Covid-19 Outbreak’s impact on tech contracts
This is the English version of Covid-19 et Contrats informatiques
During this time of health crisis, several legal mechanisms remain available for contractors who are no longer able to perform their ongoing IT contracts.
First, the force majeure exception allows to suspend performance of, or terminate an ongoing contract, subject to a number of restrictive conditions.
In addition, pursuant to section 1195 of the French Civil Code regarding hardship, a party facing a performance which has become excessively onerous may request the terms’ renegotiation and, if unsuccessful, obtain from the judge the amendment of the contract or its termination.
Last, the ability to access softwares’ source codes mitigates the risk of facing IT vendors’ insolvency and the resulting breakdown in the maintenance continuity. Users should therefore audit their contract to check if such access is provided for or else, obtain such warranties
Most IT contracts have high stakes
A number of companies may be prevented from performing their obligations as a result of the epidemic, which may have impacts on ongoing IT contracts, most of which have high stakes.
Your company is a software vendor or an IT service provider (development, maintenance, SaaS, outsourcing ): due to the Covid-19 outbreak, under French law, you may have to face:
- non-payment of license or support fees or of provided services;
- customers’ claims for the renegotiation of their contracts, based on unforeseen hardship, pursuant to section 1195 of the French Civil Code.
Your company is a user: due to the Covid-19 outbreak, you may have to face:
- the insolvency of an IT vendor you have an ongoing contract with;
- the failure of your IT vendor to perform your softwares’ support or third party maintenance, to perform outsourced services.
- your own inability to continue paying license fees and/ or IT services.
Under French law, the main legal mechanisms which may be enforceable in such cases are :
- an exception of force majeure;
- hardship for contracts drafted after October 1st 2016,
- insolvency proceedings and the implementation of a right of access to the software’s source codes if it has been placed in escrow.
The present analysis details the above mechanisms in the context of the present health crisis.
1. The force majeure exception
Does Covid-19 qualifies as a force majeure event? Between professionals, it depends on the contract’s terms.
Section 1218 of the French Civil Code provides that:
« There is force majeure (…) when an event out of the debtor’s control, which may not have been reasonably foreseen when concluding the contract and the effects of which cannot be avoided by appropriate measures, prevents the debtor from performing its obligations. If the impediment is temporary, performance is suspended unless the delay resulting from it justifies termination. If the impediment is permanent, the contract is automatically terminated and the parties are discharged from their obligations (…)».
Therefore, it is statutory provided that a party is discharged from its obligations – temporarily or permanently— when performance is made impossible or is hindered as a result of an event which is cumulatively unforeseeable, exterior, and beyond the party’s control.
What does your contract provide for in case of force majeure event?
Before determining whether Covid-19 qualifies as force majeure, one must analyze the terms of the contract since the above statutory provisions are not mandatory.
A number of cases are detailed below:
- most typically, the contract will refer to the provisions of the French Civil Code but will add a non-exhaustive list of cases pre-qualified as force majeure Either pandemics are listed and Covid-19 automatically qualifies as a force majeure event or they aren’t and the criteria listed at section 1218 above should be met.
- the contract denies the benefit of force majeure for one or both parties : as a consequence, such party may not search relief under force majeure (unless it is able to demonstrate there is a significant imbalance and the contract is an adhesion contract, in which case the provisions of section 1171 of the French civil Code may be enforceable).
- the contract uses its own standards rather than the definition set forth in the French Civil Code to evaluate force majeure. In that case the Covid-19 outbreak should meet the criteria set out in the contract in order to be qualified as a force majeure event.
- the contract remains silent: section 1218 of the French Civil Code is applicable.
Does Covid-19 outbreak qualifies as a force majeure event?
The qualification of the pandemic as an event of force majeure must be made in the light of the criteria listed at section 1218. The French Ministry of Economy and Finance declared on February 28, 2020 that Covid-19 constitutes an event of force majeure. On this ground, penalties will not be imposed on companies which are delayed in their public procurements deliveries.
Such a statement only has a political scope and is not binding per se. However, the mere reference to the notion of force majeure in this context of health crisis paves the way towards its application to private law contracts.
Each condition set out in section 1218 must be fulfilled in view of the specific circumstances of the contract:
Exteriority is admittedly met regarding Covid-19.
Unpredictability, meaning that the event could not have reasonably been foreseen at the time of conclusion of the contract, depends on the date of this conclusion. For contracts signed, or orders placed, before the spread of the pandemic, unpredictability is considered as fulfilled. In France, after the French President’s speech on confinement, on March 16 2020, unpredictability is admittedly denied. In-between, unpredictability is left to the judge’s appreciation. In that respect, the Court of Appeal of Besançon ruled  that the H1N1 pandemic was not unforeseeable for a company seeking relief because the pandemic had « been anticipated long before the implementation of health regulations ».
Beyond the party’s control
Beyond the party’s control, means that the event’s effects may not be avoided by appropriate measures. This criterion must also be examined on a case to case basis. If the company’s business or the performance of the contract is directly impaired by the confinement or by the closure of non-essential activities, the criterion is deemed to be met. However mere cash-flow difficulties are not considered as directly preventing the contract’s performance. In this case the debtor is not discharged from its payment obligation, as the French supreme Court ruled in a decision of 2014. In case of difficulties of cash flow, a debtor may search relief based on hardship under of section 1195 of the French Civil Code.
2. Applicability of hardship
Section 1195 of The French Civil Code on hardship is applicable to contracts entered into after October 1st, 2016, date of effect of the reform of the French law of obligations. It provides that :
If a change in the circumstances which was unforeseeable at the time of conclusion of the contract makes performance excessively onerous for a party which had not agreed to bear such a risk, such party may request the other for the contract’s renegotiation. The requesting party continues to perform its obligations during the renegotiation period.
In case of refusal or failure of the negotiation, the parties may agree to rescind the contract at the date and to the conditions they decide, or may request from the judge to adapt it. If an agreement is not reached within a reasonable time, the court may, upon request of a party, amend or terminate the contract at the date and under the terms it sets out.’’
The same mechanism that is applicable to force majeure applies here. Since hardship statutory provisions are not mandatory, one must check its contract to determine if the benefit of section 1195 has been denied to one or both of the parties. If so, one will only be able to rely on the parties’ obligation to perform the contract in good faith provided for at section 1134 of the French Civil Code.
Else, section 1195 applies and either party may seek relief on this ground if it demonstrates that performance would imply an excessive burden, subject to the condition that such burden results from a change in circumstances which was unforeseeable at the time of conclusion of the contract.
One must bear in mind that that during the entire time of negotiations, the requesting party must continue to perform the contract.
In case of failure of the negotiation, the judge may amend the contract or rescind it.
Other legal mechanisms enable users to protect themselves against a vendor who would become a defaulter, especially if it is subject to an insolvency proceeding.
3. Insolvency proceedings and the right to access source codes
A software maintenance may be jeopardized if a collective procedure the software editor or the service provider in charge of application management is subject to collective insolvency proceedings.
It is underlined that during the present quarantine, insolvency proceedings in France are not necessarily an immediate threat, thanks to the recent public preventive measures to alleviate companies’ cash flow difficulties; However an increase in the number of insolvencies is likely in the medium term.
Insolvency of a software vendor
To prevent its consequences, one must check whether its license agreement provides for the source codes deposit with a third party escrow and for a right of access.
If so, the user will be able to access the codes and hire a third party to continue application management.
Failing that, section L.122-6-1 of the French Intellectual Property Code enables licensee to the reproduce and modify the software in order to correct errors.
However, the license agreement may reserve such rights to the editor. Hence the need to audit one’s license agreement in order to anticipate the potential disruption of maintenance.
Insolvency of a service provider
A service provider may be in charge of development, integration, or IT managed services.
In case of judicial redress
The judicial trustee may require the continuation of ongoing contracts. A user wishing to terminate the contract may solely require the trustee to decide if the contract is continued; In case it remains silent after a month the contract is automatically terminated.
In case of judicial liquidation
The user may only declare file a claim with the liquidator for the refund of any amount paid in advance.
Regarding software development agreements, users are advised to check whether the agreement provides for the transfer of rights as developments occur. If so, the user will be able to claim property relating to the developments already created and to hire a third party to complete the work.
If on the contrary, the user has no rights on developments already created, they will be retained as part of the liquidations’ assets.
Florence Ivanier – Partner – AURELE IT