The case: a first in commercial matters
On 20 May 2020, following summary proceedings before the Paris Commercial Court regarding a contractual dispute between Électricité de France (EDF) and Total Direct Energie (TDE), the president of the court ordered EDF to suspend contractual performance in accordance with the force majeure clause drafted by the parties.
This decision on a contractual dispute between private parties may well be the very first where the French courts have stated that the COVID-19 crisis is a force majeure event, and so has understandably caught the eye of the legal community.
Although the context of the dispute, relating specifically to the regulation of the French energy market, is important, the impact of this decision is by no means limited to this sector alone.
The context: the domino effect of COVID-19 and the fall in electricity market prices
In France, the vast majority of the country’s electricity is produced by EDF-owned nuclear power plants. In order to grant competitors with effective access to the French energy market, a law regulating the market requires EDF to sell 100 TWh annually at a set price of €42 per MWh1. It is by virtue of this law that alternative energy suppliers such as TDE may enter into specific energy supply agreements with EDF. Such agreements are based on the ARENH2 Model Agreement (“ARENH Agreement “) drafted by the Energy Regulation Commission3.
The dispute in question arose out of one such supply agreement, concluded between EDF and TDE on 4 May 2016.
Typically, and under normal conditions, the regulated price is very attractive. However, the COVID-19 crisis created an inevitable domino effect on demand for electricity, which in turn resulted in a significant price drop. As such, alternative energy suppliers had no choice but to sell electricity at half the regulated price. It is in this context that TDE notified EDF of its desire to suspend the order of electricity in accordance with the force majeure clause contained within the agreement. EDF rejected this request and a dispute arose regarding the interpretation of the force majeure clause and its applicability to the circumstances.
Technically speaking, contract performance between the parties was still possible: EDF was still providing electricity and under French law, financial troubles are not usually an admissible ground for force majeure. From EDF’s point of view, allowing alternative electricity suppliers to avoid their payment obligations under ARENH agreements would be unjust, as EDF would have to support the financial risk alone.4
As the interpretation of the agreement was subject to the jurisdiction of the Paris Commercial Court, TDE initiated summary proceedings before the court and requested that the president of the court apply the necessary measures to give effect to the force majeure clause. Due to the ongoing health crisis, the hearing took place in May by way of videoconference.
The law: force majeure under French law
Unlike other jurisdictions, the specific rules governing force majeure under French law are intended to protect parties who are unable to perform due to circumstances beyond their reasonable control, and operate as a general exception to the performance of a contract, provided that certain conditions are met. Article 1218(1) of the French Civil Code defines force majeure as “an event beyond the control of the debtor, which could not have reasonably been foreseen at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures, preventing performance of its obligation by the debtor.5” If performance is temporarily prevented, the contract performance is suspended; if not, then the contract is terminated.
Force majeure is not to be confused with other legal provisions under French law that provide for certain protections in the event of hardship, which were recently introduced into French law and are now set out in Article 1195(1) of the French Civil Code6.
Unlike hardship, force majeure rules are designed for a party, under exceptional circumstances, to avoid contractual responsibility. They are not a tool to protect the financial balance of the contract. That being said, parties are free to extend or limit the force majeure provisions in their contracts.
The ARENH agreements define force majeure as “an unforeseeable event beyond the control of the parties whose effect cannot be avoided, which make impossible the performance of the contract by the parties under reasonable financial conditions”.
In the present case, the principle of force majeure had therefore been extended by the parties from conditions simply preventing contract performance, to conditions preventing contract performance under reasonable economic conditions (although such conditions were not defined in the agreement).
The decision and its impact: recognition of COVID-19 as a force majeure event
Summary proceedings, although efficient, are not the appropriate forum to carry out an in-depth inquiry. As such, the president of the court carried out a straightforward and rudimentary analysis.
Regarding the COVID-19 crisis, the court found that it was evident that such a pandemic could not have been reasonably foreseeable at the time of conclusion of the agreement. The court also found that the pandemic and its consequences were clearly beyond the control of the parties and could not have been avoided by appropriate measures.
These findings together constituted a firm ruling that the COVID-19 crisis fulfils the characteristics of, and therefore constitutes, a force majeure event under French law.
Notwithstanding the cursory nature of the analysis carried out, and subject to the further comments below, this decision is likely to have a significant impact on all commercial contracts, not just in the energy sector. That said, for a ruling of force majeure, the event concerned must prevent contract performance.
It is important to bear in mind here the specifics of the case, notably the legal definition given to force majeure by the parties. Although the court admitted that performance was still technically possible, it underlined the fact that the parties had extended the scope of force majeure to cover “unreasonable economic conditions”. As such conditions were not defined in the agreement, the court was required to interpret the meaning of this phrase under French law.
In doing so, the court considered that the clause did not take into consideration the market powers of the parties, nor the length of the force majeure event. In light of the fact that the price was fixed, and that it is impossible to store unconsumed electricity, TDE was forced to sell electricity at half the regulated price, which inevitably led to significant losses.
The court considered that, given the wording of the clause, these events obviously qualified as a force majeure preventing performance under the agreement and ordered EDF to comply with the force majeure clause and suspend performance accordingly. EDF was also ordered to pay €50,000 to TDE in costs.
As the agreement permitted EDF to terminate in circumstances where performance is suspended for more than two months following a force majeure event, following the court’s ruling, EDF decided to terminate its ARENH agreements with a number of other alternative electricity providers.
The future: outstanding questions
The legal and commercial consequences of the ongoing COVID-19 crisis will continue to be felt into the foreseeable future. This decision, although the first reached in a contractual dispute between private parties, will undoubtedly not be the last. One issue which may give rise to further disagreement before the courts is whether the COVID-19 crisis should continue to be construed as an unforeseeable event, especially with regard to contracts concluded around or after the beginning of the COVID-19 outbreak. Furthermore, the court’s interpretation of this specific agreement may not be final given that the court chose a literal interpretation of the force majeure clause (and it may still be possible to argue that the court should have taken into account other financial factors that were not considered) and EDF has appealed the decision. We await the appeal court’s decision with bated breath.
How Reed Smith can help
If you currently have projects in development, and have been impacted by the COVID-19 crisis, you will need to check the terms of your agreements, and notably any provisions that provide for force majeure events. With the commercial impact of the crisis, and how long it will continue, remaining uncertain, it is important to be aware of your rights and manage the risks accordingly. With extensive experience working in the energy and construction industries, ranging from providing advice on drafting contracts at the tender stage to involvement in complex dispute resolution procedures, Reed Smith’s Energy and Natural Resources team can offer valuable assistance and advice regarding all your contractual needs in a variety of jurisdictions.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVIDfirstname.lastname@example.org
French Law No. 2010-1488 on the reorganisation of the electricity market dated 7 December 2010.2. Accès Régulé à l’Electricité Nucléaire Historique (regulated access to historic nuclear power).
- Annexed to a decree dated 28 April 2011.
- The competition-related risks that the market may face were also unclear.
- It is worth noting that although the above-mentioned Article 1218 entered into force on 1st October 2016, the meaning of Force Majeure remains largely unchanged from its previous pre-2016 iteration.
- Article 1195 provides that “If a change of circumstances that was unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract. The first party must continue to perform his obligations during renegotiation.” This article entered into force on 1st October 2016.
- French court qualifies COVID-19 crisis as force majeure event resulting in alternative electricity suppliers’ financial losses.
Client Alert 2020-369