COVID-19 crisis – Cui bono?

With containment and sanitary measures, many economic players are suffering. After the relations between commercial tenants and their landlords, many legal uncertainties remain, notably for tenants who can continue their activities but suffer a drop in sales, and a little less so for businesses that have had to close. With the upturn in construction activity, developers and contractors are now trying to make the most of their opportunities.

Many purchasers in a future state of completion have recently received letters and/or amendments announcing that their building site will be delayed, or even that they will have to bear additional costs.

It’s true that following the sanitary containment measures put in place, more and more economic players are experiencing liquidity difficulties.

As government aid is partly inadequate and often slow to arrive, some companies have tended not to pay their suppliers. This technique poses a serious systemic risk, even if the courts are not issuing bankruptcies at the moment, and are slow to issue securities to unpaid creditors. However, this trend does not mean that the crisis is benefiting bad payers, since effective legal means exist to remedy the situation.

With the reopening of building sites under certain conditions from April 20, 2020, developers and builders are now turning their attention to their customers-buyers in future state of completion.

It has to be said that health and safety measures on construction sites have had to be adapted, and contractors expect the owner to bear the additional costs generated by these measures, by requesting a few percent more than the initial contract. In addition, they indicate that delivery delays are to be expected.

The lawfulness of the builder’s claims must be taken into account, given the exceptional circumstances and legal figures that are likely to apply.

Can a party unilaterally force its co-contractor to revise the terms of the contract?

1. Force majeure

It is not a means of revising the terms of the contract, but it is common practice to refer to the theory of “force majeure” when there are problems with contract performance. It derives from the Latin axioms “Ubi maior, minor cessat” and “Nemo impossibilia tenetur”.

This principle is set out in article 1148 of the French Civil Code: “no damages are due when, as a result of force majeure or a fortuitous event, the debtor has been prevented from giving or doing what he was obliged to do, or has done what he was forbidden to do”.

In the absence of an express definition between the parties, case law has developed three conditions that force majeure must meet: exteriority, unforeseeability and irresistibility.

Without going into too much detail, the condition of irresistibility merits discussion, as it must be total and definitive, with temporary or partial impossibility not constituting force majeure.

Operators in the real estate sector have of course encountered difficulties in performance, but it is debatable whether the 36-day interruption of the worksites (from March 16 to April 20, 2020) and the new hygiene measures (listed in the Grand Ducal Regulation of April 17, 2020 introducing a series of occupational health and safety measures as part of the fight against Covid-19) are sufficient to call into question the economics of the contract

2. The theory of unforeseeability

In this respect, the theory of “unforeseeability” seems much more relevant: it refers to the possibility of revising the contract in the event of unforeseeable circumstances making performance excessively onerous for the contracting parties.

Unforeseeability is a major exception to the principle that contracts are binding, and derives from the parties’ obligation to perform in good faith.

The theory of unforeseeability exists in German law and has been applied in French administrative law before being codified in the new article 1195 of the French Civil Code. It allows the judge to modify contractual provisions in response to changes in performance conditions that could not reasonably have been foreseen when the contract was concluded:

“If a change in circumstances unforeseeable at the time of conclusion of the contract makes performance excessively onerous for a party who had not agreed to assume the risk, that party may request renegotiation of the contract from its co-contractor. During renegotiation, the party concerned continues to perform its obligations. If renegotiation fails or is refused, the parties may agree to terminate the contract, on a date and subject to conditions to be determined by them, or ask the court, by mutual agreement, to adapt the contract. Failing agreement within a reasonable time, the judge may, at the request of a party, revise the contract or terminate it, on the date and under the conditions he or she determines”.

For the time being, this theory has not been expressly endorsed by the Luxembourg courts, so manufacturers will have to hope for a reversal of case law in order to succeed in their claims, which is not necessarily out of the question given the unprecedented conditions characterizing this pandemic, which has already disrupted many habits.

The bulwark against the theory of unforeseeability has always been the landmark “Canal de Craponne” ruling of the French Court of Cassation, according to which the contract crystallizes the immutable law between the parties, and no judge can, in the name of a principle of equity, undermine the binding force of the law of the parties.

“Pacta sunt servanda”, as the Romans used to say, is the oldest principle of public international law and, on reflection, a principle at the root of all human civilization, to quote Rousseau and his “Social Contract”.

In the light of the above, contracts can include a so-called “Hardship” clause, which enables either party to demand a new round of negotiations when the occurrence of an event seriously upsets the balance of services provided for in the contract.

It is also possible to include other contractual stipulations that allow a little more flexibility in the performance of contracts in the absence of a regulatory basis for requiring adaptation to the circumstances of the case.

In any case, the debate remains open and the final word is far from being spoken. For the time being, it has to be said that the crisis is not benefiting anyone, but with the imminent reopening of the courts, it will be interesting to follow any jurisprudential developments in the light of recent exceptional circumstances.

In any case, before it comes to that, for either party, a consultation with the lawyer could help to re-examine the contracts, modify or renegotiate them, or even analyze the issues at stake and the best options on a case-by-case basis. The first deadlock situations arise, as the parties fail to make constructive progress and insist on their positions. The conciliating lawyer can then help the parties find a solution that suits everyone.