The impact of armed conflicts on commercial disputes: recent developments in France

Jean-Sébastien Bazille
Gide, Paris
bazille@gide.com

Clara Giordano
Gide, Paris
clara.giordano@gide.com

Embargoes, delivery delays, exponential increases in the cost of energy and raw materials, or supply difficulties are among the various direct and indirect consequences of the current international context resulting from the war in Ukraine, which can adversely affect international commercial contracts.

The purpose of this analysis is to examine the extent to which a party to a contract governed by French law may invoke the consequences of armed conflicts taking place thousands of miles away from France in order to avoid performance of that contract or, at least, to adapt it to face such exceptional circumstances (the Affected Party).

Two tools can be used under French Law to help the Affected Party overcome these exceptional circumstances: (1) force majeure, when performance has become impossible; and (2), the doctrine of unforeseeability when performance, although still possible, has become ‘excessively onerous’ for the Affected Party.

These two important tools were brought to the fore by the 2016 reform of French contract law (Reform), which codified the former and recognised the latter for the first time under French law.

Force majeure and armed conflicts

Force majeure refers to an unforeseeable and irresistible event which, for reasons external to the Affected Party, makes it objectively impossible to perform its obligations under a contract.

Although this concept has long been recognised by French courts, it was only codified with the Reform.

In the absence of a specific clause in the contract defining force majeure, the event must meet all three of the following criteria, examined on a case-by-case basis, to qualify as force majeure: (1) exteriority; (2) unforeseeability; and (3) irresistibility.

Article 1218 of the French Civil Code, as amended by the Reform, now defines force majeure in contractual matters as ‘an event beyond the control of the Affected Party that could not reasonably have been foreseen at the time of the conclusion of the contract and the effects of which could not have been be avoided by appropriate measures.’

While it may have appeared as though the exteriority criterion had been abandoned by French case law at some point, the French Supreme Court reaffirmed its importance in a decision of its Plenary Assembly, its most solemn formation, on 10 July 2020.[1]

In its decision, the Court rejected the application of an Iranian bank, whose assets had been frozen as a result of sanctions imposed by the United Nations Security Council on entities identified as contributing to Iran’s nuclear or ballistic missile programmes. The bank argued that such sanctions constituted a force majeure event preventing the payment it owed and as such, exonerating it of the consequences of its default.

The Court rejected this argument and ruled that the freezing of the assets of a person or entity does not constitute a force majeure event due to the lack of exteriority, as such measures have been imposed because of said person or entity’s own activities.

If this decision is interesting for the clarification it brings to the legal regime of force majeure under French law, it is remarkable for the insight it brings to this concept in the context of sanctions.

It is more often on the criterion of unforeseeability that the debate before the courts is likely to crystallise, bearing in mind that it must be assessed at the time of the conclusion of the contract.

In this respect, the Paris Court of Appeal has already ruled that while a Taliban attack can be considered an external and irresistible event, such an attack in a country at war cannot be considered an unforeseeable event.[2]

The attitude adopted by the Affected Party towards the event in order to prevent its effects through ‘appropriate measures’ is moreover closely scrutinised by the courts.

The French Supreme Court therefore ruled in the 1990s that when a transport company had taken all the necessary measures to avoid the consequences of the air traffic disruption caused by the Gulf War but was unable to do so, this constituted an event of force majeure.[3]

Furthermore, it should also be pointed out that unforseeability may exist as to the event itself or its magnitude. For example, the cost of energy may fluctuate, which is not really unforeseeable, but one of those fluctuations may be so exceptional that it may constitute an unforeseeable event.

As for the consequences of the force majeure, French law distinguishes between a temporary hindrance, in which case performance of the obligation is merely suspended, unless the resulting delay justifies termination of the contract, and a definitive hindrance, in which case the contract is terminated by operation of law and the parties are released from their respective obligations, that is, without the need for judicial intervention.

In the event of suspension, the Affected Party must resume performance as soon as it is possible to do so. In other words, in order for the Affected Party to be definitively released from the performance of its obligations without incurring contractual liability, the event constituting force majeure must fully prevent the Affected Party from fulfilling its contractual obligations.

In this respect, the mere fact that the performance of the Affected Party’s obligations becomes more burdensome or onerous, or cannot be performed on time, will not suffice.

The French Supreme Court has indeed repeatedly, and again very recently,[4] stated that force majeure cannot, as a matter of principle, be invoked to relieve a party from its obligation to pay a sum of money in light of the difficulties it may have to do so. In other words, there is no such thing as ‘financial force majeure’ under French law.

Since the provisions of Article 1218 of the French Civil Code are not part of the public order, the parties may decide to draft their own contractual provisions relating to the definition of a force majeure event and/or its effects over the parties’ obligations (notice of non-performance, cure period, suspension, etc.), which will be binding on the judge, provided that such a clause is carefully drafted.

The doctrine of unforeseeability and armed conflicts

For contracts entered into after 1 October 2016, the Affected Party may invoke the doctrine of unforeseeability (théorie de l’imprévision), which was introduced into French law for the first time by the Reform.

Pursuant to Article 1195 of the French Civil Code: (1) if a change in circumstances that was unforeseeable at the time of the conclusion of the contract; (2) renders its performance excessively onerous for a party; (3) that did not accept to bear such risk, that party may request its counterparty to renegotiate the contract.

Unlike force majeure, the doctrine of unforeseeability does not require that performance be rendered impossible, but rather that it be ‘excessively onerous’.

These three elements can usefully be specified in a ‘hardship clause’, that can detail each of the three conditions for triggering renegotiation, frame the renegotiation process, and the possibility of referring the matter to the courts or excluding it.

The case law of Paris courts shows a strict scrutiny in the characterisation, in particular by means of accounting and financial information, that the performance was ‘excessively onerous’ and that this cannot be inferred from the mere fluctuation of the price of raw materials.[5]

In a recent decision, the Paris Commercial Court, while rejecting the unforeseeability argument, ruled that the succession of Covid-19 and the war in Ukraine had created the conditions for a sharp rise in energy and paper prices, as evidenced by the work of an auditor, which made it excessively onerous for the claimant to perform the contract.[6]

However, the claim based on the doctrine of unforeseeability was dismissed, as the Court found that it was not clearly established that the claimant had not assumed the risk of such an increase, given the wording of the contract.

Moreover, it must also be emphasised that the Affected Party must continue to perform its obligations during the renegotiation phase. In other words, the Affected Party cannot force its counterparty to renegotiate by suspending the performance of its own obligations.

In this regard, Article 1195, paragraph 2 of the French Civil Code specifies that if renegotiation fails or is refused by the Affected Party’s counterparty, the parties may agree to terminate the contract, on a date and subject to conditions to be determined by them, or jointly ask the judge to adapt the contract.

If no agreement is reached within a reasonable period of time, the judge may, at the request of either party, revise or terminate the contract, on the date and under the conditions set by the judge.

In this respect, the recognition of the doctrine of unforeseeability under French law was a major change brought about by the Reform, in view of the possibility given to the judge to revise the contract.

The Covid-19 crisis, followed by the war in Ukraine, led to numerous claims filed before the French Courts on this ground. However, these claims are analysed very strictly.

For the first time, on 14 December 2022, the Paris Commercial Court found, on the ground of these new provisions enacted by the Reform, that the doctrine of unforeseeability should be applied.

The Court ruled that a contract for the sale of ceramic tiles should be terminated at the end of its initial period due to rising costs resulting from Covid-19 and the Russian-Ukrainian conflict, although the Claimant’s primary request was for a revision of the contract.[7] Indeed, the Court considered that, even if unforeseeability had been established, the elements provided by the Claimant did not allow it to revise the contract.

Such a decision, and the judicial uncertainty that the parties will face if they do not find common ground, is likely to encourage them to negotiate effectively.

As in the case of force majeure, the parties may contractually frame the possibility of renegotiating their contract in the event of unforeseen circumstances, by including a ‘hardship’ clause defining the circumstances in which such renegotiation is possible.

Conversely, they can also agree to fully exclude the ability to request a revision of the contract on that basis.