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
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| English law |
French 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.
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- 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:
- unforeseeable;
- 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.
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PROTECTING AND ENFORCING CONTRACTUAL RIGHTS
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English law |
French law |
| Termination |
- The threshold for terminating on the basis of repudiatory breach is generally high: breach of a condition, i.e. a vital term, or a breach that deprives the other party of substantially the whole benefit of the contract.
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- A contract can be terminated if the failure of performance of the other party is sufficiently serious, which is generally a lower threshold than for repudiatory breach under English law.
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| Liquidated damages |
- If a liquidated damages payment constitutes a penalty (i.e. the payment agreed is not a genuine pre-estimate of loss and is out of all proportion to the legitimate interests of the innocent party), it will be unenforceable.
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- French law does not draw a distinction between penalty and liquidated damages clauses (i.e. penalties are not necessarily unenforceable), but a court or tribunal can adjust the amount agreed by the parties if it is "manifestly excessive" or "manifestly derisory".
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| Liability |
- A claimant can generally recover losses that are direct and/or foreseeable. Loss of profit and consequential losses (arising from a special circumstance of the case, not in the usual course of events) may be recoverable in certain circumstances.
- Parties can agree to limit or exclude their liability, including in relation to gross negligence. Such clauses can potentially be challenged if they are excessively wide and/or wording is ambiguous.
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- Recoverability is generally limited to losses which arise naturally in the ordinary course of events and loss of opportunity is generally not recoverable.
- Limitation and exclusion of liability clauses are valid, unless they "deprive the contract of its essential provisions". Liability for gross negligence cannot be capped or excluded in the contract.
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| Joint liability |
- In general, if two or more parties contract together to perform an obligation then, in the absence of any express provision to the contrary, there is a presumption in favour of joint liability.
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The presumption of joint liability applies to commercial transactions where there are multiple obligors, but there are exceptions to it. |
| Endeavours |
- It is common for parties to include endeavours obligations and to refer to concepts such as 'reasonable endeavours' or 'best endeavours'.
- 'Best' endeavours (or the equivalent) can require the obligor to incur costs or to act against its own interests.
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- French law only recognises absolute obligations and endeavours obligations, without drawing a specific distinction between 'reasonable endeavours' and 'best endeavours'.
- Endeavours obligations need to be drafted particularly carefully and articulate as explicitly as possible what is expected from the obligor.
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| Duty to mitigate |
- In relation to a damages claim (but not a debt or, in certain cases, an indemnity claim), the claimant must take reasonable steps to minimise its loss.
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- No duty to mitigate per se, but the concept of good faith is often used to adjust damages recovered.
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| Setoff |
- It is generally possible to set off debts arising under separate (but connected) contracts, including potentially unliquidated damages based on a reasonable assessment of the loss.
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- Connected debts that are due and payable can generally be setoff, but this generally does not extend to unliquidated damages.
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Taking and enforcing security
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- Debentures, floating charges and security agents are well-established concepts
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- No general concepts of floating charge and debenture or blanket security agreement covering all or most of the assets of a company. Separate pledges are generally required to be taken over all the assets of a company, and each class of asset is subject to a different set of statutory provisions governing the creation and perfection of security.
- The concept of a security agent is relatively new under French law and is not recognised in a number of civil law jurisdictions.
- It is possible to create security over future assets provided they can be sufficiently identified and determined, but creating security over potential future assets is not allowed.
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OTHER KEY CONTRACT LAW POINTS TO CONSIDER
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English law |
French law |
| Interpretation |
- Focus is on the objective interpretation of words in the document.
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- The contract must be interpreted in light of the common intention of the parties, which prevails over the literal meaning of the words in the document.
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| Good faith |
- No general duty of good faith.
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- Contracts must be negotiated, formed and performed in good faith.
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| Agreement to agree |
- An obligation that is a mere agreement to agree, or that is too uncertain, is generally unenforceable. However the consequences of failure to agree, if specified, are typically enforceable.
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- An obligation that is too uncertain is generally unenforceable.
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What is the law governing your contract?
Your contract is likely to include a governing law clause, especially if it was entered into with a foreign counterparty.
If the contract is silent, the place of the performance of the contract will most probably dictate the governing law.
COVID-19 pandemic: contractual mechanisms to consider (in addition to force majeure and hardship provisions)
- Change of law: does your contract include a 'change of law', 'stabilisation' or 'economic equilibrium' clause (if it was entered into with a State or state owned entity)? What is the trigger, and does it give rise to termination or renegotiation rights?
- Price revision: does your contract include a “price re-opener” or “price review” clause? This is often the case in long term offtake agreements, such as gas sales agreements. What is the trigger? Also, does your contract include a take-or-pay clause and how is it structured? Is there a risk that it may be construed as a penalty clause if the contract is governed by English law? Other contracts may include a price adjustment provision on closing or post-closing.
- Extension of time and additional costs: where performance of the contract is still (at least in part) possible despite COVID-19 disruptions, there may nevertheless be time and cost implications that should be assessed and allocated between the parties if your contract includes specific extension of time and/or cost recovery clauses, which are common in standard form construction contracts.
- MAC: a material adverse change or event clause is common in sale and purchase agreements and in loan agreements. It can be structured as a condition precedent, a termination right or a warranty. A subjective standard generally puts the claiming party in a more favourable position. A MAC clause often includes a list of exceptions, which must be considered carefully. If the contract is governed by civil law, the relationship between any MAC clause and any hardship relief available at law must also be considered.
- Conditions precedent and longstop date: sale and purchase agreements typically include a number of conditions precedent, and a longstop date by which these must be satisfied. It may be that the agreement can be terminated if these conditions precedent are not satisfied by that date.
- Insurance is also an important consideration. Parties should check their insurance policies to see whether the disruption and delay occasioned by the COVID-19 outbreak is covered.
BUSINESS RESCUE AND INSOLVENCY
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English law |
French law |
| Trigger for compulsory liquidation / administration |
- No express duty to commence proceedings at any particular time on the grounds of either cash flow or balance sheet insolvency, although directors may commence proceedings to try and mitigate the risk of personal liability for wrongful trading.
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- Cash flow test ('cessation de paiement').
- Directors are legally obliged to start proceedings for liquidation / administration within 45 days of the company becoming cash flow insolvent.
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Administration – Moratorium, reviewable transactions and pre-pack
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- Primary objective is to rescue the company as a going concern although in practice this has been rare historically and a sale process or pre-pack is more common.
- One feature is to create a moratorium – no step can be taken to enforce security and no legal process may be instituted or continued.
- No current prohibition on termination as a result of insolvency. However, there are legislative proposals to introduce an ipso facto regime but drafting of legislation and commencement date are to be confirmed
- Transactions made at an undervalue and preferences granted prior to insolvency may in certain circumstances be declared void.
- Pre-pack (administration followed by an immediate sale of the business and/or assets) is common, but likely to be challenging in the current environment given the difficulties in running M&A processes and financing acquisitions.
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- The French equivalent of administration is called 'redressement judiciaire'. In practice, the main objective is to save jobs and a sale process is frequent.
- 'Redressement judiciaire' triggers a moratorium. As a general rule, creditors must file a proof of their claim within two months of the start of the proceedings for domestic creditors, or four months for foreign creditors.
- There is a prohibition on terminating contracts as a result of insolvency, even if the contract contains an 'ipso facto' clause providing for such termination.
- Claw-back rules are generally stricter. Certain transactions will (and others may) be void if they were entered into during the hardening period ('période suspecte') prior to insolvency.
- Pre-pack sales are possible and must be preceded by a voluntary reorganisation scheme ('mandat ad hoc' or 'conciliation' – see below).
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| Voluntary reorganisations |
- The two main processes are company voluntary arrangements ('CVA') and schemes of arrangement.
- A scheme of arrangement generally requires extensive court involvement.
- Unlike a scheme of arrangement, a CVA cannot bind any secured or preferential creditor without its consent.
- CVAs and schemes of arrangement do not in principle involve an automatic statutory moratorium.
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- The three main processes are 'mandat ad hoc', 'conciliation' and 'procédure de sauvegarde'.
- They are generally available to companies that are solvent (or, in relation to 'conciliation', that have been insolvent for less than 45 days). 'Procédure de sauvegarde' is only available to a company 'facing difficulties that it does not manage to overcome'.
- 'Mandat ad hoc' and 'conciliation' are amicable proceedings with very low court involvement and require the consent of all stakeholders. 'Procédure de sauvegarde' requires extensive court involvement and generally triggers an automatic moratorium, but no claw-back. An accelerated 'procédure de sauvegarde' is available if key creditors are onboard.
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| Key COVID-19 measures |
- In the UK, the offence of wrongful trading for company directors has been suspended to remove the threat of personal liability during the pandemic.
- In France, the obligation to start proceedings for liquidation / administration within 45 days of the company becoming cash flow insolvent has been suspended as of 12 March 2020.
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