IMPACT OF COVID 19 ON THE DEADLINES AND PENALTIES PROVIDED FOR BY COMMERCIAL CONTRACTS UNDER FRENCH LAW

June 18, 2020

By Dominique Dumas, attorney at law and managing partner of Dumas Structure, 13 Ter Bd Berthier, 75017 Paris - contact@dumas-structure.com

The issue of the impact of COVID 19 on certain clauses provided for in commercial contracts under French private law is mainly governed, on the date hereof, by Ordinance No. 2020-306 of March 25, 2020 as subsequently amended by Ordinance No. 2020-427 of April 15, 2020. A lot of literature exists, but reading it is sometimes very technical. In addition, some articles address too many subjects that the reader does not have a clear vision of the consequences of COVID 19 in relation to the deadlines and penalties provided for in commercial contracts under French private law.

Of course, this summary note does not exempt from a case-by-case examination to ensure that no particular provision derogates from these general rules. However, this provides an indication of the generally applicable rules.

I – Two key definitions for understanding the mechanisms for postponing contractual deadlines or contractual penalties

Before summarizing the situation, let us recall two essential concepts:

The “health emergency period” started on March 12, 2020 and ended on May 24, 2020 at midnight.

 
The “legally protected period” started on March 12 and should end on June 23, 2020 at midnight.
 

If we want to summarize the situation:

II – For clauses providing for penalties for failure to fulfill an obligation within a specified period

The clauses providing for penalties which are covered by the said order are periodic penalty payments, penal clauses, termination clauses as well as clauses providing for forfeiture, when their purpose is to penalize the non-performance of an obligation within a specified period.

1. For clauses providing for penalties and which took effect before the "legally protected period" (before March 12, 2020)

 
The course of periodic penalty payments (astreintes) and the application of penal clauses (clauses pénales) which took effect before March 12, 2020 are suspended during the "legally protected period" (until June 23, 2020).

On the other hand, the termination clauses (clauses résolutoires) and the clauses providing for forfeiture (déchéance) are deemed to have produced their effects. The termination / resolution or forfeiture are therefore acquired since prior to March 12, 2020.

2. For clauses providing for penalties and which were to take effect during the "legally protected period" (between March 12 and June 23, 2020)

These clauses are deemed to be suspended during the “legally protected period” but can in some instances be extended beyond the “legally protected period”.

How to calculate the extension? Since these clauses penalize the non-performance of an obligation, the period added after June 23, 2020 is equal to the period running between March 12 (or if the obligation arose later during the “legally protected period”, from this date) and the date on which it should have been executed. In other words, the additional period is equivalent to the period during which the effects of these clauses have been suspended during the "legally protected period".

Example:

An obligation was to be executed on March 20, 2020 after which a penal clause was to apply providing for a penalty of 100 euros per day.

• No penalty may be required during the “legally protected period”, namely in this case between March 20 and June 23, 2020;
• After the end of the “legally protected period”, the penal clause will continue to be suspended for 8 days (since the sanction was to take effect from the 8th day after March 12) if the debtor of the obligation has not executed in the meantime.

 
3. For clauses providing for penalties and which were to take effect after the end of the “legally protected period” (after June 23, 2020)

If the clause does not sanction a default in payment, it is suspended during the "legally protected period".

Thus, the date on which such a clause takes effect is postponed for a period equal to the time elapsed between, on the one hand, March 12, 2020 or, if it is later, the date on which the obligation is born and, on the other hand, the end of the “legally protected period”, therefore June 23, 2020.

If the clause concerns a payment obligation, it is not suspended. This is the rule. However, account should be taken of the very specific provisions applicable to the payment of individuals and small companies carrying out an economic activity particularly affected by the economic, financial and social consequences of the spread of covid-19, making it possible to suspend to some extent the effects of non-payment of rents for professional and commercial premises. For those individuals and small companies, the penalties are suspended until 23 August, 2020 but the payment obligation and the debt remain.
 

III – For clauses providing for termination or renewal

When:

• a contract provided that it could only be terminated during a specific period which expires during the “legally protected period”, or
• a clause provides that the renewal can be stopped only if a prior-notice of a certain duration is given before renewal and that this time period was expiring  during the “legally protected period”,

 
the period for terminating the contract or preventing its renewal is automatically extended by 2 months, therefore until midnight August 23, 2020 (to compensate for the difficulty of acting during the "legally protected period").

Example: The term of a commercial lease is contractually set at September 30, 2020. If the lessor wants to give a notice of termination under French law (whether with or without renewal offer), he must do so 6 months before the end of the lease term, that is before March 31, 2020, which is impossible for him since this falls within the “legally protected period”. If the “legally protected period” ends at midnight on June 23, 2020, the lessor can give notice of termination until August 23, 2020 midnight.

This summary is of course made in the current state of the texts and taking into account the dates of the "legally protected period" mentioned at the beginning of this article.

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