This is our fourth client alert on the new French contract law provisions applicable to French law governed contracts concluded after 1 October 2016.
In our previous client alerts, we outlined this legal revolution in France and described the new recognition of hardship under French contract law as well as the new codified French regime applicable to pre-contractual negotiations.
This client alert focuses on the new provisions of the French civil code that set out to protect the weaker contracting party or parties to any given contractual arrangement. Such protection was one of the express objectives of the reform.
Background
In 2015, the French Parliament listed 13 objectives for the reform of French contract law. The second objective includes the notion of unfair terms and contemplates sanctions against a party who takes advantage of a weaker contractual counterparty. To meet this objective, the legislator introduced three notions which we address in turn below.
1) Standard form contract and significant imbalance
Article 1110 of the new French civil code introduces a statutory definition of a standard form contract (contrat d'adhésion) for the first time. A standard form contract is one where the "general conditions, removed from negotiations, are determined in advance by one of the parties".
Where a contract is found to be a standard form contract, any clause creating a "significant imbalance" (déséquilibre significatif) between the parties may be considered unfair and deemed to be of no effect by the courts (article 1171). However, the core purpose of the contract as well as the adequacy of the price for the contractual benefit conferred on the paying party are both excluded from sanction under article 1171.
In addition, pursuant to article 1190, a standard form contract must be construed in favour of the party who did not determine the terms of the contract.
2) Abuse of a position of dependence
Under French law, consent may be vitiated in case of duress (violence). Article 1143 of the new civil code supplements the definition of duress. It provides that "there is also duress where a party, who abuses the position of dependence in which its counterparty finds itself, obtains from that counterparty an undertaking that the latter would not have agreed to if such constraint had not existed and takes a manifestly excessive advantage [of the situation]".
Hence, where the weaker party finds itself in a position of dependence (état de dépendance) with respect to its counterparty, there is the further risk for the stronger party that its contract may be annulled.
3) Master agreement and judicial scrutiny of price mechanism
The new French civil code also introduces a statutory definition for the first time of master agreement (contrat cadre) as "an agreement by which the parties agree the general characteristics of their future contractual relations" (article 1111).
Article 1164 provides that, where a contract is found to be a master agreement, the parties may agree that the price be set unilaterally by one of them. However, a new provision requires that, if challenged, the party setting the price must justify the amount to the other party.
The new provisions also give power to the court to order damages and/or terminate the contract where it considers that there was abuse in setting the price.
Discussion
The final draft of the reform took into consideration some of the criticisms of the first draft made by academics and practitioners. The unfair term regime is now limited to standard form contracts, whereas it was initially drafted to apply to all type of contracts. Efforts were made with regards to the proper terms to be used to capture the meaning of what is now termed a "position of dependence". The sanction for abuse in setting the price was in the end limited to damages and judicial termination of the contract, whereas in the original debates judicial power to revise and set the price was contemplated.
Most of the provisions that were finally adopted are new to the French common law of contract. Their implementation will depend on the judicial approach adopted to the new provisions. Terms such as "removed from negotiation", "significant imbalance", "position of dependence", "manifestly excessive advantage" and "abuse in setting the price" will need to be developed on a case by case basis by the courts.
French courts already had power prior to the reform to sanction abusive unilateral setting of the price but rarely exercised such power, being reluctant to find the necessary abuse. It will be interesting to observe how the courts apply the new statutory regime in this area.
One other area where there will be overlap with the pre-reform law is with respect to the notion of "significant imbalance". This notion is already known to French law. Previously, imbalance was generally found where there was a lack of reciprocity between the parties' obligations, where there was no consideration or where there was no other clause to balance the situation of each of the parties. Such imbalance has not infrequently been found in relation to limitation of liability, warranty and termination clauses.
The new common law regime will need to work alongside two separate and independent regimes:
- Article L. 132-1 of the French consumer code, applicable to contracts entered into between consumers and professional parties. This regime provides that unfair terms creating a significant imbalance are deemed to be of no effect. Lists of unfair terms or potential unfair terms under this regime have been set by decree.
- Article L. 442-6-I- 2° of the French commercial code. This regime is applicable between commercial parties and provides that a party may be liable for forcing a "commercial partner" to enter into an agreement creating a significant imbalance between the parties. Case law sanctions this by setting aside the relevant clause as well as awarding damages.
There is currently a doctrinal debate as to how the new general common law regime will apply vis-à-vis the particular regimes governing consumer and commercial matters.
Practical considerations
If you are the stronger negotiating party, the reform makes it all the more important that a good record be kept of the negotiations with your counterparty.
If there is a position of dependence between the parties which results in the stronger party obtaining a manifestly excessive advantage, the contract may be annulled if the weaker party can demonstrate that such an advantage existed and that it would not have entered into the contract in question in such circumstances.
If you are a party entering into a master agreement allowing you to unilaterally set the price, you should be evidentially ready to justify, at short notice, any such setting of the price.
How Reed Smith can help you
Reed Smith can assist clients through the implementation of the new French civil code and, for example, adapt their general conditions of business to accommodate and address the new legal landscape in force since 1 October 2016. Also, Reed Smith can advise and accompany clients in the litigation that these new provisions will inevitably create until the altered legal landscape becomes clearer as case law develops.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
