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The reform of the French law of obligations implemented by the French ordinance No 2016—131 of 10 February 2016 (the Ordinance), conducted after public consultations and high quality working papers, constitutes the deepest overhaul of French contract law since the Civil Code of 1804. The Ordinance applies to contracts entered into as from 1 October 2016,² including amendment agreements, tacit renewals and novated contracts executed or occurring after that date.

The reform aims to modernise French contract law, provide more legal certainty, render it more accessible and reinforce its attractiveness in international transactions. It crystallises to a large degree existing case law that had adapted the Civil Code rules to meet the new needs of economic operators but remains subject to former specific legislation regulating certain types of contracts, such as contracts entered into at arm''s length, or certain categories of parties, such as consumers.

The key provisions affect the formation and termination of contracts together with three-party arrangements transferring obligations. The impact of the provisions on financial transactions governed by French law will vary in intensity.

FORMATION OF THE CONTRACT

Abandonment of the requirement for a rationale ("cause") to validate the contract

Under French law, the rationale of a contract is the reason that a party enters into the contract. It may be different for each party but must be lawful. A neighbouring concept is the anglo-saxon concept of consideration. The rationale for the borrower in a credit agreement would be the delivery of the borrowed funds by the lender.³ After the reform, the rationale will no longer be required. This reduces uncertainty, as the notion of rationale created litigation, although the concept was already set aside in cross-border financing agreements since the mediatised decision in Belvédère in 2008 in respect of parallel debt arrangements.⁴

In its place, the legislator has provided clearer requirements.

First, a contract has to be lawful in both its stipulation and purpose.⁵ Contracts for valuable consideration must not have an illusory counterparty.⁶ A contract might be rendered invalid if it is dependent on another void contract,⁷ provided the party to be charged knew of the interdependence. Therefore, whenever there are multiple agreements or securities, it would be useful to add a clause specifying that the annulment of one contract within the same financing package will not affect the others.

Duty to disclose material information

During negotiations, the parties have a statutory duty to inform each other of any known and material information that could determine whether the other party will give consent ("information déterminante") unless that other party legitimately ignores the information or trusts the informed party. The duty to inform applies to all types of material information, except information concerning the estimated value of the performance of the contract.

In financing arrangements, parties — lenders and obligors alike, who fail to provide material information to their counterparties will be held liable. The scope of the duty will be greater for lenders than their mere duty to warn ("devoir de mise en garde") the borrower or guarantor of the consequences of not providing material information, as the duty merely to warn is generally limited to unsophisticated parties. The duty to disclose material information will apply to all parties whether sophisticated or not. So far, where material information is omitted intentionally French courts are prepared to award damages to the affected party or even to void a contract,⁹ 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 a facilities agreement, the more sophisticated the affected party, the harder it becomes to prove legitimate ignorance. To that end, while parties cannot limit their duty to provide all material information that would determine another party''s consent, a French judge may still refuse to grant remedies when it is unreasonable for a lender to plead ignorance of the material information or to plead trust in the other party despite the representations and warranties made.

Sanction of economic imbalance and economic duress

The Ordinance has introduced the notions of economic duress

("violence économique") and economic imbalance ("déséquilibre économique").

The concept of economic duress, in Art 1143 of the French Code Civil, appears to apply generally the isolated case law on the subject.¹⁰

A contract is voidable if, at the time of its conclusion, one of the parties depended on the other and this imbalance was abused by the other party such that the latter obtained a commitment which the dependent party would not otherwise have agreed to and out of which it benefitted from a manifestly excessive advantage.

One could argue that a highly indebted borrower seeking a loan that no other lender would provide could be in a state of dependence. In such cases, lenders should be cautious to not require consciously "manifestly" excessive advantages, for example in the form of disproportionate remuneration or negative pledge covenants. As for security agreements, they should not be voidable by way of economic duress as they are already subject to a statutory prohibition on excessive securities.¹¹

Clauses that create a significant imbalance will be deemed unwritten under Art 1171. However, this Article is limited in scope: first, it does not apply to the adequacy of the price of the contract, nor to the main object/purpose of the contract. Second, it does not apply to non-consumer credit agreements, as Art 1171 only applies to pre-formulated standard contracts ("contrat d''adhésion"), defined as a contract in which the general terms are not negotiated or determined in advance. Therefore, the question of economic imbalance should arise only in limited circumstances and not in sophisticated party credit agreements.

TERMINATION OF THE CONTRACT Unforeseen circumstances

A party is now entitled to demand the renegotiation of a contract ("imprévision'')''¹² if unforeseen circumstances at the time of the execution of the contract render its performance excessively onerous for a party who had not agreed to assume the risk.If renegotiation fails, the parties can agree to terminate the contract or file a joint petition to a judge to modify it. If, after a reasonable period of time, that proves unsuccessful, either party can unilaterally request a judge to modify or terminate the contract by setting terms for its termination.

This provides borrowers and lenders with leverage to renegotiate the terms of a contract in the case of an unforeseen event, such as a substantial change in the interest rate index or the occurrence of a political risk that did not constitute a force majeure. Generally, parties address these concerns through the material adverse change/event (MAC/MAE) or market material adverse change/ event (Market MAC/MAE) clauses. It would seem that the new law may allow the trigger of a renegotiation absent of or beyond the scope of these clauses.

Anticipated non-performance

The reform permits 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. This appears to legalise the notion of potential event of default and therefore, gives leverage to lenders to impose clauses to that effect.

NEW METHODS FOR TRANSFERRING, REFINANCING OR SECURING A DEBT

One mechanism is simplified; two others are introduced, creating new tools in financial engineering.

Assignment of receivables

The Ordinance restates the principle that an assignment of receivables ("cession de créance'') is valid without the consent of the debtor. It also confirms that the parties may decide otherwise,¹³ which was already commonly accepted practice. Further, the assignment must be in writing in order to be valid,¹⁴ but will no longer require a price.¹⁵ More importantly, it will be enforceable against third parties on the date of signing and against the debtor on the date of notification. An assignment of receivables by way of security/to secure a debt will also be enforceable against third parties on the date of signing, instead of by way of the previously overly burdensome service by a bailiff.¹⁶ The French market practice loan agreement should be modified accordingly.

Transfer of debt

The transfer of debt (liabilities) is now expressly authorised, ending uncertainty as to its validity.¹⁷ It is provided that unless the creditor expressly discharges the debtor-seller, the latter remains jointly liable with the new debtor/buyer. The parties cannot enforce the transfer of debt against the creditor and the creditor cannot benefit from the transfer until being notified. If the seller is not released, any security interests related to the previous debt remain; otherwise, any security interests consented to by third parties can only be maintained with their consent. Although it would appear that the transfer of debt to a new debtor requires the consent of the creditor, it seems that the transfer can be valid as against all parties even without creditor consent, but it would remain unenforceable against the creditor if the creditor had not consented. The transfer of debt could be used as mechanism for refinancing existing debt or of defeasance: a financier can acquire the debt against a price. If an auditor is sufficiently confident that the primary creditor can be reimbursed, the debtor- seller will be able to remove the debt from the primary creditor''s balance sheet.

Transfer of a contract

Finally, the Ordinance settles questions in case law¹⁸ regarding rules governing the transfer of a contract, in particular as to 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.¹⁹ The transfer has to be in writing otherwise it is void, and does not discharge the transferor unless the transferee consents. The position of the transferred contractual party remains unchanged, as it can invoke against the transferee any exceptions it had against the transferor. The transferee can invoke the exceptions inherent to the debt. The transfer of contract provision puts French civil law at the same level as anglo-saxon law in terms of authorising the assignment of a contract by way of security.