WSG Article: Extension of contractual deadlines expiring during the state of health emergency

Jeantet
April 15, 2020 - France

Extension of contractual deadlines expiring during the state of health emergency

Adopted as part of the measures supporting enterprises in the context of the Covid-19 crisis, the ordinance n° 2020-306 of March 25^th, 2020 contains the following temporary provisions applicable to contractual deadlines:

SUSPENSION OF THE CONTRACTUAL STIPULATIONS SANCTIONING THE NON-PERFORMANCE OF AN OBLIGATION

According to Article 4 of the ordinance: “Penalty payments, penalty clauses, termination clauses and acceleration clauses, the purpose of which is to sanction the non-performance of an obligation within a specified period of time, are considered not to have started running or to have taken effect, if that period has expired between 12 March 2020 and the expiry of a one-month period from the date of cessation of the state of health emergency.”

The ordinance therefore covers the following:

The penalty payments clauses (clause d’astreinte) which are intended to induce the debtor of an obligation to respect the terms of his commitment within the agreed time limits. Unlike the penalty clause, thepenalty paymenthas a comminatory function;
Penalty clauses, which enable the parties to assess “in a lump sum and in advance the indemnity to which the non-performance of the contractually undertaken obligation will give rise” (Civ. 1, October 10^th, 1995, no. 93-16.869, Bull. civ., I, no. 347);
Termination clauses, which provide in advance for the automatic termination of the contract in the event of one of the parties failing to perform one of its contractual obligations; and
Acceleration clauses, allowing lenders to demand early repayment of a loan and thus to revoke the term to which the lender granted its initial consent.

Period of suspension and resumption of effects:

For clauses that have not been implemented by March 12^th, 2020, the ordinance specifies that“these penalty payments shall run and these clauses shall produce their effects one month following the cessation of the state of health emergency, if the debtor has not performed his obligation before that time.”Debtors will therefore benefit from suspension of these clauses until one month after the cessation of the state of health emergency (the date of which has for the moment been set at May 24^th, 2020), i.e. until June 24^th, 2020.
Regarding penalty payments and of penalty clauses that took effect before 12 March 2020, the effects shall “be suspended until the expiry of a one-month period starting from the date of cessation of the state of health emergency

EXTENSION OF TACIT RENEWAL CLAUSES (ARTICLE 5 OF ORDINANCE N°2020-206)

Pursuant to Article 5 of the ordinance: “when an agreement may be terminated only during a specified period of time or is renewed in the absence of termination notice within a specific period, such period or deadline shall be extended if it expires between March 12^th, 2020 and the expiry of one-month period starting from the date of cessation of the state of health emergency, increased by two months after the end of that period.”

Our analysis

• Application as of right

These provisions shall apply as of right on the date on which they take legal effect. It is therefore unnecessary for the debtor to request their application by way of notification. Moreover, the debtor does not have to show that its business has suffered as a result of the economic crisis and the containment measures resulting from the Covid-19 pandemic in order to set aside the implementation of the contractual terms covered by the ordinance.

• Covered contracts

These measures apply without doubt to contracts governed by French law, even when the debtor is a non-French party.

These measures seek to draw the consequences of the exceptional public health crisis on the above clauses and mitigate its negative impact on debtors and the French economy in general. In this regard, they are, in our view, part of the French international public policy.

Therefore, in our opinion, they would also apply to contracts subject to foreign law when the contract is enforced in France against a French debtor. In such case, a French court would apply these provisions if it were referred to on the merits of a dispute or in relation to the search for protective measures and could refuse exequatur of a foreign court decision or arbitral award taken in breach of the provisions of this ordinance.

• Exclusions

A case of default that occurred before 12 March 2020 will not be affected by these provisions, even if it is caused by the Covid-19 crisis (e.g. supply chain disruption involving products imported from China). In this case, the force majeure clause, if available, could produce the same effects.
Financial contracts and instruments (mainly derivatives and interbank guarantees) are not affected by the suspension of time limits since “the financial obligations and related guarantees mentioned in Articles L. 211-36 et seq. of the Monetary and Financial Code” are excluded from the scope of this ordinance.

This ordinance does not apply to time limits and measures that have been the subject matter of other specific adaptations under the Emergency Law of 23 March 2020 in response to the Covid-19 outbreak or implementation measures.