French contract law reform – Focus on the automotive sector

Among the numerous code revisions, this note presents three key aspects of the reform which are significant for the automotive sector:

1. Introduction of statutory Hardship

Until this reform, French courts resisted attempts to admit hardship provisions as a matter of law in connection with contractual performance. French courts have steadfastly refused to intervene to alter the terms of agreements in place in the absence of express contractual clauses allowing them to do so.

However, the new Article 1195 of the French Civil Code expressly allows, upon the request of a contractual party, a Court to intervene and alter the terms of a contract or order contract termination in the event that unforeseeable circumstances appear which make performance of the agreement “excessively onerous” for a party “who did not assume such risk”. This code provision does not allow a party to terminate the contract unilaterally for hardship without a court decision. 

The reform constitutes a fundamental break from the past and opens the door to claims for renegotiating agreements in changed circumstances, particularly in long term agreements where future conditions are rarely foreseeable. This type of statutory mechanism could be useful for suppliers to seek renegotiation of prices where volumes are way below levels anticipated by the automaker. Whether the supply obligation in such case is “excessively onerous” and whether the risk was foreseeable or assumed will be subject to debate.

In view to avoiding uncertainties associated with hardship claims, automotive manufacturers will undoubtedly revise their purchase terms and conditions to exclude the application of the new Article 1195. The effect is likely to cascade down the supply chain. Consequently, automotive suppliers must be attentive to their contract terms to avoid hardship claims where costs cannot be passed on to its customer.

2. The new regime of pre-contractual obligations

Although contractual freedom is a basic principle governing contract law and especially pre-contractual negotiations, it is not without limit.

Indeed, the new Article 1112-1 of the Civil Code stipulates a duty by which each party must disclose all relevant information pertinent to the other party in connection with the formation of an agreement. A party who fails or omits to disclose relevant information which could be deemed to affect the other party’s consent may be held liable for a breach of duty. In the event a duty towards the other exists regarding certain information, the party having the duty must prove he indeed disclosed such information. If a breach is established, the contract may be terminated and the defaulting party held liable for ensuing damages.

This provision comes into play in connection with the negotiation of a broad array of agreements such as in an auto part development program agreement where if one party fails to reveal key information about the process or about the market, such omission could give rise to contract rescission and/or liability.

The express call for liability on a party arising from silence without intent to deceive means a mere omission of sharing key information by one party could expose such party to consequences.

The application of this new provision may not be excluded or disclaimed by agreement.

3. New provisions concerning price revision

First, the reform introduces under Article 1217 the right of a party to seek a proportionate reduction in price where the co-contractor fails to perform an obligation subject to prior notice and acceptance of the incomplete performance.

Although interesting, this right may also give rise to risks insofar as the acceptance of incomplete performance could mean deficiencies that the buyer did not fully understand. As batches represent thousands of parts, acceptance of an incomplete part may have consequences that were not anticipated.

Second, framework agreements are identified expressly under the reform as agreements in which parties agree on the general terms and conditions to be applicable to their future contracts, and whereby it is possible for the parties to allow the product price to be determined unilaterally.

OEMs may seek price reductions unilaterally through this mechanism and specific provisions shall be applicable to such contracts including price revision.

In connection with framework or service agreements, the reform expressly allows the service provider to have the right, in the absence of an agreed price prior to performance, to set the price for such performance unilaterally subject to an obligation to justify the price in case of objection. A court claim may be introduced for termination of the contract and compensation in damages in case of abuse.

With the exception of the pre-contractual liability mentioned above, the foregoing provisions may be varied or excluded by contractual agreement. Contracts concluded prior to October 1, 2016 remain governed by the previous French Civil Code provisions.