Trade Agreements and Health Crisis: CEPC Issues Recommendation on the Effects of COVID-19

On July 10, 2020, the last day of the state of health emergency[1], the Commission d’examen des pratiques commerciales (“CEPC”) published Recommendation No. 20-1 concerning the contracts provided for in Articles L.441-3 and L.441-4 of the French Commercial Code and the effects of the health crisis of Covid-19 in the food-dominated retail sector (the “Recommendation”).

Resulting from the work of an ad hoc working group, the Recommendation aims to guide professionals “in regard to the possible difficulties in applying current contracts due to the health crisis and its aftermath“.

Although specifically aimed at food-dominated retail sector, the scope of this Recommendation may seem broader since:

• All supplier-distributor relations are covered by Articles L. 441-3 and L. 441-4 of the French Commercial Code.
• Food distribution was not the only sector affected by the COVID-19 crisis.

After having recalled the specificity of the commercial agreements provided for in the Commercial Code, the CEPC comes back to the application of the so-called “classic” legal mechanisms in the event of difficulties of execution (I), then formulates its recommendations concerning the management of possible difficulties in the application of current contracts and the development of commercial relations, particularly in the event of a health crisis or its aftermath (II).

I. Legal mechanisms applicable in the event of difficulties in the performance of contractual obligations and their application in times of health crisis

Noting that the health crisis may have “confronted the contracting parties with the impossibility or difficulty of executing the current agreements that bind them“, the CEPC makes an inventory of the mechanisms and legal foundations likely to apply to these situations.

The CEPC recalls that in application of article 1104 of the Civil Code, good faith plays a key role in the contractual relationship, in times of crisis as well as in post-crisis situations.

Loyalty in commercial relations must lead each party to behave in good faith in all circumstances, and in particular to inform its co-contracting party of circumstances that may modify or suspend the performance of one’s obligations, otherwise liability may be incurred.

The legal mechanisms applicable in the event of performance difficulties, as recalled by CEPC, are:

Force majeure

Defined by article 1218 of the Civil Code as “an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures, [which] prevents the performance of his/her obligation by the debtor “.

Article 1218 of the Civil Code is not of public order. The parties to a contract may therefore modify or waive its definition.

It should be noted that “financial force majeure” is not recognized, as case law traditionally excludes the suspension of a payment obligation due to force majeure.

According to the Recommendation, CEPC invites the relevant operators to identify, verify and analyze the contracts concluded with regard to the following points:

• Contractual obligations whose performance is actually impossible;
• The contractual clauses defining and organizing the conditions of application of the force majeure ;
• The date of signature of the contract with regard to the knowledge of the health crisis and its real or foreseeable effects.

The CEPC specifies that it is a “contract by contract” and “order by order” assessment depending on the circumstances, and in particular with regard to the dates of signature of the initial contract, application contracts and placing of orders, which constitute a “key factor in assessing unpredictability and irresistibility“.

The first decisions handed down concerning COVID-19 and/or its consequences confirm this casuistic assessment, which is somewhat a source of case law uncertainty.

Unforeseen events

Unforeseen circumstances are defined by article 1195 of the Civil Code as follows: “If a change in circumstances unforeseeable at the time of the conclusion of the contract makes performance excessively onerous for a party who had not agreed to assume the risk, the latter may request a renegotiation of the contract from its co-contracting party. It continues to perform its obligations during the renegotiation.”

Unforeseeability is a moderating cause of the binding force of the contract, which makes it possible to combat major contractual imbalances that arise during performance.

The parties to the contract may have referred to this mechanism, either to claim its application, or to modify its conditions or effects, or to expressly exclude them.

The CEPC states in this regard that it is “important that the contracting party facing the effects of the health crisis be able to assess its contractual obligations as they may have been proposed, then negotiated, clarified, adapted or waived by accepting the risk associated with its performance.“

The exception of non-performance

(Article 1219 of the Civil Code): “a party may refuse to perform its obligation, even though it is due, if the other party does not perform its obligation and if this non-performance is sufficiently serious.“

A party may thus refuse to perform, at its own risk and peril and under the subsequent supervision of the court, even though its obligation is due, if the other party has not performed its own obligation, provided that such non-performance is sufficiently serious.

The exception for risk of non-performance

(Article 1220 of the Civil Code): “a party may suspend the performance of its obligation as soon as it is obvious that its co-contracting party will not perform on the due date and that the consequences of this non-performance are sufficiently serious for it.“.

It should be noted, however, that if these legal mechanisms, including force majeure and unforeseeability, were not implemented during the health emergency period, their implementation during the post-crisis period could be questionable.

II. Recommendations on the effects of the health crisis on the commercial relationship and current contracts

Generally speaking, the Commission recommends that the Parties “enter into bilateral negotiations to adapt as necessary the 2020 agreements to the conditions arising from the Covid-19 crisis and its aftermath.

Dialogue and negotiation between suppliers and distributors is thus the guiding principle of the recommendations made by CEPC under Recommendation 20-1.

In practice, it is therefore up to the parties to meet and exchange, preferably in writing, to put forward their requests and observations.

In terms of logistics

Under the terms of its Recommendation No. 19-1 on a guide to good practice on logistics penalties, CEPC has considered that health crises are among the circumstances that may be exempt from the applicability of logistics penalties.

It invites the operators to carry out a “proportionate analysis and [to seek] with discernment an amicable solution to the dysfunctions linked to the health crisis and any resulting penalties“.

CEPC notes in this regard that “in some cases, distributors have voluntarily suspended the application of penalties at the onset of the Confinement period, recognizing the particular nature of the degraded supply chain operating mode“.

It advocates a “pragmatic differential treatment” and encourages business partners to proceed to the following:

• Not to backtrack on the suspension of penalties expressly admitted since the beginning of the health crisis and to note their cancellation;
• To set up as quickly as possible specific progress initiatives to help us emerge from the crisis;
• To agree on an individualized follow-up of the service rates, along with arrangements to accompany the return to a normal situation;
• Ensure transparency of information on possible difficulties in fulfilling orders by setting up an alert mechanism within a pre-determined period of time between business partners.“

In commercial matters

After recalling that commercial agreements “must not be subject to unilateral and automatic amendments“, the CEPC specifies that the assumption of “additional costs […] which were not taken into account during the negotiation of the agreed price“, for example for the equipment of employees with protective gear, or the adaptation of production and marketing sites, “cannot be the only reason that can justify a renegotiation of the current contract, except in the case where the performance of the contract would become excessively onerous for one of the parties“.

It encourages dialogue and prior information of the trading partner on the difficulties encountered during a health crisis, as well as “bilateral initiatives and practices for the legal adaptation of temporary and exceptional operational conditions insofar as they allow the rapid resumption of business.” It thus recommends that “the parties evaluate, if necessary, the commercial and contractual relationship in light of the impact of the crisis, and consider ways of adapting it if this reflects the common interest of the parties“.

Thus, the CEPC considers that it is the entire business plan that the Parties must re-evaluate and in particular:

• The resumption of “fair […] delivery rates with regard to all customers“, subject to compliance with competition law;
• The return to “setting up the entire initial assortment“;
• The application of the “innovation launch plan”, as long as it is possible ;
• The “revision of projected sales if they have been affected by the health crisis“;
• An adaptation of the promotional plan affected by the crisis, “with regard to the feasibility of operations in the second half of 2020.” If necessary, the mandate contracts (NIP) must also be adapted accordingly.

The use of mediation

To avoid the risk of litigation or, more generally, to “seize the best opportunities for agreement“, the Commission encourages the Parties to use all techniques for the amicable settlement of disputes, including mediation.

Mediation allows the parties to “explore all opportunities for agreement“, in good faith, to enable further collaboration.

As the mediation is confidential, the content of the mediation is always secret and cannot be revealed. At most, the judge can know whether or not there has been an attempt at mediation, but no one can reveal to the judge the reasons for the failure of a mediation.

The CEPC thus recalls the interest of this path for the Parties, especially in times of crisis.

Faced with COVID-19 and the measures taken by government authorities to stop the spread of the virus, suppliers and distributors had to react quickly.

The Recommendation, although not imperative, is a tool to guide operators in the gradual return to a normal supply situation.

It should be noted that Recommendation 20-1 does not pronounce on the application of Article 4 of Ordinance no. 2020-306, which suspended, between March 12, 2020 and June 23, 2020 inclusive, the application of certain penalties intended to sanction the non-performance of an obligation within a given period, thus making it possible to limit contractual sanctions in case of difficulties due to the health crisis. The CEPC’s clarification on this point would have made it possible to clarify certain situations relating in particular to logistical penalties.

This Recommendation could also be taken into account in the framework of the 2021 negotiations, which are already subject to a certain amount of uncertainty. Certain commercial documents and/or contracts could, in fact, be usefully amended for the future, to incorporate legal mechanisms more appropriate in the event of a health crisis.

1] Declared by Act no. 2020-290 of March 23, 2020; extended by Act no. 2020-546 of May 11, 2020; and extended until October 30, 2020 by Act no. 2020-856 of July 9, 2020, for the territories of French Guyana and Mayotte alone.