At the same time as it declared France to be in a state of health emergency, the Emergency Law (No. 2020-290) to face the Covid-19 epidemic dated 23 March 2020 has empowered the French Government to legislate by means of Orders in many areas.
Under this authorization, the Government was given the task to take any measure in view of adapting, interrupting, suspending or extending the deadlines of time limits which are laid down under sanctions of nullity, lapse, foreclosure, statutes of limitation, unenforceability, forfeiture of a right, termination of an approval or authorization or cessation of a measure.
This is the purpose of Order No. 2020-306 of 25 March 2020 on the extension of time limits during the health emergency period and the adaptation of procedures during this same period, published in the Official Journal of the French Republic on 26 March 2020.
Among the various aspects it deals with, Order No. 2020-306 of 25 March 2020 includes fundamental provisions relating to the implementation of periodic penalty payments, penalty clauses, termination clauses and clauses providing for forfeiture, which we address in this alert.
I.The solutions adopted by Order No. 2020-306 of 25 March 2020
Articles 4 and 5 of the Order state that:
- Periodic penalty payments, penalty clauses, termination clauses and clauses providing for forfeiture, when their purpose is to sanction the non-performance of an obligation within a specified period, are deemed not to have taken effect, if that period has expired between 12 March 2020 and one month after the end of the state of health emergency;
- Such periodic penalty payments shall take effect and such clauses shall produce their effects as of the expiry of a period of one month after the end of this period if the debtor has not performed his obligation before this term;
- The course of periodic penalty payments and the application of penalty clauses which took effect before 12 March 2020 are suspended during the period between 12 March 2020 and one month after the end of the state of health emergency;
- Where an agreement can only be terminated during a specified period or, where it is renewed in the absence of denunciation within a specified time limit, this period or time limit shall be extended, if they expire during the period between 12 March 2020 and one month after the end of the state of health emergency, by two months after the end of that period.
A circular, issued by the Ministry of Justice, gives practical examples for the application of articles 4 and 5 of Order n°2020-306 of 25 March 2020, from which it results that the effect of the above-mentioned clauses is suspended during the period of health emergency and that the debtor actually benefits from additional time to remedy his contractual breach. If he does not do so at the end of the health emergency period, the clauses regain their effectiveness.
The purpose of these provisions is clearly to enable businesses to overcome possible economic difficulties resulting from the health crisis and its impact on the economy. Yet, no condition regarding the solvency of businesses has been laid down in the Order, unlike what has been implemented for commercial rents.
However, these provisions must be read in the light of the statements made by the Minister for Economic Affairs, who recently expressed his concern regarding the increase in payment delays due to the consequences of the health crisis. He specified that (i) businesses which do not comply with payment terms will no longer benefit from the State guarantee for credit facilities and that (ii) the names of such businesses will be forwarded to credit institutions so that the latter may refuse loans.
II. The impact of Order No. 2020-306 of 25 March 2020 on contracts subject to foreign law
Order No. 2020-306 of 25 March 2020 constitutes an undisguised intervention by the Government in the performance of certain contractual clauses provided for by private parties.
Nonetheless, if this intervention is limited from a material point of view (which clauses are covered by the extension of time limits?) and from a temporal point of view (which period is covered by the extension of time limits?), Order No. 2020-306 of 25 March 2020 leaves one fundamental question pending: are contracts subject to foreign law covered by the rule of extension of time limits?
Many French businesses have with their trading partners contractual relations which are not governed by French law. In this respect, the application of foreign law to the contract concluded by a French business may result either from an express choice on its part (where it has agreed to stipulate a choice-of-law clause) or from a set of subjective and objective circumstances linking the contract to a foreign legal system (precisely where the contract remains silent on the issue of the applicable law).
The question then arises as to whether, in a contract subject to foreign law, the parties, or one of them, may seek to benefit from the provisions of Order No. 2020-306 of 25 March 2020 relating to the extension of time limits.
Although, at this stage, the question remains open, it will probably be appropriate to invoke the mechanism of overriding mandatory provisions, which allows applying to a contract governed by foreign law, a French provision regarded as internationally mandatory because of the public, economic and social policy goals that it pursues.
It is essentially for the courts to determine which specific French provision has this internationally mandatory value, and it is very likely that French judges will have to deal with this issue in the future.
In any case, the determination of a French overriding mandatory provision requires the judge to address two different questions:
- The first question is whether the French provision pursues public, economic or social policy goals such that its application to the disputed situation is crucial for the French legal systems;
- The second question is that of the connecting link between the dispute at stake and the French legal system, which would precisely justify that the foreign law normally applicable be completed by the French overriding mandatory provision.
The application of the provisions from the Order No. 2020-306, in particular, to international contracts governed by foreign law will raise a number of delicate questions to which the courts will have to answer.