumstances

Articles L. 2194-1 and R. 2194-5 of the French Code de la commande publique allow existing contracts to be adjusted in response to unforeseen circumstances, without having to launch a new procurement procedure, provided that the following conditions are met:

• Unforeseeable and external event(s): the required adjustment of the contractual provisions must be justified by an event which was unforeseeable by both parties in its occurrence and/or in its extent and the costly consequences of which exceed what was reasonably foreseeable by the parties in its original forecasts at the time of execution of the contract. This means that none of the parties must have played a role (in whole or in part) in the occurrence of such event or the worsening of its consequences. Contractors who have signed contracts with the French State should be vigilant about how much the French State participates in discussions with the European Union to adopt any EU trade tariffs rules. These could jeopardize their ability to demonstrate that the changes in trade tariffs are external and unforeseeable events; 
• Necessity of the required adjustment(s): the required adjustment(s) of the contractual provisions must be necessary to overcome the unforeseen event;
• Limitation to the required adjustment(s): the financial impact of the required adjustment(s) of the contractual provisions must not exceed 50% of the initial contract value.

Even if those conditions are met, such modifications are not automatic for the contractor and must be agreed between the parties, with the possibility of the contracting authority refusing to apply them.

A possible way to adjust a contract in this situation is to add or revise a price adjustment clause. A good source of inspiration for such clauses are the standard ones in the cahier des clauses administratives générales, which provide for adjustment mechanisms. These clauses are not mandatory, but it offer a well-established framework to justify a fair financial readjustment in line with market fluctuations.

Although it may not be difficult to demonstrate (depending on the timing sequence) that changes to trade tariffs were unforeseeable, the scope of any contractual adjustment will be limited (50% of the original contract value). This threshold, while protecting public procurement principles, may not be enough to cover the actual losses in some cases. If the financial impact is higher than this limit, contractors may have to claim force majeure or seek for other remedies.

Other remedies provided in the French Code de la commande publique to address trade tariffs changes

The French Code de la commande publique also allow existing contracts to be adjusted without having to launch a new procurement procedure in case of minor changes (also called de minimis exemption - Article L. 2194-1 6°¹) and non-substantial changes (Article L. 2194-1, 5°). These alternatives provide limited flexibility for adjusting ongoing contracts in response to operational or economic changes.

In case of significant changes to trade tariffs, any envisaged adjustment to the financial terms of a contract is unlikely to be considered non-substantial, as the French Conseil d'Etat considers that changes that affect the economic balance of the contract in favour of the contractor are generally considered to be substantial (Conseil d'Etat, 15 September 2022, opinion no. 405540).

Impact on future French public procurement contracts that are not awarded and/or signed yet

To negotiate the French public procurement contracts under the process of being awarded, the impact of significant changes to trade tariffs can be discussed with the contracting authority depending on the procedure type and whether a final tender has been submitted or not. 

For non-negotiated procedures without a final tender, it is recommended to factor in the extra costs of the import duties in the offer price. 

For procedures with a final tender, the impact of significant changes to trade tariffs can be discussed with the contracting authority during the "mise au point" phase provided that the significant changes to trade tariffs are considered as financially neutral and apply to all candidates, which can be rarely accepted in practice.

For illustration, the significant rise in energy prices after Russia's invasion of Ukraine has made contracting authorities more cautious about the use of price variation clauses in their contracts. Although public procurements should normally have fixed prices, the French Code de la commande publique requires the inclusion of a price revision clause in contracts lasting more than three months that require a significant amount of supplies whose price is directly affected by global market fluctuations. Contracting authorities may therefore be more willing to include such clauses.

Impact on existing French private contracts

The force majeure theory

In private law, the force majeure is governed by Article 1218 of the French civil code.

The scope and consequence of force majeure is essentially the same in French public and private law. See Section I/ (i) above. 

As mentioned above: (1) the force majeure cannot be alleged unless and until the event considered renders impossible the performance of the contract, and (2) if such force majeure is evidenced, the consequence associated thereto under French law is the termination of the contract, which may not be the objective pursued.

The "imprévision" theory (hardship)

The French legal concept of hardship, known as "imprévision" provided at the Article 1195 of the French Code civil, allows a party to a contract to seek judicial intervention to renegotiate the terms or terminate the contract when unforeseen circumstances make performance excessively onerous.

There are three key elements of hardship:

• Unforeseeable change of circumstances: The change must be unforeseeable at the time the contract was concluded. This means it could not have been reasonably anticipated by the parties or accounted for in the contract;
• Excessively onerous performance: The change must render the performance excessively onerous for one party, creating a significant imbalance between the parties' obligations or imposing a disproportionate burden on the affected party. This is distinct from force majeure, where performance becomes impossible ;
• Non-acceptance of risk: The affected party must not have accepted the risk of such a change, either explicitly or implicitly, through the nature of the contract, market conditions, or specific contractual provisions.

Recognised cases of hardship within private contractual relationships

French courts are generally favourable towards accepting requests for contract revision or termination under the hardship doctrine, provided that the condition of excessive onerousness is rigorously documented. Precise accounting statements, including invoices, are recognised as valid evidence to demonstrate the new burden incurred.

• Significant Increase in Raw Material Prices: Courts have acknowledged hardship in cases of unforeseen and drastic increases in the cost of materials or goods necessary for contract performance. For example, the significant rise in energy prices following geopolitical events like Russia's invasion of Ukraine;
• Regulatory Changes: Sudden and significant changes in regulations or laws that affect contractual obligations can be grounds for invoking hardship. For instance, new environmental regulations that impose additional costs on a party;
• Pandemics: The COVID-19 pandemic has been recognised as a case of hardship due to its unforeseen nature and substantial impact on various contractual relationships, particularly in sectors like tourism, hospitality, and supply chains.

Based on our legal expertise and case law, it appears that significant external changes, such as trade tariffs increase are likely to constitute a case of hardship under French law (subject to case by case analysis). This doctrine ensures that contracts remain fair and balanced in the face of unforeseen and burdensome changes.

See our Global trade tariffs and business resilience resources page for more Ashurst publications on this topic.