Partner Sylvie Gallage-Alwis, and associates Gaëtan de Robillard and Colin Grech examine, in Law360, the new guidance from the Paris Commercial Court regarding COVID-19, namely that the recent decision classifies it as a force majeure event, and whether the decision would have been the same before UK Courts.
Sylvie, Gaëtan and Colin’s article was published in Law360, 18 June 2020, and can be found here.
The worldwide pandemic of Covid-19, and the measures taken by Governments across the globe to contain the outbreak, have put a stop to the business of companies operating in a wide variety of industries. As a result, businesses have experienced difficulties in complying with their contractual obligations and a significant number of them have triggered the force majeure clause contained in their contract to suspend the consequences of their non-performance. Yet, up until now, there was no case law recognising Covid-19 as a force majeure event in the scope of commercial litigation. To our knowledge, the order handed down in summary proceedings by the Presiding Judge of the Paris Commercial Court on 20 May 2020 is the first court decision to go down this path.
In France, up until now, the only existing decisions relate to immigration proceedings, where some of the Courts of Appeal have ruled that the claimants could skip the trial hearing as the pandemic and the lockdown measures constitute a force majeure event; this was decided on the basis that the territories in question were “major hotbeds of the epidemic with a high level of contagion that involves real risks that are sufficiently serious“. These decisions were a good start for the recognition of Covid-19 as a force majeure event but there were no guarantees that this would be the position of French Courts in the scope of business relations.
It is in the context of an important debate between the key French electricity suppliers on the disputed Regulated Access to Historic Nuclear Electricity (i.e. a scheme that entitles suppliers to purchase electricity from Electricité de France (“EDF”) at a regulated price, in volumes determined by the French energy regulator) that the first court decision recognising the Covid-19 pandemic as a force majeure event was rendered. In substance, the dispute relates to the implementation of the force majeure clause contained in the Framework Agreement concluded between Total Direct Energie (“TDE”) and EDF to suspend their respective obligations under the said agreement given the “significant decrease in consumption“.
The order handed down in summary proceedings by the Presiding Judge of the Paris Commercial Court on 20 May 2020 in the dispute between TDE and EDF alongside Réseau de Transport d’Electricité (“RTE”), in the presence of the French Independent Electricity and Gas Association (“AFIEG”) has now changed this situation. This decision provides an interesting example of the recognition of Covid-19 as a case of force majeure. It illustrates the attention that the courts give to the wording of contractual force majeure clauses and the discussions that would have taken place had the ground of the action been hardship (imprévision), a concept which was introduced into French Law in 2016. This decision is even more noteworthy given that no equivalent decision has been handed down in common law jurisdictions so far whilst the concept of force majeure appears to be similar.
A clause-by-clause approach is key
French Law defines force majeure in Article 1218 of the French Civil Code, which indicates that “force majeure occurs in contractual matters when an event beyond the control of the debtor, which could not reasonably be expected at the time of the conclusion of the contract and the effects of which cannot be avoided using appropriate means, prevents the performance of the debtor’s obligation“.
Interestingly, there is no legal definition of force majeure prescribed in any enactments in the United Kingdom. The definition to be applied by the Court will fully depend on the drafting of the force majeure contractual clause.
This is what has happened in the case examined by the Paris Judge. Indeed, the disputed clause was Article 10 of the framework agreement binding EDF to TDE, which states that force majeure refers to “an extraneous, irresistible and unforeseeable event making it impossible to perform the parties’ obligations in reasonable economic conditions“.
What is interesting is that this clause is not just limited to the fact that performance becomes impossible. It extends the possibility for force majeure to be recognised when performance is possible but more costly and therefore provides for more possibilities for the parties to invoke force majeure than French Law would have entitled them to.
There is somewhat of a similarity between the words “in reasonable economic conditions” and hardship, which is defined as a change in unforeseeable circumstances rendering “the performance of the agreement excessively costly for one of the parties“. It therefore seems that the parties wanted to mix the two concepts into one single clause. This has forced the Court to focus on the contractual definition of force majeure rather than the statutory one, as would have been the case in common law jurisdictions.
Covid-19 is a force majeure event
Based on the definition of force majeure of Article 10, the Judge considered that “the spread of the virus is obviously extraneous to the parties, is irresistible and was unforeseeable, as proven by the sudden nature and extent of its appearance“.
This “obvious” nature was not being discussed, which explains the brevity of the reasoning compared to the case law relating to the H1N1, Dengue Fever, Chikungunya and other epidemics, which have not been recognised as force majeure cases by French Courts.
Here, it is the spread of the virus that is deemed a force majeure event, not the governmental measures. This will probably trigger discussions in other cases, in particular in relation to the question of knowing when the spread started and stopped. Indeed, one can foresee disputes arising where the question will be at what point the Covid-19 pandemic could be deemed to be a foreseeable event and at what point it should no longer be considered a threat to businesses returning to normal, in terms of their activity. By referring to the spread of the virus, the Judge is pushing for a scientific debate on the level of risk for the health of employees.
However, in light of the very strict case law when it comes to the recognition of an epidemic as a force majeure event, one cannot exclude that the governmental measures themselves (such as the lockdown or border closure measures that have been taken to stop the outbreak) will be deemed force majeure.
Obviously, the party which relies on the force majeure concept will have to choose wisely when deciding which event exactly constitutes force majeure (i.e. the virus, a specific governmental measure, all governmental measures, etc.), depending on the wording of its force majeure clause. This is why, notably in the United Kingdom where there is no definition of force majeure, the contract must be negotiated and contain a clause which is unambiguous for the parties to be able to rely on it. Indeed, English common law will not apply force majeure to a contract that does not explicitly provide for it. The actual phrase ‘force majeure’ need not be used (although it commonly is) but parties will be required to explicitly set out the events that would excuse them from performance of their obligations under the contract (or allow them to delay or suspend performance) in the event they arise. Conversely, if the phrase ‘force majeure’ is used alone in the contract without any qualification, English common law may construe this more strictly as being only events which prevented performance. Furthermore, given the lack of any legal definition in the United Kingdom, such a clause has previously been held to be void for uncertainty.
Discussions about the concept of “reasonable economic conditions“
Given that the force majeure clause of the contract at stake grants the parties the possibility to rely on force majeure even when the performance of the contract is possible but more costly, the Paris Judge had to determine whether or not TDE was faced with unreasonable economic conditions.
Here, the Paris Judge carried out a factual analysis to rule that “this results in [TDE] observing significant, immediate and permanent losses over a period of time beyond its control“, further considering that the occurrence of a case of force majeure resulting in “a disruption affecting prior economic conditions resulting in the occurrence of significant losses arising from the performance of the agreement“.
This reasoning can be interpreted as the implementation of a presumption, according to which a case of force majeure necessarily leads to a more costly performance, that the parties have to discuss the extent of the acceptable risk.
More importantly, this case law shows that case-by-case analysis will be the norm when it comes to the interpretation of the contract. The review of the clauses is, therefore, necessary before relying on the now fashionable concept of force majeure. If no such clause is in the contract, businesses will have to refer to statutes and case law. This may change the whole outcome of the matter. Indeed, what if the EDF/TDE contract did not mention the concept of “unreasonable economic circumstance“?
Answers to be expected from common law jurisdictions
We are not aware, at the time of writing this article, of any judicial decisions where the courts have recognised the Covid-19 pandemic as a force majeure event in the United Kingdom. Nevertheless, it seems like the answer to be expected from courts in common law jurisdictions would, as in France, largely depend on the drafting of the clause. As mentioned above, contracts are taken at face value and a court would interpret the provision using the ordinary meaning of the words.
For example, Acts of God are generally interpreted as being uncontrollable events which occur without any human intervention (such as natural disasters); therefore, if a contract only lists Acts of God in its force majeure clause, it may not cover a pandemic which relies heavily on human-to-human transmission. A balance must be struck between what the parties’ intentions were when entering into the contract, what the clause explicitly states and how the courts interpret the wording.
In all likelihood, commercial contracts would not cater explicitly for the Covid-19 pandemic. Parties seeking to trigger the clause would therefore need to rely on another explicit event which may be provided for in the clause and which could cover the pandemic (e.g. epidemics, government actions, events beyond their control). The onus would be on the party seeking to rely on the force majeure clause to prove that the event has prevented them from carrying out their obligations under the contract. The contract would also need to provide for a situation which covers the current pandemic.
It is an in-depth analysis of the wording of the contract, the performance of which is called into question, that will enable entities to determine whether a party is entitled to seek relief from the force majeure clause to suspend its contractual obligations. This strict interpretation will be carried out both by French and English courts. Surely, Covid-19 and the case law that will follow will push companies, regardless of their jurisdiction, to review their contracts and properly scrutinise the force majeure clauses contained therein.
Sep 28, 2020
Sep 28, 2020