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March 25, 2020

Contractual and Institutional Remedies Against the Impact of COVID 19 on Your Business

 1.    Exceptional measures put in place by the government

The government has implemented the following measures to help companies facing the difficulties caused by COVID-19:

  • Payment terms for social and tax debts can be requested by companies, using the preset form available on the government site listed below.
  • A direct tax rebate can be requested for companies in critical situations.
  • Support from the state and the French national bank is possible for renegotiating loan repayments.
  • A sum of €1,500 is available for small businesses (companies, self-employed persons and micro entrepreneurs whose turnover does not exceed 1 million euros) that operate in the most heavily impacted sectors (nonfood retail, restaurant, housing, tourism, cultural, sport, transport and event industries).
  • New overdraft facilities may be requested with the help of the state or the Public Bank for Investment (BPI France), which will act as guarantor.
  • A simplified procedure is available to put employees into partial employment.
  • A mediator is available for companies and may help solve any disputes companies may have with their clients or suppliers further to COVID-19.

1.1.     The health emergency bill and the 25 ordinances adopted by the government

To support these measures, the French parliament enacted, on Sunday, March 22, 2020, a health emergency bill that notably allows the government to enact, without the prior approval of the parliament, provisional measures.

Pursuant to this bill, the French government adopted and published, on Wednesday, March 25, 2020, 25 ordinances aimed at mitigating the consequences of the COVID-19 outbreak.

The ordinances are available here:

https://www.legifrance.gouv.fr/rechTexte.do?reprise=true&fastReqId=57020312&page=1. 

These ordinances notably provide the following:

1.1.1.    Creation of a solidarity fund

This solidarity fund will run for a period of three months, renewable once for the same amount of time.

Its purpose will be to provide financial supports to private natural and legal persons whose economic activity is particularly affected by the consequences (economic, financial and social) of the COVID-19 outbreak as well as of the measures put in place by the government to stop or limit this outbreak.

A decree will set the scope of application of this mechanism, the conditions to be eligible for financial supports and the amounts that may be granted, as well as the management and operating conditions of the fund.  

The ordinance is available here:

https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041755852&fastPos=13&fastReqId=57020312&categorieLien=id&oldAction=rechTexte.

1.1.2.    Possibility for qualified natural and legal persons to suspend the payment of their rent, electricity, gas and water bills, without penalty or termination of contracts

From March 25, 2020 until the end of the national health emergency (presently set as May 24, 2020):

Private natural and legal persons who meet the criteria to receive financial supports from the solidarity fund and those who are currently continuing their activity under an insolvency proceeding (safeguarding, receivership or liquidation):

  • Shall not suffer, when their provider is one of those listed in the ordinance, any suspension, interruption or decrease of their water, gas and electricity supply should they default on the payment of one or more of their invoices during the above-mentioned period (March 25 until the end of the national health emergency)
  • Shall have the possibility, without any penalty, fees or indemnity, of requesting the payment in several instalments of their invoices for the above-mentioned period, when their provider is one of those listed in the ordinance

In such case, the repayment of their outstanding invoices shall start at the end of the calendar month following the end of the national health emergency. The instalments shall be equally spread out over a minimum period of six months, and shall occur at the same time as the due date for invoices issued after the end of the national health emergency.

  • Shall (i) neither be subject to any penalty, late payment interest or damages nor (ii) suffer the termination of their contract, the enforcement of any penalty clause, forfeiting clause or guarantee clause, should they default on the payment of their rent or rental charges in relation to their professional or commercial premises, notwithstanding any clause to the contrary  

The ordinance is available here: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041755842&fastPos=14&fastReqId=57020312&categorieLien=id&oldAction=rechTexte.

1.1.3.    Extension of contractual time limits for the enforcement of contracts

Penalties of any kind, termination and forfeiting clauses shall be deemed not to have accrued or entered into effect when their aim is to sanction the nonperformance or breach of an obligation that should have been enforced within a set time limit, which has either been reached or will be reached between March 12, 2020 and one month after the end of the national health emergency (i.e., currently set as June 24, 2020, unless the term of the national health emergency is shortened or lengthened). 

These penalties and clauses shall become effective two months after the end of the national health emergency (July 24, 2020), if the debtor has not yet complied with its obligation by that time.

Likewise, penalties that began to accrue before March 12, 2020 are suspended until the end of the month following the national health emergency (June 24, 2020).

Finally, when a contract (i) can only be terminated within a specific period or (ii) is automatically renewed unless a party provides a written notice of termination within a specific time limit, such period or time limit is extended up to three months after the end of the national health emergency (Aug. 24, 2020).

The ordinance is available here: https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000041755644&fastPos=22&fastReqId=57020312&categorieLien=id&oldAction=rechTexte

1.1.4.       Adaptation of rules applicable to meetings and deliberations of assembly and governing body of legal persons/entities, which do not have legal personality

The French commercial code has been modified to ease meetings and deliberations of general assemblies and governing bodies of legal persons/entities, which do not have a legal personality.

The amendments notably include the following: 

  • For companies whose shares are admitted to trading on a regulated market or a multilateral trading facility, the nullity that could be incurred in case of failure to send the invitation to the general assembly by post no longer applies when such invitation cannot be sent by post due to circumstances that are independent of the company.
  • Provided certain conditions are met, it is now possible to respond to a request for documents or information by electronic means.
  • The rules governing the participation in the general assembly and deliberation process have been simplified in order to increase the use of videoconferencing or written consultation. In the latter, the condition is that the law applicable to the type of companies/governing body concerned allows it. It is not necessary that the statute also provide for the use of such mechanism.

Other amendments have also been adopted in order to modify the rules governing the preparation, closing, audit, review, approval and publication of annual accounts as well as other related documents and information.

The related ordinances are available here:

1.1.5.       Provisional amendments of rules governing period holidays, rest days and working time

In order to address the economic, financial and social implications of the COVID-19 outbreak and/or when it is in the interests of the company in view of the economic difficulties encountered due to this outbreak, employers are allowed:

  • To (i) require that employees use the periodic holidays with pay they have acquired so far, even when the period they should normally be used for has not been reached, or (ii) to modify, unilaterally, the dates during which such period holidays with pay should be used by employees. Such possibility for the employer shall be provided for in a company-level agreement or, failing that, a branch agreement. It shall be limited to a maximum of six period holidays with pay and is subject to other conditions, including notably with respect to the advance notice that should be given to the employees, and that shall be of at least one day.
  • To (i) require that their employees take rest days, acquired so far, on dates chosen by the employers, (ii) unilaterally modify the dates on which their employees take their rest days, (iii) for rest days which are provided in a flat-rate pay agreement (convention de forfait), require that such rest days be used on dates chosen by the employers, or unilaterally modify the dates on which such rest days are used, and (iv) require that rights related to a working time account (compte épargne-temps) be used by their employees to take rest days at a time chosen by the employers.

These rights are subject to some conditions, including with respect to the advance notice that should be given to the employees and the maximum number of rest days that employees may be requested to take or change (10 days). 

  • For companies that operate in sectors that are essential for the safety of the nation or the continuity of social and economic life (as identified by decree), daily and monthly working time of day and night workers may be increased and resting time reduced. The same applies to Sunday rest, which may be allocated monthly and by way of rotation.

Other measures have also temporarily modified the terms and conditions according to which the daily allowances, as well as the deadline and conditions of payment of the sums that may be due in relation to profit sharing and incentive plans, may be complemented by an additional indemnity.

The related ordinances are available here: 

1.2.     A freephone number for companies in need of assistance 

Finally, insolvency officers (judicial administrators and receivers) are coming together with the French Ministry of Economy and Finance to help companies put in place the governmental measures outlined above. Any company in need of advice may call them at the following number: 0 800 94 25 64 (free of charge).

1.3.     Relevant information and documents

Relevant information and documents in relation to the measures put in place by the government can be found here:

2.    Standard remedies available under French law

Aside from the exceptional measures put in place (as mentioned above), companies may also benefit from a range of mechanisms that are available under French law and that may help them address the difficulties caused by COVID-19. These mechanisms may be contractual (force majeure and hardship) or institutional (insolvency law).

2.1.   Force majeure or fait du prince to justify the suspension of an obligation or the termination of a contract 

Purpose: To suspend the enforcement of an obligation or terminate a contract, without any compensation or liability.

Conditions: Unless otherwise stipulated in the contract, force majeure is defined as, and applies to, events that:

  • Are beyond the control of the debtor
  • Could not have been foreseen at the time of conclusion of the contract
  • Prevent the enforcement of an obligation or of a contract

Points to be aware of: In the context of the COVID-19 crisis, and of the health/confinement measures put in place by the government, the force majeure or fait du prince may justify, more often than not, the suspension of an obligation or the termination of a contract. 

Yet even in the case of epidemics, parties should ensure they can justify the suspension of one or more of their obligations based on force majeure, giving due consideration to (i) the characteristics of the event and obligation at stake, (ii) the existence of a possible force majeure clause in their contract and (iii) the availability of alternative measures that could be put in place to ensure the enforcement of their obligations, in spite of the event impacting them.

The decision of a party to suspend an obligation or terminate a contract should be carefully documented, with a particular focus on the following points:

  • Existence and impact of a force majeure clause included in the contract, particularly with respect to the definition or effect that may be derived from a force majeure event.
  • Date of conclusion of the contract: If the contract was concluded after the outbreak of COVID-19, parties should assess the importance of such outbreak at the time of conclusion of the contract (notably in relation to the number of persons contaminated/number of states involved, measures put in place and overall political discourse) in order to determine whether the current consequences of the COVID-19 outbreak were foreseeable at the time of conclusion.
  • Impact of the COVID-19 outbreak on the enforcement of all or part of the obligations of the contract: Before suspending the enforcement of an obligation or terminating a contract, parties should also (i) assess whether the COVID-19 outbreak, and measures taken in response, prevent the enforcement of such obligation/contract, and (ii) check that no alternative measure is available to ensure the enforcement of the obligation/contract, in spite of the COVID-19 outbreak.

To note:

  • For public contracts, it shall not be assumed that force majeure will apply, even if the government had announced that COVID-19 would qualify and be treated as such. On the contrary, further to this statement, the direction juridique des affaires (the department in charge of legal matters at the government level) has published guidelines that make it clear that force majeure will be applied not automatically but rather on a case-by-case basis, in view of the above-mentioned criteria as well as of any contractual provisions agreed upon between the parties. For more details, see

 https://www.economie.gouv.fr/daj/passation-et-execution-des-marches-publics-en-situation-de-crise-sanitaire.

  • A priori, force majeure does not apply to monetary obligations, meaning that debtors cannot rely on such grounds to justify a payment default.

2.2.   Hardship to renegotiate the enforcement of a contract that has become excessively “onerous”

Purpose: To request a revision of a contract or to obtain its termination.  

Conditions: Unless otherwise stipulated in the contract, hardship requires the occurrence of a change of circumstances:

  • That could not have been reasonably foreseen at the time of conclusion of the contract
  • That makes the enforcement of the contract excessively onerous
  • For a party that had not accepted, at the time of conclusion of the contract, to bear the risk of such a change of circumstances

Points to be aware of: Hardship could be invoked in the current context to request a renegotiation of existing contracts when their enforcement is still possible, but at a cost excessively higher than initially foreseen. This could be the case as a result of: 

  • The sanitary and confinement measures put in place by the governments and the new constraints — and related costs — they may create for businesses
  • The difficulties and additional costs that certain companies may face when trying to get their supplies in the current context
  • the costs related to the decision of companies to postpone events that ought to take place during this first semester

In such cases, the characterization of hardship should be carefully considered and documented, with particular attention to:

  • The date of conclusion of the contract: The ability to rely on hardship for contracts concluded before Oct. 1, 2016 will depend on the inclusion in the contract of a hardship clause.
  • The existence and incidence of a hardship clause, included in the contract: The definition and effects of hardship may be modified by such clause, or hardship may be excluded altogether.
  • The need to enforce the contract during its renegotiation.
  • The need to justify a substantial increase in cost.

To note:

  • In accordance with the law n°2018-287 of April 20, 2018, the hardship mechanism provided for by law cannot be applied in relation to a security transaction, including notably the sale of shares (see article L. 211-40-1, which has been inserted in the financial and monetary code further to the above mentioned law).
  • The appeal court of Versailles has recently ruled, in a decision dated Dec. 12, 2019, that the hardship mechanism provided for by law shall not apply to commercial rental agreements, as such agreements are governed by specific provisions derogating from standard provisions on hardship.

2.3.   Mediation to overcome the closure of the courts and their congestion in the foreseeable futur

Courts are now closed to the public and will deal only with the most urgent matters. Other pending matters are postponed to faraway dates, especially since the French judicial system has already been disrupted by the general strike of lawyers during the first few months of 2020.

As a result, the use of mediators, who may officiate through video conference and on a confidential basis, might help parties solve their disputes amicably and more quickly.

2.4.   Institutional framework to help companies in difficulty

French law provides other institutional remedies when amicable solutions cannot be found with the use of the above-mentioned contractual mechanisms.

These remedies lie in the institutional framework for companies in difficulty, and notably enable companies to benefit from the help of specialized professionals to negotiate or renegotiate agreements (mandat ad hoc and conciliation) and, where necessary, to reorganize their activity or debts before they default on payment (sauvegarde judiciaire).

2.4.1.    Mandat ad hoc or conciliation to renegotiate one or more contractual arrangements and get new funding with the help of a third party, in a secured and confidential manner

Purpose: To benefit from the help and experience of a professional when trying to renegotiate existing contracts (new payment terms and, more generally, any disagreement related to such contracts) or get new funding.

Benefits: Fairly informal and confidential, the mandat ad hoc and conciliation procedures provide assistance to CEOs looking for solutions and agreements with their creditors.

In the case of conciliation, creditors are also encouraged to grant new funding (if they do so in the context of an agreement approved by the court, they can benefit, in the event of a subsequent insolvency, from a legal privilege, according to which they will be paid with priority over most other creditors of the company).

Points to be aware of:

  • The company/association must not be in a situation of cessation des paiements (i.e., unable to pay its outstanding debts with available assets) at the date of opening of the mandate ad hoc or must not be in such situation for more than 45 days in the case of conciliation.
  • The CEO continues to run and manage the business.
  • The professional assisting the CEO has no power of constraint and cannot therefore impose an agreement or settlement upon the creditors and partners of the company/association.
  • The mandat ad hoc lasts three months and may be renewed an unlimited number of times.
  • The conciliation lasts four months and can only be renewed once for one month by a specifically motivated decision from the competent court.
  • The conciliation may be preceded or followed by a mandate ad hoc (provided the company is not in cessation des paiements).

2.4.2.    The safeguarding procedure to facilitate the reorganization of companies that face difficulties likely to lead to a situation of cessation des paiements  

Purpose: To protect companies in difficulty and offer them the necessary tools and time to draw up a safeguarding plan that will ensure the continuity of their activity, maintain the employment level and ensure the payment of outstanding debts.

Benefits: The safeguarding procedure has the effect of:

  • Stopping the payment of all outstanding debts the origins of which arose prior to the opening of the safeguarding procedure
  • Stopping all interest (legal and stipulated in contracts) and penalties (except for interest related to loans with a term of more than one year) that may be applicable
  • Interrupting all pending court proceedings and stopping all enforcement measures

Points to be aware of:

  • The company/association must not be in a situation of cessation of payments.
  • The CEO must continue to run and manage the business but can either be under the supervision of or assisted by a judicial administrator.
  • Existing contracts must continue to be enforced by parties, even if the company has not paid part or all of its debts prior to the opening of the safeguarding procedure, or if the contract includes a clause stating otherwise.
  • The company/association may request, at any time, during the so-called observation period, the closure of the safeguarding procedure if it appears that its situation has improved and that it can pay all its outstanding debts without further delays.

To note:

Courts are reviewing and updating their organization to enable CEOs to request the benefit of the above-mentioned procedures in spite of the confinement measures. Given that some courts, including the Commercial court of Paris, already accept dematerialized requests for the opening of such procedures (i.e., through electronic means) and conduct their hearing by phone or video conference.

The ordinance n°2020-304 of March 25, 2020 modifying the rules applicable to the judicial system now expressly allows judges to conduct their hearing through video-conference or, if that is not technically or materially possible, through any other electronic means, including by phone, so long as the identity of the participant and the quality/confidentiality of the debates can be ensured.

Questions? Assistance required

Lawyers at Kramer Levin are fully committed to responding to your legal queries in relation to the COVID-19 outbreak and to helping you put in place the different legal remedies that may be available to relieve your business from the economic strain caused by the outbreak (implementation of the partial employment scheme, tax measures or contractual audits; renegotiation of contracts; mediation; opening of one of the proceedings available to help companies in difficulty; etc.).

Authors and Editors

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