Contractual Tensions in the Context of Post-COVID Economic Recovery: Legal Tools and Guidelines | Kramer Levin Naftalis & Frankel LLP
After a year and a half of a global pandemic, the INSEE (National Institute for Statistics and Economic Studies) announced on September 7 a growth forecast of 6.25% of French GDP, thanks in particular to household consumption.
On the same day, the French Treasury presented the outlook for the French economy for the second half of 2021 and for the year 2022 (see graph below).
The accelerated resumption of economic activity after (or with) COVID is the source of significant economic – and therefore contractual – tensions.
Economic players are faced with difficulties of various kinds, impacting their commercial relations:
- Mainly, the supply of raw materials, including supply was slowed down, or even stopped during the year 2020, has not yet returned to normal, while world demand is exploding (for copper, iron, steel, aluminum, wheat, wood, oil, etc.). As a result, the the price of raw materials increases exponentially and suppliers are obliged to announce shortage of raw materials Where primary components.
- The production difficulties added to the supply difficulties. The health crisis has destroyed jobs and the recruitment required combined with the reorganization of human resources also limits production capacity in some sectors.
- Finally, companies encounter difficulties by transporting products and goods due to increased demand in some parts of the world, and are exposed to a increased freight cost and, for the customer, of goods.
In such circumstances, economic players strive to respect their contractual commitments and risk their liability in the event of breach of contractual obligations, or even sudden termination of commercial relations.
What legal tools can be used to avoid or limit contractual liability?
The notions of force majeure and unpredictability are widely invoked. However, it is possible to use other legal grounds, such as a significant imbalance between the parties, or to use sliding scale, take-or-pay or make-or-pay clauses.
Force majeure – Force majeure releases the person who is no longer able to fulfill his obligation. The new formulation of the definition of force majeure seems to have softened slightly the requirements of unpredictability and irresistibility.
In addition, the courts also accept the contractual arrangement of the concept of force majeure, provided that a certain unpredictability remains. The effectiveness of force majeure clauses depends on their drafting, which must be carefully drafted.
Mainly, the clauses which list, by way of illustration and without limitation, the events constituting force majeure do not exempt the defendant from proving that the conditions of force majeure – unpredictability, irresistibility and exteriority – are met. By way of illustration, the Paris Court of Appeal ruled that a clause providing that “by express agreement between the parties, all natural phenomena, such as storms, thunderstorms and cyclones, etc., are considered to be cases of force majeure, exonerating the service provider from any liability»Does not deprive the judge of his power to assess the unpredictable and irresistible nature of the event. A reference in the force majeure clause to a supply disruption or a pandemic does not necessarily exempt the party invoking it from establishing the force majeure conditions.
Conversely, the clauses which provide that the events in question must be qualified as force majeure, independently of the legal requirements of exteriority and irresistibility, exempt the parties from proving that the conditions of force majeure are met. In order to broaden the definition of force majeure, these clauses may also ease the severity of irresistibility. Total Direct Energie has succeeded in relieving itself of its responsibility vis-à-vis EDF, on the basis of the force majeure clause exonerating the parties in the event of impossibility of performance ”under reasonable economic conditions. “
Force majeure clauses have already proven their effectiveness in the context of the COVID crisis, even if this efficiency can be qualified given the increasingly low unpredictability.
The consequences of force majeure are drastic, and it may be better to renegotiate agreements, thus allowing the relationship to continue under new and more acceptable conditions.
Unpredictability (article 1195) – The concept of unpredictability ”make the execution excessively onerous for a party who did not agree to bear the risk“ seems to be particularly relevant in situations of rapidly rising commodity or transport prices.
The legal renegotiation mechanism can, for example, allow the adjustment of the execution time of the contract, the waiver of late penalties or the revision of the price, either with the business partner at best or with the commercial court.
Please note, the occurrence of an “unforeseeable event” within the meaning of the law does not authorize the party to suspend the performance of its obligations. Article 1195 provides that “he will continue to perform his obligations during the renegotiation. ”
However, the clauses derogating from the provisions of Article 1195 of the Civil Code have multiplied for fear that the judge will be entrusted with the determination of the “fair price”, thus excluding the right to renegotiate the contract. In the future, lawyers will certainly try to adjust the conditions and effects of unpredictability rather than opting for its systematic exclusion.
For now, the effectiveness of these waiver clauses could be called into question on the basis of a significant imbalance.
Significant imbalance in the contract – A waiver clause provided for in Article 1195 of the Civil Code could be set aside if it is deemed to create a significant imbalance between the rights and obligations of the parties, on the basis of Article 1171 of the Civil Code or on the basis of the Article L. 442-1 of the Commercial Code (which authorizes a request for the nullity of the clause), in particular when it imposes on a party all the risks inherent in the performance of the contract.
Regardless of the effectiveness of the waiver clause, the significant imbalance between the rights and obligations of the parties may justify compensation from the party bearing the alleged imbalance – and lead to the same result as renegotiating the price due to unpredictability – especially when a contract provides for a long-term relationship and was not (or was only marginally) negotiated at the time of its conclusion and when there are non-reciprocal clauses.
Decreasing clauses – Degressive clauses, or indexation clauses, which allow the price to vary automatically according to the fluctuation of a benchmark index (for example, the price of wheat or oil), are also particularly useful in this phase of recovery. post-COVID. Their beneficiaries should not hesitate to rely on them because they only reflect the intention of the parties at the outset.
Conversely, the resulting price increases could again make the performance of the contract particularly onerous for the purchaser of the good or service, who could then be tempted to invoke unpredictability.
Trade agreements sometimes only provide for an upward price change and a price freeze if the index falls. The Court of Cassation ruled that such clauses must be reciprocal and that otherwise they are null.
The indexation clause only protects against price variations. It is therefore recommended to accompany it with contractual mechanisms which further protect the parties against the risks of non-performance (for example, delays in supply) and above all to be capped in order to avoid excessive price increases.
Take-or-pay / make-or-pay clauses – Supply disruptions should not obscure the risk incurred by suppliers who continue to make deliveries but are faced with the refusal of customers to collect goods. Under the firm purchase clauses, a company is required to ensure the withdrawal of the products ordered or, failing that, to pay a penalty.
The situations are diverse, and the use of specific levers must be adapted to the desired objective, to the position of the customer or supplier, and to the extent of the upheavals caused to economic players after a recovery unanimously hailed but whose strength is unprecedented.
 Article 1218 of the Civil Code: “There is force majeure in contractual matters when an event beyond the debtor’s control, which could not reasonably have been foreseen at the time of the conclusion of the contract and the effects of which cannot be avoided by appropriate measures, prevents the execution of the contract. its obligation by the debtor. “
 CA Paris, 28 Feb. 1990: RTD civ. 1990, p. 669, obs. P. Jourdain.
 T. com. Paris, ref. decree, May 20, 2020, n ° 20201647: JCP E 2020, 1350, notes M. Lamoureux.
 Do not see. Representing. min. n ° 28330: JEANNE, August 25, 2020, p. 5644.
 Article 1195 of the Civil Code: “If an unforeseeable change in circumstances at the time of the conclusion of the contract makes performance excessively onerous for a party who had not agreed to assume the risk, this party may request the renegotiation of the contract from his co-contracting party. It will continue to perform its obligations during the renegotiation.
“In the event of refusal or failure of the renegotiation, the parties may agree to terminate the contract, on the date and under the conditions they determine, or ask the court, by mutual agreement, to adapt it. Failing agreement within a reasonable time, the court may, at the request of one of the parties, revise the contract or terminate it, on the date and under the conditions it determines.“
 C. com. L. 442-4, as modified by the decree of April 24, 2019.
 Court of Cassation – Civil Chamber 3, Public hearing of Thursday, January 14, 2016, n ° 14-24681.