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Law360 (June 18, 2020, 4:47 PM EDT) --
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| Sylvie Gallage-Alwis |
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| Colin Grech |
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| Gaetan de Robillard |
Yet, up until now, there was no case law recognizing COVD-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 May 20 is the first court decision to go down this path.
In France, the only prior decisions related 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 jurisdictions 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 an early 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 was in the context of an important debate between key French electricity suppliers on the disputed Regulated Access to Historic Nuclear Electricity — an arrangement that entitles suppliers to purchase electricity from Electricité de France, or EDF, at a regulated price, in volumes determined by the French energy regulator — that the first court decision recognizing 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, or TDE, and EDF to suspend their respective obligations under the said agreement given the significant decrease in electricity consumption.
The order handed down in summary proceedings by the Paris Commercial Court in the dispute between TDE and EDF, alongside Réseau de Transport d'Electricité, or RTE, and in the presence of the French Independent Electricity and Gas Association, 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 imprévision, or hardship, 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, even though the concept of force majeure in those jurisdictions appears to be similar.
A Clause-by-Clause Approach
French law defines force majeure in Article 1218 of the French Civil Code, which indicates that:
Interestingly, there is no legal definition of force majeure prescribed in any enactments in the United Kingdom. The definition of force majeure to be applied by the court will fully depend on the drafting of the force majeure contractual clause.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.
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 recognized when performance is possible, but more costly — and therefore provides for more possibilities for the parties to invoke force majeure than French law would ordinarily have entitled them to.
There is some similarity between the words "in reasonable economic conditions" and the concept of 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 as a Force Majeure Event
Based on the definition of force majeure of article 10 of the agreement, 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."
The "obviousness" of the circumstances was not discussed — which explains the brevity of the reasoning compared to the case law relating to the H1N1, Dengue fever, Chikungunya and other epidemics, which were not recognized as force majeure situations by French courts.
In this case, it was the spread of the virus that was deemed a force majeure event, not the governmental measures in response to the virus. This will probably trigger discussions in other cases — in particular, in relation to the question of the parties' knowledge of when the spread of the virus started, and when it can be considered to have 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 activity. By referring to the spread of the virus, the judge invited a scientific debate over the level of health risks for 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 the possibility that governmental measures themselves (such as the lockdown and border closure measures that have been taken to stop the COVID-19 outbreak) will be deemed force majeure.
Obviously, the party that relies on the force majeure concept will have to choose wisely when deciding which event exactly constitutes force majeure — e.g., the virus, a specific governmental measure, all governmental measures, etc. — depending on the wording of its force majeure clause. This is why a contract in the U.K., where there is no definition of force majeure, must be negotiated and contain an unambiguous force majeure clause in order 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. Indeed, given the lack of any legal definition of force majeure in the U.K., such a clause has previously been held to be void due to its ambiguity.
Reasonable Economic Conditions
Given that the force majeure clause of the TDE-EDF contract at stake granted the parties the ability to rely on force majeure even when the performance of the contract is possible but more costly, the judge had to determine whether or not TDE was faced with unreasonable economic conditions.
The 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," finding the occurrence of a case of force majeure due to "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 creating a presumption that a case of force majeure necessarily leads to more costly contractual performance, and that therefore, the parties to a contract with a force majeure clause must 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 contracts with force majeure clauses. Review of the clauses is, therefore, necessary before relying on the currently 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 TDE-EDF contract had not mentioned the concept of "unreasonable economic circumstance"?
What to Expect From Common Law Jurisdictions
We are not aware, at the time of writing this article, of any judicial decisions where the courts have recognized the COVID-19 pandemic as a force majeure event in the U.K. Nevertheless, it seems likely that the ruling of a court in a common law jurisdiction on such a question would, as in France, largely depend on the drafting of the force majeure clause at issue.
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, the force majeure clauses in most commercial contracts would not apply specifically to the COVID-19 pandemic. Parties seeking to trigger the clause would therefore need to rely on other events provided for in the clause which could cover the pandemic — e.g., government actions.
The onus would be on the party seeking to rely on the force majeure clause to prove that the event in question 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.
Conclusion
An in-depth analysis of the wording of a particular contract will enable entities to determine whether a party is entitled to seek relief from a force majeure clause to suspend its contractual obligations. This type of strict interpretation will be carried out both by French and common law courts.
Undoubtedly, COVID-19 — and the case law that will follow — will push companies, regardless of their jurisdiction, to review their contracts and properly scrutinize the force majeure clauses contained therein.
Sylvie Gallage-Alwis is a partner, and Colin Grech and Gaëtan de Robillard are associates, at Signature Litigation LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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