The Theory of Unforeseeability: Clarifications on the Concept of Excessive Burden

Since the start of the COVID-19 pandemic, the economic upheaval may have made it “excessively burdensome” to fulfill your contractual obligations.

To address this, and in the absence of specific contractual provisions, the law provides several means for renegotiating contracts, including the doctrine of unforeseeable circumstances. This mechanism is provided for in Article 1195 of the Civil Code (resulting from the reform of the law of obligations, and applicable only to contracts entered into on or after October 1, 2016) (see our latest article on the subject here), which states: “If a change in circumstances that was unforeseeable at the time the contract was entered into makes performance excessively onerous for a party that had not agreed to assume that risk, that party may request that the other party renegotiate the contract. That party shall continue to perform its obligations during the renegotiation. In the event of a refusal or failure to renegotiate, the parties may agree to terminate the contract on the date and under the terms they determine, or may jointly request that a court adjust the contract. “If no agreement is reached within a reasonable time, the court may, at the request of a party, amend the contract or terminate it on the date and under the conditions it sets.” Upon reading this provision, three cumulative conditions must be met:

a change in circumstances that was unforeseeable at the time the contract was entered into;
the party affected by this change must not have agreed to assume the risk;
this change in circumstances makes performance of the contract excessively onerous.

It is worth considering what the concept of “excessive burden” entails. In other words, does “excessive burden” refer solely to an increase in the cost of performance—without passing the cost on to customers—or does it also encompass a significant decrease in the value of the consideration for one party? At first glance, based on the wording of the article, the first option appears to be intended—namely, an increase in the cost of performance that cannot be passed on. However, an unforeseeable change in circumstances may also lead to a considerable decrease in the contract’s profitability for one of the parties, and the contract may thus lose some of its value for the creditor when the value of the consideration decreases relative to the price initially agreed upon—even if the cost of performance does not increase. In such cases, the focus should be on the economic terms of the contract rather than on the debtor’s ability to pay. A parallel analysis of Article 1221 of the Civil Code regarding specific performance could be conducted, as it provides: “The creditor of an obligation may, after formal notice, seek performance in kind unless such performance is impossible or there is a manifest disproportion between its cost to the debtor acting in good faith and its benefit to the creditor.”

Only subsequent case law will make it possible to assess how judges intend to interpret this delicate concept.

And it is precisely the interpretation of this “onerosity” that is the subject of debate and on which legal scholarship diverges the most. Some scholars argue that it can refer only to the cost of the performance, which would become excessively onerous; while others wish to include in this concept “the reduction in the consideration, a cost-benefit ratio that has become negative ” (P. Malaurie, L. Aynès, and P. Stoffel-Munck, Law of Obligations, LGDJ, 2018) or “the depreciation of the price that the creditor may receive”; B. Fages, Law of Obligations, LGDJ, 08/2019). In this regard, the Catala preliminary draft for the reform of the law of obligations adopted this option. Article 1135-1 of the draft thus noted the possibility for the contracting parties “in contracts involving successive or staggered performance to agree to negotiate an amendment to their agreement in the event that, due to circumstances, the initial balance of reciprocal performances were to be disrupted to such an extent that the contract would lose all value for one of the parties.” Article 1135-2 of the same draft provided that “in the absence of such a clause, the party that loses its interest in the contract may request that the president of the district court order a renegotiation.” The party that lost all interest in the performance of the contract could therefore ask the judge to order renegotiation and, if that failed, obtain a judicial termination. However, this provision was not included in the new Article 1195 of the Civil Code, as the legislature opted for a strict interpretation of excessive onerosity. This concept applies to all agreements, with the exception of those provided for in Article L.211-40-1 of the Monetary and Financial Code, and to obligations arising from transactions involving securities and financial contracts (equity securities issued by corporations; debt securities; units or shares in collective investment schemes; and financial contracts). All other agreements remain excluded from the application of Article 1195.

The concept of excessive onerousness is likely to be invoked frequently in the coming months in light of the COVID-19 crisis; it will be important to monitor the interpretation that emerges from the extensive case law that will result. More information on the force majeure mechanism is available here.