5th Banking and Finance Law Seminar THE 2016 REFORM OF THE LAW OF OBLIGATIONS IN THE FRENCH CIVIL CODE: IMPACT ON BANKING AND FINANCE TRANSACTIONS Jean‐François Adelle Partner JEANTET 1 Introduction . Legacy of the Napoleonic Code of 21 March 1804 “My true glory is not to have won forty battles; Waterloo will erase the memory of so many v ict ori es; wh at nothi ng will erase, what will live forever is my Civil Code” Napppoleon Bonaparte 2 Introduction 3 Introduction . 2016 : First major reform of the law of obligations since 1804 Codify material case law Enhance Take into international account new competitiveness practices and of French Civil technology law Purposes Modernise Strengthen legal language certainty 4 Introduction . 10 years of preparatory work: Catala (2005) – Chancery (2008) - Terré (2009) . RfReform bywayof ordinance Enabling law of 16 February 2015 Ordinance n° 2016-131 of 10, February 2016: Decree level pending ratification Entry into force on 1st October 2016: Only applies to contracts and amendments concluded after 1st October 2016 (but confirmatory action immediately applicable to all contracts) . Evaluation by High Committee of the Paris Financial Marketplace . Ratification bill of 24 January 2018 (review in progress) 5 4. Transfer, renewal and 2. Formation: Validity of extension 3. Performance of contract contract 4.1. Assignment of receivables 2.1. Capacity of legal persons Revisiting and cancelling the 4.2. Assignment of liabilities contract for hardship 2.2. Valid consent: duress and 4.3. Assignment of contracts abuse of dependence 4.4. Clarification of novation / 232.3. Valid consent: fraud and subrogation / delegation intentional concealment 4.5. Extension / Renewal 2.4. Content: lawful and certain 2.5. Fake abandonment of the 5. Breach of contract requirement for cause 2016 5.1. Anticipatory breach Reform 5.2. Resolution for breach 5. 3. Remedies: damages / in 1. Negotiation of contract Content kind 1.1. Freedom of contract 6. Other 121.2. GdfithGood faith . Preference pact 1.3. Precontractual duty of . Netting of related claims information . Unilateral promise 1.4. Precontractual duty . Electronic execution confidentiality . Force majeure 1.5. Remedies for breach – . Monetary nominalism . Evidence breaking off 6 1. Negotiation of contract 1.1. Enshrinement of freedom of contract . Freedom of contract was recognised by case law as a directing principle of French contract law with constitutional value . A Civil Code rule . Limits to free contracts Public order remains – An undefined notion Prohibition to derogate from morality (“boni mores”) exits New reference to pre-formulated standard contract 7 1.2. Consecration of good faith in the precontractual phase . Extension by case law to precontractual negotiations. The obligation for the parties to act in good faith was recognised but limited to . The Ordinance positions good faith as a the performance of the contract: duty . Sanction of abusive conduct (no Good faith in contracts covers the intention to contract but inducement to negotiation phase (Article 1104) believe) Good faith in negotiations (Article 1112): “The commencement , continuation and . Sanction of abusive break-off (abrupt breaking-off of precontractual and unilateral without legitimate negotiations are free from control. They reasons and prior notice) must mandatorily satisfy the requirements of good faith .” . Good faith does not incorporate a duty of cooperation 8 1.3. Precontractual duty of information . Distinct from duty of good faith and public order rule. The duty exists if: information of decisive importance for the other party’s consent debtor of the duty has knowledge of such information legitimate ignorance of the information by the creditor of the duty or legitimate reliance in the debtor of the duty . No duty to inform of the assessment of the value of the performance of the contract. Burden of proof: The person who claims that information was due to him has the burden of proving that the other party had the duty to provide it, and he succeeds, then that other party has the burden of proving that he has provided it . Remedies: damages or contract voidance if the breach caused a defect of consent . What does it change for bank acting as lender / seller of financial products / M&A advisor? 9 1.4. Precontractual duty of confidentiality Case law had already recognized a . Article 1112-2 gives a legal basis to duty of confidentiality in relation to duty of confidentiality information obtained during negotiations, in the absence of NDA, . Pro hibition o f use or disc losure on the basis of duties of loyalty and . The provider of the information can good faith release the recipient of its duty . NDA remains relevant to specify protected information; prohibited use, duration of confidentiality period and permitted disclosure, sanctions, etc. Limited impact on banks already liable to duty of confidentiality 10 1.5. Remedies for precontractual breach - breaking off negotiations French Cour de cassation landmark . Article 1112 codifies case law Manoukian case (Com. 26 November 2003, No 00-10.243): . Aims at ending lower courts’ resistance and providing legal “Remedies for breaking off certainty negotiation cannot compensate loss of benefits which were expected from the contract that was not concluded” 11 2. Formation : Validity of contract Napoleonic Code 2016 Civil Code Moral Cappyacity Cappyacity entities Confirmatory action: Mistake Silence of requested party during 6 months extinggguishes its right CtfConsent of CtfConsent of Fraud to act in voidness of the obligor the parties contract Duress Lawful No illusory or derisory consideration Object Content (ti)(certain) No contractual term depriving Certain from their content the debtor's essential obligation Rationale In pre-formulated standard contracts, no economic (lawful) imbalance 12 2.1. Capacity of legal persons limited by usefulness, compliance with purpose and conflict of interests rules . Capacity of legal persons is limited to acts useful for achieving their purpose as defined by their byy,laws, and acts which are incidental to them . Introduction of interrogatory action : If the principal / legal representative does not answer within reasonably prescribed time, the agent is deemed to be empowered . Conflict of interests : Prohibition of representation of two parties or contracting on own behalf and representing other party, under pain of voidness, unless such is authorised by law or the act is prior authorised or ratified by the person represented. Sanctions of breach of capacity rules are clarified for all legal / physical persons: Absence of authority / ultra vires: Act unenforceable against person represented, agent ppyersonally bound, exceptincaseofapparent authority, contractor who ignored absence of authority / ultra vires may invoke voidness Misuse of authority to the detriment of the person represented: Voidness of the act if the contracting third ppyarty was aware or could not have been unaware . The prevention of conflict of interests rule has raised criticism 13 2.2. Valid consent: Duress is enlarged to abuse of dependence . The definition of duress (“violence”) is modernised . Threat must be illegitimate: threat of legal action does not constitute duress except where the legal process is diverted from its purpose or where it is invoked or exercised in order to obtain a manifestly excessive advantage (Article 1141) . Duress is enlarged to abuse of dependence, a notion so far applied by case law only for abuse of economic dependence (Article 1143) . There is abuse of dependence when : Dependence of one party on the other Abuse is such that the abusing party obtained a commitment which the dependent party would not otherwise have agreed to and out of which it benefitted from a manifestly excessive advantage . Impact on lender / borrower relationship: o Disproportionate remuneration or negative pledge covenants o Excessive security is already prohibited by statute 14 2.3.Valid consent: Fraud covers intentional concealment . The definition of fraud (“dol”) is modernised: (Article 1137) . Intentional concealment is fraud if the concealing party knows the decisive character of the information for the other party as per former case law . Should intentional concealment be correlated to the precontractual duty of information ? 15 2.4. Content Lawful content Ensures all types of compliance with public order Certain content No illusory or No contract term No substantial imbalance in pre-formulated derisory diithdepriving the standard contracts (Article 1171) consideration debtor’s substantial . Contract in which the general terms are determined in (Article 1169) obligations from advance by one of the parties without negotiation their substance . Contract term creating substantial imbalance in the rights and obligations of the parties is deemed (Article 1170) unwritten . Substantial imbalance is not prohibited if it relates to : Sanction: Sanction: main object/purpose of the contract, or Voidness of Term is deemed adequacy of the price and the good or service contract unwritten . Are by-laws, assigned contacts or shareholder’s agreements to be considered pre-formulated standard contracts? 16 2.5. Fake abandonment of cause requirement ( “cause”) . The cause of a contract is the abstract motivation for a party to enter into a contract: e.g.expected consideration, transferred asset, animus donandi . It can different for each party but must exist and be lawful . The concept was perceived as complex