French Contract Law Reform:
What impacts on financing transactions?
March 2017
On October 1st, 2016, the French contract law reform
introduced by the Ordinance No 2016-131 of 10 February
2016 took effect (the “Reform”). The government merely
codified existing case law with the intention to simplify and
stabilize the law, to render it more accessible and to reinforce
its attractiveness in international transactions. Nevertheless,
it also introduced a number of innovations which deserve a
closer look.
The Reform applies to contracts entered into as from 1st
October 2016, including amendment agreements, tacit
renewals and novated contracts executed or occurring
after such date. Hence, financial transactions having been
concluded under the former law may (partially) fall in the
scope of the Reform.
The key new provisions affect the formation and termination
of contracts together with three-party arrangements
transferring obligations. Their impact on financial transactions
governed by French law will have variable intensity.
Rationale (“cause”) for the validity of the contract:
The rationale of a contract is the reason for each party to
enter into the contract that may be different for each party
but must be lawful. With the reform, the rationale is still
required but is no longer explicitly mentioned as a condition
for the formation of a contract. Instead, the legislator provided
clearer requirements:
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Any given contract has to be lawful in both its stipulations
and purpose;
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It must be for valuable consideration and not for an illusory
counterparty;
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might be rendered invalid if dependent on another void
contract, as long as the party to be charged knew of the
interdependence. Therefore, whenever there are multiple
agreements or securities, it should be considered in each
case to add a clause, specifying that the annulment of
one contract of the same financing transaction would not
affect the others.
Good faith and pre-contractual information:
The contractual parties must negotiate, form and perform the
contract in ‘good faith’.
In addition, the Reform explicitly reinforced the precontractual duty to inform the respective other party. During
the negotiations, the contractual parties mutually owe each
other the obligation to disclose all information that is critical
to the other party’s consent. When approaching negotiations,
it is important to bear in mind that: (i) the parties cannot
limit or exclude this duty or waive their related rights, (ii) this
duty applies where the other party is ‘legitimately’ unaware
of the information or ‘trusts’ the disclosing party; and (iii) the
disclosure obligation is wide-ranging covering all information
having a direct and necessary link with the content of the
contract or the parties. Failure to disclose could result not only
in liability, but also in the annulment of the ensuing contract.
In financing arrangements, the main impact of this duty will be
to hold liable lenders and obligors, who fail to provide material
information to their counterparties. The scope of this duty will
be larger for lenders than their mere duty to warn the borrower
or guarantor of the consequences of its potential commitment
as such duty is generally limited to unsophisticated parties.
The duty to disclose will apply to all parties.
French courts have already recognized the possibility to
allocate damages or even to void a contract in case of an
intentional misrepresentation by omission, provided however
that it was reasonable in the circumstances for the affected
party to have failed to obtain the information or to have been
deceived. In facility agreements, the more sophisticated the
party, the harder it becomes to prove legitimate ignorance.
While parties cannot limit their duty to inform of all material
information that is important for the other party’s consent, a
French judge might still refuse to allocate remedies when the
ignorance of material information or trust in the other party is
unreasonable for a lender.
Group companies
The Reform introduced also two articles which have a
particular importance for a group of companies and the
organization of loan agreements:
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Article 1161 (Representation): A representative cannot act
on behalf of both parties to a contact nor can he contract
on his behalf with the person whom he represents. Where
he does so, any act which is concluded is a nullity unless
legislation authorizes it or the person represented has
authorized or ratified it. It is therefore recommendable to
stipulate such authorization in the power of attorney or the
signature or more importantly in such clauses according to
which the credit agent or the security agent are entitled to
represent the lender or the hedging counterparty.
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Article 1145 (Capacity): The capacity of a legal entity
(civil or commercial company) is limited to acts useful for
realizing their purpose as defined by their statutes and
acts which are incidental to them, in accordance with
the rules applicable to each of those entities. In case of
a ‘cross-collateralization’ or an ‘up-stream’ and ‘crossstream’ guarantee or loan, it must be verified whether
the transaction is covered by the wording of the by-laws
and whether the transaction is not exceeding the financial
capacity of the respective company.
Significant Imbalance:
The Ordinance introduced the notion of ‘significant imbalance’
(“déséquilibre significatif”).
Any term of a ‘standard form contract’ which creates a
significant imbalance in the rights and obligations of the parties
to the contract is deemed void. The assessment of significant
imbalance must neither concern the main subject-matter of
the contract nor the adequacy of the price in relation of the
act of performance. The standard form contract is defined as
one whose general conditions are determined in advance by
one party without negotiation.
Hence, it is important to demonstrate that all terms of a
facility agreement have been negotiated and that not (for the
economy of time) a large number of standard clauses have
been used without any discussion between the parties.
Concept of ‘hardship’
The Reform introduced the doctrine of ’hardship’ in the
French Civil Code to address certain evolutions arising in the
course of the performance of a contract. If an unforeseeable
change in circumstances occurs and renders the performance
excessively onerous for a party that had not accepted to
bear the risk, then the party has the right to ask the other to
renegotiate the contact. The mechanism then entails further
stages, which include the potential involvement of a judge to
revise, or even end, the contract in certain cases.
On this legal background the contractual parties may try, by
all means, to find a mutually acceptable solution in case of
an unforeseen event, (e.g. such as a substantial change in
the interest rate index or of an occurrence of a political risk
that do not constitute a force majeure) to avoid the judge’s
intervention. This practice seems us permitted as the concept
of ‘hardship’ is not declared part of the French public order. In
practice, parties should, therefore, explicitly exclude the legal
concept of ‘hardship’ in their financial documentation and
insert either (i.) no hardship provision, (recommendation of
the Loan Market Association (LMA) in the standard contract
for an investment grade loan); or (ii.) a ‘contractual’ hardship
provision as for example the material adverse change (MAC)
or market material adverse change (Market MAC) clause.
Anticipated non-performance:
The reform introduces the possibility for a party to suspend
performance of its obligations as soon as it becomes
manifest that the other party will be in a material breach
of its own obligations. Of course, the performance default
must be obvious (manifeste), sufficiently serious and the
non-breaching party must notify the suspension as soon as
possible to be justified.
This appears to legalize the notion of ‘potential event of default’
and therefore, will give leverage to lenders to impose clauses
to that effect unless the parties waived this provision in the
financial documentation. The obvious case for its application
is the facility agreement with successive drawdowns, in which
the lender could now refuse a drawdown in the event of a
potential event of default.
Modifications of the contractual counterparts
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Assignment of receivables:
The Ordinance restates the principle that an assignment of
receivable is valid without the consent of the debtor, unless
the right was stipulated to be non-assignable. The assignment
must be effected in writing under the sanction of nullity. It
will be enforceable against third parties as of the date of the
signing and against the debtor on the date of notification,
also required for the enforceability related to the transfer of
collateral securing the debt.
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Transfer of debt:
A debtor may now assign his debt to another person with the
agreement of the creditor. If the creditor gave his agreement
to the assignment in advance, he may find it set up against
him, but can only take advantage of it himself, as from the
day when he was notified of it. The original debtor may be
discharged for the future, if the creditor expressly agreed so.
If the debtor (seller) is not released, the security interests of
the previous debt remain; otherwise, the security interests
consented by third parties can only be maintained with their
consent.
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Transfer of a contract:
The Ordinance introduced the rules governing the transfer of
a contract, which is of particular importance with regards of
‘step-in rights’ in project finance documentation. Contracts
can now be transferred with the agreement of the other
party, which can be given in advance. The transfer must be
in writing under the sanction of nullity. The assigning party
will in principle be held jointly and severally liable following the
assignment unless it is discharged for the future. The situation
of the sold contractual party remains unchanged, as it can
invoke against the transferee any exceptions it had against
the transferor. The transferee can invoke the exceptions that
are inherent to the debt.
In practice, the modification of the lender or the agent may
be considered as the transfer of a contract (and/or a transfer
of debt for the undrawn part of such participation), it is
recommended to introduce in French law facility agreements
Dr. Alfred Fink
Partner I Real estate
T: +33 (0)1 72 74 03 33
[email protected]
the consent of the borrower to such an assignment of
the contract (and/or debt) with the legal effect that the
assignment will become effective against the borrower
with its simple notification to him and the same applies for
the release of the lender or the agent of their respective
obligations under the facility agreement (although the new law
does not explicitly allow an upfront consent of the borrower
for such release). The parties may condition such consent of
the borrower for example by the creditworthiness of the new
lender with regard to the undrawn facility amount. In case that
the finance documents do provide for third party guarantees
the security documentation should contain a wording that the
security interests may be maintained in case of novation and
the assignment of contract.
All credit documentation must in future comply with these
new articles of the French civil code.
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