The Covid-19 pandemic constitutes an unprecedented health crisis. Because of its unparalleled impact on the economy, businesses and contracts more generally, the crisis is of great interest to legal professionals. The upheavals that this crisis will bring with respect to the performance of various contracts will undoubtedly give rise to numerous disputes that will have to be decided by judicial courts and arbitral tribunals.
In this context, the orders issued by the interim relief judge (juge des référés) of the Paris Commercial Court on 20, 25 and 27 May 2020 are the first example of such disputes in France.
In these cases, several alternative electricity suppliers - Total Direct Énergie, Gazel and Alpiq – who suffered from the fall in electricity prices caused by the pandemic, requested the suspension of the ARENH framework agreements entered into with EDF by invoking the contracts’ force majeure clauses. The interim relief judge considered that the conditions for a claim of force majeure were satisfied and granted the suppliers’ request.
The Regulated Access to Incumbent Nuclear Electricity (Accès Régulé à l’Électricité Nucléaire Historique ("ARENH")) is a mechanism introduced by the law n°2010-1488 of 7 December 2010 on the new organisation of the electricity market.
The ARENH mechanism allows electricity suppliers to acquire a share of EDF’s production if they so choose. EDF and each of the electricity supplies wishing to benefit from the scheme then enter into a framework agreement, pursuant to which the alternative electricity suppliers subscribe to a volume of EDF’s electricity annually at a fixed price - 42 euros per MWh since 2012 - and undertake to receive and pay for the subscribed volumes of electricity.
However, the Covid-19 outbreak and the containment measures put in place to curb the spread of the pandemic in France have put these suppliers in a delicate situation. The pandemic has led to a significant drop in France’s electricity consumption, which had a knock-on effect resulting in the fall of electricity prices on the market.
Alternative electricity suppliers therefore found themselves contractually bound to acquire the subscribed volumes from EDF for year 2020 at a price of 42 euros per MWh, and to then resell these volumes to their own customers at a much lower price (the French Energy Regulatory Commission ("Commission de Régulation de l’énergie") noted a price of 21 euros per MWh on 26 March 2020). This situation led these suppliers to incur significant losses.
In this context, the suppliers sought to rely on the force majeure clause contained in the ARENH framework agreement entered into with EDF.
The force majeure clause contained in the ARENH framework agreement
Article 10 of the ARENH framework agreement defines force majeure as "an external, irresistible and unforeseeable event, which renders the performance of the Parties’ obligations, under reasonable economic conditions, impossible" and allows the Parties to suspend the performance of their obligations under the agreement for the duration of the force majeure event.
Article 10 thus refers to the usual conditions of force majeure under French law (i.e. an event that is "external", "unforeseeable" and beyond the parties’ control (i.e. "irresistible")) which are now found in article 1218 of the French Civil Code. The framework agreement specifies, however, that impossibility for a Party to perform its contractual obligations must be defined by reference to 'reasonable economic conditions', a wording which, as will be analysed below, had an impact on the interim relief judge’s decisions.
The decision of the Paris Commercial Court
The alternative electricity suppliers’ position before the court was relatively straightforward: they argued that the fall in electricity consumption due to the Covid-19 outbreak led to a fall in the market price of electricity, which in turn forced them to purchase energy from EDF at a much higher price than the one at which they resold that same energy to their own customers. For Total Direct Énergie, Gazel and Alpiq, the Covid-19 pandemic therefore constituted an event of force majeure which made it impossible for them to fulfil the purchase and payment obligations they owed to EDF.
A reading of the court orders suggests that EDF had not disputed the “external” and "unforeseeable" nature of the pandemic. However, EDF argued that the electricity suppliers did not demonstrate that they were unable to fulfil their obligations under the contract. According to EDF, the suppliers could, in fact, accept the delivery of the subscribed electricity volumes and pay the corresponding invoices. EDF's position was based in particular on French case-law, which generally denies a party the possibility to invoke force majeure in relation to a failure to fulfil a payment obligation.
First, the interim relief judge considered that: "[...] the spread of the virus is clearly external to the parties, unforeseeable and cannot be overcome, as reflected by the suddenness and extent of its appearance".
Second, with respect to whether it was impossible for the electricity suppliers to perform their contractual obligations, the interim relief judge focused on the actual wording of the force majeure clause in dispute. In order to constitute a force majeure event under the framework agreement, the Covid-19 pandemic had to make it impossible for the suppliers to perform their obligations "under reasonable economic conditions". In the absence of a definition of "reasonable economic conditions", the interim relief judge considered that this related to a "disruption of previous economic conditions resulting in the occurrence of significant losses arising from the performance of the contract".
In this context, the interim relief judge considered that the alternative suppliers, who were faced with a sudden and unforeseeable fall in electricity consumption, had no choice but to sell the subscribed volumes of energy to their customers at a price well below the acquisition cost normally payable to EDF. As a result, the interim relief judge considered that the suppliers had to face "significant, immediate and definitive losses over a period of time which" was beyond their control. The judge therefore held that the conditions set out in the force majeure clause were satisfied and ordered the suspension of the framework agreement.
These interim orders are only a first step in the context of the disputes between EDF and certain electricity suppliers as a result of the Covid-19 pandemic. EDF has already indicated that it has appealed the orders to the Paris Court of appeal and notified the energy suppliers concerned of the termination of their contracts.
These orders also emphasise the importance of the drafting of force majeure clauses. Had the impossibility to perform not been defined by reference to "reasonable economic conditions", the interim relief judge’s decision could have been different. Prior to the Covid-19 crisis, French case law had already considered whether a pandemic could constitute an event of force majeure. In fact, an analysis of such case law shows the rigorous approach followed by French judges who do not hesitate to refuse to ascribe force majeure event status to a pandemic, by adopting, for instance, a strict interpretation of the condition that the event "cannot be overcome" by the parties (i.e. that the event is "irresistible") (for instance, both the chikungunya and the dengue viruses were not considered to be events of force majeure by the French courts; in another decision, the Paris Court of Appeal considered that while the Ebola virus could in principle be regarded as an event of force majeure, this was not the case as the virus had not made it impossible for the parties to perform their obligations).
 The French version reads as follows: « un événement extérieur, irrésistible et imprévisible rendant impossible l’exécution des obligations des Parties dans des conditions économiques raisonnables ».
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020