1. Navigating the supply chain in a distressed market:
a. My company supplies goods and I am concerned about the solvency of my customers. Are there any steps I can take to mitigate risk/my exposure?
Below is a brief overview of some solutions that may improve a supplier’s resilience:
- Retain title to goods supplied until all payments due from the customer are made.
- Periodic monitoring: for example, are customer’s accounts filed on time, and are any insolvency proceedings commenced? Audit of stock segregation conditions at customer premises if holding goods supplied that are not yet paid for.
- Is credit insurance or guarantee available?
- Monitor and review level of credit exposure.
- Procure payment on account.
b. My company relies upon the supply of goods/services and I am concerned about the solvency of my supplier? Are there any steps I can take to mitigate risk?
Below is a brief overview of some solutions that may improve a customer’s resilience:
- Identify key suppliers.
- Consider whether there are any alternative suppliers and what the timeframe would be for them to replace one of your existing suppliers.
- Monitor potential knock-on impact on your ability to deliver an onward supply contract.
- In the event of supplier distress, would that provide an opportunity to acquire assets/bring part of the production in-house?
Litigation and Regulation
2. How will legal disputes that have arisen as a result of COVID-19 or its effects (for instance, in relation to force majeure) be affected by restrictions being lifted and resuming business operations in whole or in part?
Recommendation 1: Adapt behaviour according to restrictions lifted in order to demonstrate good faith in the performance of the contract
Suspensions of contractual obligations that may have been justified in good faith during the period of restrictions will become ungrounded when restrictions are lifted. Therefore, if a business raised arguments such as force majeure to suspend performance of its contractual obligations during the period of imposed restrictions, that business should resume performance as soon as restrictions are lifted, especially if a dispute has arisen due to suspension. Resumption of activities should be notified to the other party as per the contract’s provisions.
Recommendation 2: Check the effects of measures adopted by the French government to suspend/delay effects on contractual sanctions mechanisms
In order to mitigate the consequences of the COVID-19 restrictions, French government adopted measures on March 25 and April 16, 2020 (Order n°2020-306) that delay the effects of certain contractual sanction mechanisms. More specifically, when they aim to sanction non-performance of an obligation within a definite time, penalties, liquidated damages, termination clauses and clauses triggering forfeiture of a right are deemed not to have become effective if the time for performance has expired between 12 March 2020 and 24 June 2020 or after that period.
The delay mechanisms apply to all contacts entered into until June 24, 2020; may be expressly excluded contracted out; and do not affect cool-off, reflection and withdrawal rights contemplated by laws and regulations (e.g. consumers’ withdrawal right) or reimbursement of monetary amounts. Parties may also waive the delay mechanisms.
See our article here for more information on the measures enacted by Order n°2020-306.
3. How should you manage those disputes once COVID-19 restrictions are lifted?
Disputes should be assessed and managed on a case-by-case basis.
A legal dispute may have arisen between parties who wish to continue doing business together in the future. If so, the parties may want to explore all options for an amicable resolution.
If the parties manage to resolve the dispute amicably on their own, they should reflect their commercial understanding in a binding settlement agreement. If parties still want to do business together but are unable to reach an agreement on their own, they may seek the help of a mediator. The CMAP and the ICC offer reliable mediation services in France. If an agreement is reached, parties should reflect it in a binding settlement agreement.
If legal action is the preferred option, a party should assess its chances of success before initiating action. This includes a thorough review of the legal arguments and evidence supporting its claim. Because COVID-19 is an unpreceded situation, there is still uncertainty regarding the approach that French courts will adopt on legal disputes that have arisen during this period (e.g. assessment of force majeure criteria in the context of this specific pandemic, or application of delay mechanisms enacted by Order n°2020-306 (see the section immediately above). Parties’ ability to demonstrate good faith will be key their success in the French courts.
From a procedural standpoint, containment measures have resulted into suspension of most ongoing proceedings before French courts and delays. Where possible, it is recommended to opt for accelerated proceedings on the merits if the aim is to obtain indemnification; or for summary proceedings if the aim is to obtain interim measures (e.g. performance of clear contractual obligations).
Before initiating any legal action, a party should check the applicable law and which jurisdiction has competence to rule on the dispute. The jurisdiction clause, if any, may direct parties to a specific forum (e.g. Paris court, arbitration court). If there is no jurisdiction clause, general procedural rules will apply to determine which forum has jurisdiction.
4. What should you do when restrictions are lifted if you have suffered loss under a contract as a result of COVID-19 or the restrictions, but have not yet taken legal action in relation to that loss?
Disputes should be assessed and managed on a case-by-case basis, depending on the situation at hand.
In any event, before initiating legal action on the merits to seek indemnification, a party should:
- Check applicable law and competent jurisdiction. The party should check the content of the contract. If there are no jurisdiction and choice of law clauses, general rules will apply.
- Conduct a review of legal grounds and evidence supporting the claim in order to assess its chances of success. This involves a review of the contract, case law, arguments raised by both parties regarding their respective positions and the actual facts of the disputes. For example: was there force majeure event justifying suspension? Was/is a contractor legitimate in asking for a revision of the contract based on hardship?
- Collect all required evidences to demonstrate breach and losses incurred. To obtain damages, the claimant will need to demonstrate the actuality and quantum of loss suffered, a contractual breach – and a direct correlation between the breach and losses suffered. Collection of evidence may require, for example, the intervention of a bailiff to establish a report, or assistance of a financial expert to assess and support financial claims. Under French law there is no obligation to mitigate losses.
- Check if prerequisites for the legal action’s admissibility are fulfilled. In most cases, a party will be required to demonstrate that it sought amicable resolution before initiating legal action on the merits.
5. Is there any risk of mass claims being brought against your business? If so, how would such claims be brought? Are third party funders able to fund such claims?
There is no US-style “class action” in France. While group actions (actions de groupe) are possible, they are limited to specific areas (e.g. sale of services or goods to consumers, health products, discrimination, or private data protectiont). They are based on an opt-in mechanism and the lawsuit can be started only by a qualified entity (e.g. association or trade union). Since the introduction of class actions into French law in 2014, only a limited number of actions have been brought. Businesses may potentially face class actions in France in connection to the COVID-19 crisis (in particular if their client base comprises consumers), but we do not expect many lawsuits will be started.
Apart from class actions, collective actions (i.e. several individuals/businesses gathering to bring a common court action) are possible. Online platforms have been created recently facilitate this type of lawsuit.
While possible, the use of third-party funding remains limited overall in France (where legal costs are more moderate, in comparison to common law countries, and above all are not reimbursed, even where the party wins the case, except for a very small amount).
6. What should I do about recording contractually or otherwise any of the changes put in place during the COVID-19 lockdown period?
Unless otherwise provided in the agreement, we recommend the following regarding recording (in the sense of contractual formalisation of information given to the other party) any changes put in place during the COVID-19 lockdown period:
- Any change implemented during the COVID-19 lockdown period should be recorded in a written amendment to an existing agreement, duly executed by the parties in as many originals as the number of parties. Specific formal requirements may apply to the amendment, depending on the nature of the agreement.
- Notice must be sent to the other party in the following situations:
- if one party invokes (i) force majeure, (ii) an excuse from liability or (iii) hardship, if any such mechanism is applicable, such notice defining the conditions to apply these mechanisms.
- in case of anticipated exception for non-performance (Section 1220 of the French Civil Code).
- if the obligee intends to terminate the agreement in case of non-performance of the obligation by the obligor (i) if this non-performance is sufficiently serious (Section 1224 of the French Civil Code) or (ii) at his own risk (Section 1226 of the French Civil Code). Note that a contractual right to terminate the agreement may have been postponed pursuant to the provisions of Article 4 of Order (Ordonnance) No. 2020-306 of March 25, 2020 (amended by Order No. 2020-427 of April 15, 2020).
- From a contract management perspective, any change must be taken into account in the project management (e.g. planning, cost tracking) and reflected by either party in its contractual chain.
7. Any return to normal will likely not be as immediate as the impact of COVID-19 when it started (e.g, sales/orders will take time to ramp up, raw materials will take time to flow through supply chains, etc.) what should I think about and do to best manage this in my contracts?
First step: conduct a legal and business analysis of the existing commercial arrangements. For example:
- What obligations had to be complied with and when?
- What obligations have not been performed by me or my business partner?
- Was I or my business partner excused for such delay or non-performance (e.g. based on a force majeure event)?
- Did the parties notify each other in accordance with the contract or as required by law?
- May I pursue certain contractual remedies that have been postponed under Article 4 of Order (Ordonnance) No. 2020-306 of 25 March 25 2020 (amended by Order No. 2020-427 of April 15, 2020)?
Second step: have amicable discussions/negotiations with your business partner to manage the performance of the arrangement and consider upcoming deadlines for deliveries/deliverables.
The parties may formalise an amendment to the contract to modify, for example, the agreed-on planning of any projects or change their order of performance, in compliance with any formal legal requirement that may apply depending on the nature of the contract.
From a practical contract management perspective, we recommend (see also the points listed in the next section below):
- implementing rigorous contract management, with careful monitoring of contract performance, including the keeping of an audit trail;
- making sure all information and communications required as per the governance provisions flow seamlessly between the parties;
- keeping an open dialogue with key business partners to gain an understanding of their market conditions and the measures taken on their side to ensure performance and mitigate or eliminate impact of any disruption (whether or not covered by the applicable business continuity/disaster recovery plan) and to inform key business partners of performance difficulties arising on your end because of the same event;
- if appropriate, discuss how to mitigate impact from a performance (e.g. reduced volume or revised SLA) and/or payment (e.g. reduced price, extended payment terms) perspective.
Before entering into any discussions, you should consider providing written notice to your business partner reserving your rights in the event that no alternative solution to “normal” performance is found.
8. What additional protections or changes to existing provisions (e.g. force majeure) should I put into any new supply arrangements having regard to COVID-19?
The following points should be considered in supply arrangements (renegotiation of an existing arrangement or negotiation of a new arrangement) to ensure the resilience of the parties’ relationship, depending on whether they are supplier (obligor of the principal obligation) or the customer (obligee):
- Mechanisms of postponement of certain contractual remedies provided by Order (Ordonnance) No. 2020-306 of 25 March 2020 (amended by Order No. 2020-427 of 15 April 2020): parties may disapply the mechanism when entering into a new agreement or by way of amendment to their existing agreement.
- Force majeure clause:
- The customer’s interest is to have a clause that is not overly extensive, and is drafted in a way that retains the requirements of force majeure under the French Civil Code, and that does not apply when the applicable event is one of the events covered by the business-continuity / disaster-recovery plan.
- The supplier’s interest is to have an extensive clause referring to the French definition of force majeure under Section 1218 of the French Civil Code and a list of events (for example, including epidemics, pandemics, consequences of governmental health and distancing measures) not necessarily presented as force majeure events but excluding expressly the supplier’s liability for non-performance of, or delay in performing, its contractual obligations. The supplier’s interest is to make sure the statutory conditions of force majeure do not apply to the events expressly listed in the clause.
- Hardship mechanism (imprévision): this is (i) a change of circumstances unforeseeable when the contract was entered into, (ii) that makes performance of obligations excessively onerous (iii) for an obligor who didn’t accept to bear the risk. The mechanism is not mandatory and the parties may expressly disapply it by contract. Section 1195 of the French Civil Code sets out a renegotiation procedure that may – if the parties don’t agree a solution – allow either party to petition a court to obtain contract adjustment or termination. Considering the very rare court decisions and the lack of court interpretation of the meaning of “excessively onerous,” the parties should consider disapplying this legal mechanism or agree on a derogative hardship mechanism with a procedure different from that provided by law.
- Carefully drafted SLAs: for a customer, these should include a robust penalties / service-credits mechanism to ensure effectiveness. This includes adopting appropriate drafting to ensure the penalties/service credits are not the customer’s sole and exclusive remedy. Rather, it is in the supplier's interest that the penalties / service credits be qualified as a penalty clause (clause pénale) that sets in advance, independently from the actual loss and as the customer’s sole and exclusive remedy, the amount of damages due by the supplier to the customer in case of violation of its obligation.
- Business continuity and disaster recovery plans should be required from suppliers that fit properly with the customer’s own plans.
- Audit rights, in order to be able to assess directly the performance by either party of its obligations under the contract and/or to ascertain – as the case may be – the accuracy of the information communicated.
Governance, reporting and mutual information mechanisms and requirements, to provide an adequate structure for contract management; and flexibility in respect of termination, while complying in particular with the prohibition of abrupt termination of contracts/commercial dealings under French law.