New French contract law provisions are now in force and apply to any contracts concluded after 1 October 2016.
In previous related client alerts, we outlined this legal revolution in France and described the new recognition of hardship under French contract law.
This client alert focuses on the new rules governing pre-contractual negotiations, which draw inspiration from notions of good faith. The new provisions in part codify existing case law, and in part effect a departure from the previous law.
When the French civil code was first adopted in 1804, it did not specifically address pre-contractual negotiations. One explanation often given is that in the late seventeenth century, negotiation periods were generally short, so not worthy of legislative attention.
In due course, the subject matter gained the attention of French courts adjudicating claims relating to the breakdown of lengthy negotiations. The legislative gap was filled by the courts. Certain solutions developed by the courts have now been codified at articles 1112 et seq of the new French civil code. The French reform also introduces two general duties binding on the negotiating parties.
(a) Freedom to negotiate – subject to good faith
Article 1112 provides that parties have complete freedom to initiate, conduct and break off negotiations. However, this freedom is restricted by a specific requirement of good faith contained in article 1112 itself.
Prior to the reform, the French civil code only made reference to the requirement of good faith in the performance of contracts.
This requirement of good faith for pre-contractual negotiations is mandatory. Parties cannot contract out of it. However, the exact meaning of good faith in this context is likely to be a slippery concept until the courts have had the opportunity to decide some cases.
(b) Failure of negotiations – no loss of chance
While parties are free to break off negotiations, they may be liable if they wrongfully break them off. It is not the breaking off that is sanctioned here but the manner in which it is undertaken, examined through the prism of good faith.
However, adopting the approach previously developed by the French Cassation Court, article 1112 circumscribes recoverable losses in case of the wrongful breakdown of negotiations. Article 1112 specifically provides that in any assessment of damages, there can be no compensation for the loss of advantages expected from the contemplated contract that did not eventuate.
(c) General pre-contractual duty to inform
The reform formally introduces into French law a mandatory duty to inform during negotiations. This duty is applicable to any negotiating party, whether acting in a professional capacity or not. While a duty to inform already existed under French law in certain limited circumstances – for example, under consumer laws – the reform now introduces this duty as a general obligation under French law.
The new duty is to be found in article 1112-1 of the new French civil code. The duty arises where one party has information that is decisive to the other party’s consent, and where the other party is legitimately ignorant or places its trust in that party.
The duty will extend to information that has a direct and necessary link to the content of the contract or the quality of the parties. However, the estimated value of the contracted service is excluded from the duty to inform. This exclusion codifies established French Cassation Court case law in this regard.
The party claiming a breach of the duty to inform bears the onus of establishing the duty in its favour. The respondent party then bears the onus of showing that it duly informed the claimant party.
A breach of the pre-contractual duty to inform is sanctioned by damages. It may also lead to annulment of the contract if it can be shown that the other party’s consent was vitiated by the wrongful failure to inform.
The duty to inform is mandatory. Parties cannot limit or exclude it. However, certain legal authors have suggested that parties may nevertheless agree on what they consider as decisive information.
(d) General obligation of confidentiality
Influenced by the principles of European contract law and the UNIDROIT principles, the French contract law reform introduces a general obligation of confidentiality protecting pre-contractual negotiations.
Article 1112-2 of the new French civil code provides for a free-standing right that disclosure of confidential information obtained during negotiations, without consent, may form the basis for an action in damages.
The codification of established case law and the introduction of new principles applicable to pre-contractual negotiations are a welcome development. However, the new legal landscape will present challenges.
On good faith in negotiations, prior to the reform French law chimed with the view of the English judge Lord Ackner who, in 2005, succinctly stated that a duty to negotiate in good faith is “unworkable in practice”.1 What does this new duty herald for commercial parties? Cards-on-the-table negotiations would appear to be called for. The development here joins with a noticeable legal trend towards transparency in commercial dealings.
On the duty to inform, this will be an interesting area to follow as the courts are given fact scenarios to rule upon. The new provisions open up a large potential area of dispute, but they also firmly entrench the notion that it is still possible to validly conclude a bad deal. On any particular set of facts, the balance here may be a delicate one for courts and tribunals called upon to rule on this issue.
On confidentiality, this is a welcome innovation. Fishing expeditions for information, masquerading as negotiations, will now attract clear sanction, subject always to the inevitable challenges of proof in such areas.
Overall, the single practical takeaway from the above changes is that sophisticated parties should be putting in place a pre-agreement to anticipated negotiations, at least for those negotiations with any degree of complexity. Some aspects of the new provisions can be contractually excluded if so desired. Others can be contractually tailored or their effects potentially mitigated or defined.
While no-one can predict with certainty how the courts will develop some of these concepts, the recent codification in this area cries out for parties to ‘dress up’ and define the rules of courtship for prospective commercial partnerships. Where negotiations sour, or subsequent contractual performance disappoints, a failure to dress up may lead to downsides much greater than simply not holding on to your new partner.
How Reed Smith can help you
Reed Smith can assist clients through the implementation of the new French civil code and, for example, adapt their general conditions of business to accommodate and address the new legal landscape in force since 1 October 2016.
More specifically, Reed Smith can assist clients through pre-contractual negotiations, tailoring pre-contractual agreements, carrying out due diligences, and drafting complex contracts. Reed Smith can also assist clients in advising generally and, where appropriate, commencing legal action in relation to negotiations, or breaches of the new duty to inform or of confidentiality obligations.
Client Alert 2017-058