CMS Expert Guide on rising raw material prices in France

Consequences for the performance of public contracts

1. Have specific legislative or regulatory provisions been adopted by the Government in relation to the increase in the price of raw materials?

No specific legislative or regulatory provisions have been adopted by the French Government.

However, successive legal advisory opinions have been published on this topic since June 2021 by the French administration. They do not constitute laws or regulations, but they provide guidance to French contracting authorities.

The latest attempts to provide guidance to French contracting authorities occurred when an advisory opinion (avis) was issued by the Conseil d’Etat (the French highest administrative court) acting as counsellor for the French Government (as opposed to its judicial functions) on 15 September 2022 (CE, Ass. gén., 15 September 2022, n° 405540). This advisory opinion was shortly followed by both a legal opinion (fiche technique) from the Department of Legal Affairs of the French Ministry of Economy on 21 September 2022 and a circular (circulaire) n° 6374/SG from the French Prime Minister dated 29 September 2022, which abrogated the previous Prime minister’s circular n° 6338/SG of 30 March 2022. The recent circular aimed at addressing the solutions, which may be contemplated to provide an operational response to situations where the economic balance of contracts has been upset.

Whereas the circular dated 30 March 2022 emphasised the imprévision theory resulting from long-standing case-law, the following potential solutions have been broadened by the advisory opinion of the Conseil d’Etat and the circular:

  • the conditions of renegotiation of clauses in relation to prices or the term of a public contract (or concession contract) described in the advisory opinion of the Conseil d’Etat;
  • the reaffirmation of the obligation for the services of the French state to set up revisable prices in their public contracts when these contracts relate to services exposed to major economic hazards;
  • the articulation of the implementation of the imprévision theory to public contracts governed by French administrative law with the rules of the French public procurement code (code de la commande publique) relating to modifications of existing public contracts; 
  • freezing contractual penalties; 
  • treatment of similar difficulties in public contracts governed by French private law. 

Préfets (local representatives of the French state) are expected to make French public local contracting authorities aware of these rules and principles.

2. Does this situation give rise to amendments to existing public contracts?

1. The Conseil d’Etat has reminded the general framework allowing amendments to existing public contracts without a new tender procedure.

Firstly, a public contract or a concession contract may be amended without a new tender procedure when, in particular, under conditions and limits provided by the 2014 European directives and the French public procurement code:

  1. the amendments were provided for in the initial contractual documents;
  2. they are made necessary by unforeseen circumstances, within the limit of 50% of the value of the original contract for contracting authorities (without any cap for contracting entities);
  3. they are not substantial within the meaning of the French public procurement code; or
  4. they are of a small amount (i.e. below (i) the EU thresholds, and (ii) 10% of the initial contract value for public supply and service contracts or concessions, or 15% for public works contracts).

Whether they are made by mutual agreement between the parties or, in the case of an administrative contract, by the contracting authority unilaterally, such modifications may not change the overall nature of the public contract or concession contract.

Secondly, prices or the way in which they are set and, where appropriate, the way in which they change, must be defined in the contract. In addition, a public contract is, in principle, concluded at a definitive price, this price taking the form either (i) of a firm price, unchanging for the duration of the contract subject to its updating, when this form of price is not likely to expose the parties to major uncertainties; or (ii) of a revisable price that may be modified to take economic variations into account. 

Thirdly, a public contract may provide for one or more renewals provided that its characteristics remain unchanged and that the call for competition has been made taking its total duration into account.

2. With regard specifically to the possibility of amending only the financial clauses or the duration of the contracts, the Conseil d’Etat is of the view, unlike the circular issued in March 2022, that the amendments to the public contract or concession may relate (i) to other aspects than the characteristics or conditions of performance of the services initially agreed, and in particular to the financial clauses; and (ii) potentially to the financial clauses alone (i.e. “dry” amendment of the price).

Also, according to the same advisory opinion, the provisions of the French public procurement code do not prevent the modification of only the duration of the public contract or the concession contract alone. Thus, extensions of the term of the contract are possible without a new tender procedure if they can be considered as (i) modifications made necessary by unforeseeable circumstances; (ii) non-substantial modifications; or (iii) modifications of a small amount. The Conseil d’Etat, nevertheless, notes the practical difficulty arising from the need to evaluate a duration in proportion to the initial amount of the contract in order to ensure, where appropriate, compliance with the caps imposed by the applicable provisions.

Finally, the Conseil d’Etat emphasises that although such contractual amendments are possible, provided that they correspond to the hypotheses and comply with the conditions and limits set by the provisions applicable to them. The contracting authority, which must ensure compliance with the constitutional requirement of the proper use of public funds, is in no way obliged to take the initiative or to accept them. This position could in our view be moderated by the principle of good faith in performing contracts, which has been recognised in French administrative case-law.

3. The Conseil d’Etat has issued comments on different hypotheses of amendments related only to clauses on financial conditions or the duration of public contracts or concessions.

Where modifications related to unforeseeable circumstances are concerned, the modifications must not:

  1. result in compensating any risk that the contractor was reasonably expected to incur when the contract was entered into – the modifications are therefore possible only if the increase in expenses incurred by the contractor or the decrease of its revenues imputable to the unforeseeable circumstances exceed the limits that could be reasonably anticipated at the material time;
  2. exceed what is necessary nor the cap of 50% of the initial value of the contract if it has been entered into by a contracting authority;
  3. result in changing the overall nature of the contract;
  4. infringe the general principles of equality before public charges, good use of public money and prohibition of gifts granted by public entities.

3. Does this situation allow for the imprévision theory to be implemented?

Pursuant to the imprévision theory, originating from French administrative case-law and now part of the French public procurement code without any modification or specification compared to the principles set up by case-law, when an event occurs that is external to the parties, unforeseeable and temporarily upsets the economic balance of a public contract governed by French administrative law, a contractor which continues the performance of the contract – which ensure the continuity of the public service – is entitled to receive indemnification from the French contracting authority. This indemnity is aimed at compensating part of the additional costs that result from upsetting the economic balance of the contract.

In its advisory opinion of 15 September 2022, the Conseil d’Etat recalls that the related compensation must remain provisional and that if the events that justified its granting continue, the permanent nature of the disruption of the economic balance of the contract is an obstacle to its continued performance, so that unforeseen circumstances become a case of force majeure justifying the termination of the contract.

In addition, the Conseil d’Etat distinguishes public contracts from concessions in order to assess whether the economic balance of the contract has been upset, considering that a concessionaire is expected to have accepted a risk higher than the holder of a public contract.

The Conseil d’Etat also mentions that this theory as an alternative option in the event that the discussion between the parties to a public contract does not lead to any satisfactory solution based in particular on the renegotiation of clauses relating to prices or should the price variation clauses not be sufficient.

This being specified, the Conseil d’Etat considers that the parties may conclude, on the basis of the imprévision theory, a separate compensation agreement whose sole purpose is to compensate for the extra-contractual costs suffered by the holder of a public contract or the concessionaire by awarding an indemnity to the contractor, which – despite the exceptional situation it has been confronted in – continues the service initially planned. According to the Conseil d’Etat, the compensation agreement, as well as a unilateral decision of the contracting authority provided, cannot be considered as a modification of a public contract or a concession contract within the meaning of the provisions of the French public procurement and, therefore, to the conditions and limits they set up, in particular the cap of 50% provided for in case of a modification based on unforeseeable circumstances. This position raises questions with regard to European law.

As specified in the legal advice of the Department of Legal affairs of the French Ministry of Economy, whereas the economic balance is assessed over the whole duration of the contract, its disruption is assessed over the imprévision period, which implies that a compensation may be paid to the contractor even though the economic balance has not been upset over the whole duration of the contract. Extra-contractual costs left permanently at the expense of the contractor at the end of the contract may evolve. It is, therefore, recommended to insert in the compensation agreement clauses providing for the revision of the amounts at stake. 

Should the parties fail to reach an agreement on the compensation, this may be granted by the judge.

4. Will delays or the failure to perform a public procurement contract in this context lead to sanctions being imposed on economic operators?

As already requested in former circulars, purchasers are encouraged not to apply contractual penalties as long as the holders of public contracts are unable to obtain supplies under normal conditions and provided that this impossibility results directly from circumstances external to the contractor and not from its management choices.

5. Do the relevant regulations contain anything about the execution of public contracts?

The French Prime Minister insists on the obligation provided for by the French public procurement code to conclude contracts with revisable prices when the parties are exposed to major hazards due to reasonably foreseeable changes in economic conditions during the performance of the services (which is the case, in particular, for public contracts relating to the purchase of food or energy), and purchasers are asked not to insert stop or safeguard clauses in their terms and conditions.

6. Are public contracts that are governed by private law mentioned in the relevant regulations?

Contracting authorities are also encouraged to be openminded in situations where businesses are finding it difficult to perform public contracts governed by French private law and in particular to leave room for renegotiation between the parties pursuant to article 1195 of the French Civil code in relation to public contracts entered into later than 1 October 2016 (a principle comparable to the administrative imprévision theory with a few differences, in particular the faculty for a judge to adapt the contract should the parties refuse or fail to negotiate the new contractual conditions), subject to the conditions and limits applicable to amendments to public contracts under the provisions of the French public procurement code.