Covid-19 – implications under French Law and guidelines for future project finance transactions

Published: 29/09/20

The Coronavirus outbreak has prompted many government interventions, resulting in a partial economic standstill in a number of countries. These restrictions have implications for contractual relationships, including for the performance of obligations under project finance documentation.


Covid-19 as an event of Force Majeure

The fragile economic climate induced by unprecedented control measures due to Covid-19 has introduced significant risks in the performance of contractual obligations. Many French legal scholars have commented on the consequences of such pandemic and the measures introduced by governments in response to it.

There is now a clear consensus among legal scholars that the Covid-19 pandemic should, under French law, qualify as a Force Majeure event to the extent the performance of obligations is impossible. If the impediment to performance is permanent (définitive), an affected party may seek relief from its obligations and ask for the termination of the contract in accordance with the provisions set forth in articles 1351 and 1351-1 of the French Civil Code.

On 20 May 2020, in a litigation opposing Total Direct Energie to EDF, the Commercial Court of Paris (confirmed by the Paris Court of Appeal in July 2020) ruled that the conditions of force majeure as provided for in a contract between Total Direct Energie and EDF were met (the Total Direct Energie vs EDF Decision). The court thus ruled in favor of Direct Energie, which had wished to suspend, because of the Coronavirus pandemic, its purchases in advance and at a fixed price of nuclear electricity produced by EDF.

As a reminder, the French Civil Code (article 1218) provides for three criteria to be fulfilled in order to establish the existence of the Covid-19 pandemic as a Force Majeure event:

  • the pandemic is beyond the control of the relevant party;
  • the pandemic was reasonably unforeseeable; and
  • the effects of the pandemic could not be avoided by appropriate measures.

It is also worth remembering that project finance transactions usually provide a contractual framework comprising very detailed provisions with respect to Force Majeure events and, therefore the contractual provisions, conditions and exclusions shall apply to any evaluation of whether the Covid-19 pandemic (and its effects) constitute Force Majeure for the purposes of such contracts. It is appropriate to emphasize that under French law the Force Majeure regime is not a matter of public order (ordre public) i.e. it is not mandatorily limited to the regime as set out in the French Civil Code. Parties are free to define its conditions and consequences as they see fit, and most well-negotiated contracts between commercial parties contain a specific, though non-exhaustive, definition of Force Majeure.

The Total Direct Energie vs EDF Decision clearly supports such contractual freedom for parties to provide for a different definition of the Force Majeure Event in their agreement, as the definition  used in that case included an economic aspect of the effects of the Force Majeure that does not exist under the Civil Code definition.

The principles described above are also substantially similar in other jurisdictions in the world that have legal systems heavily inspired by the French Civil Code, notably in Francophone Africa.

Other impacts on the performance of obligations

As mentioned above, a Force Majeure event can be invoked by a party to a contract only insofar as the performance of obligations is impossible. For an event to be treated as Force Majeure under French law, is not sufficient that performance is merely more difficult or more expensive. But as mentioned above, contractual definitions of Force Majeure can modify this aspect of the legal definition.

The impacts of the Covid-19 pandemic on contractual parties may indeed not be the impossibility of the performance of the obligations, but may rather be the financial impact of performance. French law allows, since 1st October 2016, a party to invoke a hardship situation (imprévision) based on the provisions of article 1195 of the French Civil Code. If there has been a change of circumstances, that was unforeseeable at the time of conclusion of the contract, and that renders the performance of the contract “excessively onerous” for such a party who has not accepted to bear the risk, that party may ask for a contract renegotiation. Performance of the contract shall continue during the renegotiation.

If the renegotiation is refused or if it fails, the parties can mutually agree to terminate the contract or ask the courts to adapt it. If an agreement cannot be reached within a reasonable timeframe, the court can, upon request by one of the parties, revise the contract or terminate it.

However, please note that, since its introduction in the French Civil Code, the hardship regime has generally been contractually excluded by parties as a matter of market practice. In addition, the case law on the subject illustrates that courts very rarely accept that the hardship regime applies in the situations that have come before the courts. It remains to be seen if commercial parties will start to use article 1195 of the French Civil Code as a means of obtaining relief for issues arising from the Covid-19 pandemic.

Guidelines for future project finance transactions

A new challenge is starting now with respect to future contracts. Many issues need to be raised regarding the negotiation and performance of contractual obligations in the aftermath of the coronavirus health crisis. How can stakeholders adapt efficiently to the new global situation and will this new era change the traditional risk allocation in project finance transactions?

Force Majeure – Risk AllocationForce Majeure – Risk Allocation

Following general practice in project finance transactions, project contracts (PPP/Concession Agreements, PPAs) usually include a distinction between a natural Force Majeure (examples include events such as flooding, hurricanes, earthquakes, tsunamis and other adverse weather or natural conditions) and a political Force Majeure (examples include widespread riots and civil disorder, acts of terrorism, and nationwide industrial strikes).

The main consequence of the different qualification concerns the type of remedy granted. While under both natural Force Majeure and political Force Majeure events, project companies will be given time relief, other, more generous, remedies are generally available upon occurrence of a political Force Majeure, such as compensation for costs incurred as a result of such a political Force Majeure event, deemed availability / generation, and a termination payment that compensates lost equity returns.

Pandemics are generally qualified as natural Force Majeure. The more sensitive question is whether government restrictions put in place in order to reduce the spread of the coronavirus, and which therefore impact on performance of contractual obligations, could or should qualify as political Force Majeure (such as change in law), thus allowing the project parties to obtain time and cost relief from the relevant government.

The question is not an easy one. On the one hand, many governments are providing support for the private sector to deal with the cost impacts suffered by businesses in their country, as a form of economic stimulus. On the other hand, many governments consider the private sector best placed to deal with the effect of the virus. Project finance lenders will also play a significant role in developing approaches to risk allocation in post-Covid projects.

However, as of now, there is no established “new normal” and we have seen various approaches in different Francophone and Anglophone countries in Africa.

Force Majeure – Foreseeability

Nevertheless, as now the world has experienced the Covid-19 pandemic, would it be possible for a party to invoke a Force Majeure event under a French law (or other civil law) project agreement? Would it be still considered as an unforeseeable event allowing a party to obtain time (or even cost) relief from its obligations?

Based on French law precedents (Saint-Denis de la Réunion, 29 déc. 2009, n° 08/02114 ; Nancy, 1re ch. Civ., 22 nov. 2010, n°09/00003 ; Paris, 25e, section B, 25 sept. 1998, n° Juris-Data 1998-024244) the legal answer is not certain. Therefore, we would advise parties to include in their future project agreements that the occurrence of any future pandemic should be considered as being in any event unforeseeable by the affected party.

Impact on other project agreements

Typically, a Concession Agreement or a PPA will provide for Force Majeure relief to extend beyond the Concession Agreement/PPA to other project agreements that the Concession Agreement/PPA parties are also party to, including the EPC contracts or the O&M agreements. For example, where the occurrence of a Force Majeure event prevents the EPC contractor from building the power plant, the project company may be able to seek relief from its contractual obligation under the Concession Agreement/PPA.

Given the fact that the affected party may wish to seek Force Majeure relief for events that occur under other agreements, it is important to aim to have a harmonised concept of Force Majeure across all the project agreements. Otherwise, there is a risk that an event that is defined as a Force Majeure in the EPC contract, for instance, may not constitute a Force Majeure event under the Concession Agreement/PPA. In such a case, the project company would be unable to seek relief “up the chain” for the same event.

In summary, for any future project contract to be signed after the beginning of the Covid-19 pandemic, the risk allocation of the Covid-19 pandemic should be carefully assessed. Parties will need to take great care in relation to how the risk is finally allocated between governments, project companies and other counterparties.

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