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Swaps and Non-Divisible Contractual Scheme (Ensemble Contractuel Indivisible)

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Swaps and Non-Divisible Contractual Scheme (Ensemble Contractuel Indivisible)

On 08 September 2021, the French Supreme Court dealing with private matters (Cour de cassation) ruled a remarked decision relayed by economic specialized press (see Sophie Rolland, Les Echos dated 18 November 2021 « Swaps de taux : un arrêt de la Cour de cassation sème le trouble chez les professionnels du financement »).

This decision (Cour de cassation, civ., 1, 08 September 2021, 20-14.201), albeit non-published (inédit) on the Bulletin de la Cour de cassation, is important as to its impact on the financial field and by the use of the concept of non-divisible contractual scheme (ensemble contractuel indivisible).

The contractual scheme put in place is quite widely spread: a loan hedged by a rate interest swap entered into between a bank and a real estate civil company (SCI – Société Civile Immobilière). In this contractual scheme, the SCI, which corporate purpose is to acquire real estate, entered into a loan agreement with a floating interest rate (namely Euribor 1M plus 1% per year), such loan being hedged by the same bank, this later paying Euribor 1M and receiving a fixed rate of interest of 3.73%. It has to be stressed that the position of the SCI was not fully hedged as a delta of 1% per year remained to be paid by the SCI under the loan. From a strictly legal standpoint two separate agreements were entered into by the same parties: the loan and the swap, resulting in the bank receiving 3.73% plus 1% per year.

This case arose due to the contractual reimbursement before maturity of the loan by the SCI after the real estate being sold by the SCI. In terms of sequences, from a chronological standpoint, the SCI sold the real estate, contractually reimbursed the loan which triggered the unwind of the swap. The question raised to the Court was the existence of an unwind cost under the swap in addition to the cost associated with the reimbursement of the loan before maturity.

The Court of appeal of Paris, with a decision dated 27 November 2019, ruled that no amount shall be paid as to the unwind of the swap and ruled that the amount of 175,000€ (paid by the SCI in respect of the unwind costs plus legal interest as of 10 July 2014 – under penalty payment (astreinte)) shall be reimbursed to the SCI. In this context, the bank seized the French Cour de cassation, with the view of cancelling this reimbursement and receiving what it considers the contractual unwind costs.

The French Cour de cassation ruled that the Court of appeal of Paris rightly deducted, by the contractual terms and the behavior of the bank a manifest willingness, as to the borrower, to enter into an indivisible contractual scheme composed of the loan and the swap, with the cancellation of the first (the loan) resulting in the caducity of the second (the swap), the bank being obliged to pay back the unwind costs associated with the swap. 

This concept of contractual scheme (initially groupe de contrats) is commonly used by French case law and was named and revealed in France by French doctrine (firstly Bernard Teyssié, Les groupes de contrats, LGDJ 1975 cited in Droit des obligations P. Malaurie, L. Aynès, P. Stoffel-Munck LGDJ 11 ed. N°494 and A. Bénabent, Droit des obligations LGDJ e.g. 15 ed. N°330 et seq.) and is in line with the position of the French Cour de cassation, as described by the French doctrine (see Droit des obligations P. Malaurie, L. Aynès, P. Stoffel-Munck op. cit. N°495: «The unity of the group is easily admitted when the contracts are entered between the same parties or by the intermediary of the same pilot company». Other authors (Droit civil Les obligations Y. Buffelan-Lanore, Virginie Larribau-Terneyre), 17 ed. N°997 et seq. states that when the goal of the parties is the achievement of a global contractual operation using several contracts, reference is made to a contractual scheme (ensemble contractuel). For these later authors, « these contractual schemes are now a reality which is used by case law all the more than contracts are more and more driven by economy » (Droit civil Les obligations op.cit. N°998).

Ordinance Macron N°2016-131 dated 10 February 2016 (as ratified by Law N°2018-287 adopted on 11 April 2018, with an entry into force on 1 October 2018) gives the possibility for the judge to use the caducity (caducité), giving rise to the end of a contract with a potential halo effect on the contractual scheme, as a whole (not to mention the latitude for the judge to allow restitutions).

In this perspective, article 1186 alinea 2 of the French civil Code (as created by Ordinance Macron), states that «When execution of several contracts is necessary to the achievement of a single operation and when one of them disappears, other contracts which performance is then impossible by this disappearance and those for which the performance of such disappeared contract was a condition precedent of the willingness of one party are caduc ». Alinea 3 of such article states that « Caducity however only applies if the counterparty against which the caducity is opposed knew the existence of the single global operation when his willingness was given ». 

As such, it can be argued that there is no specificity applied in the fields of capital markets, as common civil principles and rules apply the same way, whereas ordinance Macron excludes derivatives (contrats financiers) from the unforeseen theory (théorie de l’imprévision), secular in administrative law and new in civil law (article L211-1 of the French monetary and financial Code), avoiding a potential disruption of the international recognized existing legal scheme based on the material adverse change (MAC) provisions.

The import of this case law on the capital markets, as a whole, remains to be determined. It is common practice that a bank offers a package composed of a loan and a hedge, resulting in the corporate paying a fixed interest amount and be covered against the increasing of a floating rate (to be paid under the loan). In this perspective, the case law of the French Cour de cassation may be applied with possible adjustments, offered by French regulation i.e. cancellation (nullité), resolution (resolution), caducity (caducité) of contract(s) and / or non-divisible contractual scheme (ensemble contractuel non divisible) with retroactive effect or not (article 1187 of the French civil Code).

It is reasonable to think that this case law may rather be considered as a reference for market participants rather than a decision not subject of amendments or evolution depending on the context of the case. If this is common practice that a bank be at the same time the lender and the hedger, it cannot be excluded that a corporate may enter into a hedge agreement with another bank. In this perspective, a non-divisible contractual scheme (ensemble contractual non divisible), may also be characterized.

Another question is the import of this decision on other non-divisible contractual schemes. This case law should apply to OTC derivatives (forward) or derivative admitted on markets (futures). In addition, it cannot be excluded as well that the hedging bank (or the corporate) has also entered contracts with other financial institutions. Should a non-divisible contractual scheme have an impact on other transactions, and on other non-divisible contractual schemes, such other transactions and other non-divisible contractual schemes may have to be unwind (or assigned), potentially ad lib.

As alinea 3 of article 1186 of the French civil Code states that « Caducity however only applies if the counterparty against which the caducity is opposed knew the existence of the single global operation when his willingness was given », other legal tools will have to be used by the judge.

Considering this, the current tools provided for by French regulation (e.g. caducity, nullity, resolution), as amended by Ordinance Macron put the judge in a situation to rule efficiently the cases brought before his Court (with also the possibility to declare a contractual relationship not enforceable against third parties – inopposabilité, or to declare a provision of a single contract of the non-divisible contractual scheme as non-written – clause reputée non écrite).

In this perspective, a distinction can be proposed based on the identification of the relevant contracts underpinning the non-divisible contractual scheme. When the judge can easily identify these contracts and can ‘close’ the non-divisible contractual scheme, a solution should be given accordingly (based on the current legal tools). If this is not the case (the end of the non-divisible contractual scheme cannot be identified), the parties may have indirectly to contractually apply a pragmatic decision of the judge, negotiating with their counterparties, based on the ratio decidendi of the case and inter alia article 1186 of the French civil Code alinea 3.

One should be confident on the pragmatism of the French Cour de cassation (especially the commercial Chamber), not only to apply the French civil Code (and French regulation, as a whole), but also previous case law architecture, based on concepts created and revealed by French doctrine.

Up to date as of 08 September 2021.

Ludovic Timbal Duclaux de Martin 

EIRL Me Ludovic Timbal Duclaux de Martin Avocat à la Cour – Barreau de Paris 

 

Jean-Christophe Grall joins Leaders in Law as the exclusive Competition Law member in France

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Leaders in Law, the leading platform in its field, is delighted to welcome Jean-Christophe Grall as our exclusively recommended & endorsed Competition Law expert in France. Jean-Christophe’s office is located in London.

Jean-Christophe Grall is the founding partner and managing partner of Grall & Associés for twenty years now. For more than 30 years, Jean-Christophe Grall has been providing legal assistance to industrial and service undertakings, notably through the drafting of commercial agreements and the setting up of comprehensive exclusive, selective or franchise distribution networks.

The competition division of Grall & Associés has one of the largest teams in the French market. Its experience working on cases enables it to assist each one of its clients by anticipating the reaction of the competition authorities and by developing the best strategy – be it advice or litigation – to respond in the right way to any complex situation that involves the French and European competition rules.

If you require any assistance in this area, please use the contact details provided in Jean-Christophe’s profile below or contact us at info@leaders-in-law.com & we will put you in touch.

Jean Christophe Grall

Europe and UK’s Response – Critical Raw Materials Supply Chains

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“To solve global warming, we have to fully electrify the entire economy, including the transportation fleet. There are currently 1.3 billion cars on the planet. By mid-century, that will be close to 3 billion, just light duty cars. To make all of those electric vehicles, as opposed to internal combustible engine, you’ll need more than $5 trillion worth of cobalt, nickel, lithium and copper. That’s incremental, in addition to all the demand for those materials, for just business as usual activities.” CEO Kurt House, KoBold.

This is just one of the many similar public statements from governments, business owners and investors drawing attention to the scale of the task ahead to transition societies and industries to a world where energy needs will depend less on fossil fuels and more on green energy and, as will be seen, is the focus of recent western government actions and policies.  Cobalt, nickel, lithium and copper are in relatively abundant supply. But that is not the case with other minerals, such as rare earths. Without these particular “critical raw materials” there will be no large-scale development of the magnets that will power the EVs and wind turbines which are crucial to the success of green energy policies in the western world.

China has dominated the global mining production of REE, the processing of REE into RE metals and alloys, and the manufacture of permanent magnets for the last 20 or so years.  Whilst China’s share of the world’s REE mining has declined in recent years, it still manufactures around 90% of all NdFeB metals and magnets. In 2018 China supplied the EU with 98.5% and the USA with 95.2% of their respective imports of RE metals and alloys.

The creation of resilient non-Chinese rare earth to magnet supply chains (NCSC) is now the focus of many western governments to reduce their reliance on Chinese imports.

What are “rare earth elements” and “permanent magnets”?

Rare earth elements (REE) are a group of 17 chemical elements that occur together in the periodic table. They are very difficult to mine because they are rarely found in economically extractable concentrations.

REE and metals and alloys that contain them are used in many everyday devices such as batteries, smart phones, catalytic converters, magnets, fluorescent lighting and much more. They also play an essential role in defence electronics in precision-guided weapons and communications equipment.

They are considered to be “critical raw materials” (CRM) because of their “critical” importance, in particular to the production of the magnets that power electric vehicles (EVs) and wind turbines.

A “permanent magnet” is an object made from material that is magnetized and creates its own persistent magnetic field – an everyday example is the simple “fridge” magnet. The strongest, lightest and most commercially available permanent magnet is the NdFeB magnet formed by neodymium (Nd) iron, and boron with praseodymium (Pr) and other REE. This is the magnet most commonly used in motors for hybrid vehicles, EVs and wind turbines.

The global demand for NdFeB magnets is projected to double this decade. The European Commission’s long-term outlook is, “In addition to rapidly rising demand driven by electric vehicles and energy storage, demand for rare earths critical for products like wind turbines could increase ten-fold by 2050”.

Western governments’ actions and initiatives.

A key objective of the establishment and maintenance of resilient CRM supply chains into the west is to ensure that the necessary components for the manufacture of the equipment and infrastructure that is crucial to achieving the transition to sources of greener energy, is increasingly independent of, and less reliant on, China.

Government support for the REE industry in general and NCSC in particular is essential if the private sector is to be able to economically produce the crucial components for the EV and wind turbine sectors. Support will need to come in many forms, including grants, tax allowances, debt financing and equity investment.

Over the last 12 months or so several western governments have announced initiatives and policies in relation to CRM which are necessary to transition to an energy system which is substantially less dependent on fossil fuels.

European Union

In September 2020 the European Commission released its Critical Raw Materials Action Plan focussing on “the most pressing need, which is to increase EU resilience in the rare earths and permanent magnets value chains, as these are vital to most EU industrial ecosystem”.

United Kingdom

The UK Government does not have a critical raw materials policy as such.

On 15 March 2021 in the course of his speech to the House of Commons, the Vice-Chair of the All-Party Parliamentary Group for CRM outlined the Group’s priorities in terms of government policy including “the development of a critical mineral midstream” i.e. the production of RE metals and alloys and the manufacture of RE permanent magnets in the UK.

The UK government’s objectives are ambitious; current policy identifies 2030 as the year when:

  • offshore wind turbines will produce more than enough electricity to power every home in the country; and
  • sales of cars with internal combustion engines will be banned.

 US

In 2017 President Trump initiated a strategy to ensure secure and reliable supplies of CRM. In February this year, President Biden ordered reports within 100 days from a variety of government agencies, identifying the risks in the supply chains for CRM including REE and policy recommendations to address those risks.

Canada

In March 2021, Canada, a major resource economy, released its list of minerals considered critical for the sustainable success of Canada and “our allies”.

Australia

Another major resource economy, Australia, earlier this year released its 10-year “road map” to create more REE processing capacity as part of a broader push to make Australia one of the developed world’s linchpin suppliers of REE and other CRM.

International cooperation

The policies of EU, UK, US, Canada and Australia all acknowledge that the establishment of NCSC to meet their projected domestic REE processing and magnet manufacturing ambitions will require international cooperation and investment.

Examples of such cooperation include:

Europe

The European Raw Material Alliance (ERMA) is an alliance of organisations from the European public and private sectors covering the entire critical raw materials value chain. Its immediate objective is to increase the resilience of EU supply chains for rare earth magnets and motors, batteries, and fuel cells.

The EU’s Action Plan highlights the need to diversify sourcing of CRM from third countries requiring “strategic international partnerships and associated funding to secure a diversified supply of sustainable critical raw materials, including through undistorted trade and investment conditions, starting with pilot partnerships with Canada, interested countries in Africa and the EU’s neighbourhood”.

US – Canada

In June 2019, the US and Canadian governments agreed to develop resilient, integrated North American supply chains for CRM. A Critical Minerals Working Group has been established and Canada now participates in the US-led Energy Resource Governance Initiative.

US – Australia

In September 2019, the US and Australian governments agreed to develop a Critical Minerals Action Plan to “improve the security and supply of rare earths and other critical minerals in the United States and Australia; increase US-Australia connectivity throughout the supply chain of critical minerals; and leverage the interest of other like-minded partners to improve the health of the global critical minerals supply chain.”

US, Canada and Australia

The US, Canada and Australia have created the Critical Minerals Mapping Initiative to assist with the building of a diversified critical minerals industry.

US, UK, Canada, Australia and New Zealand – The “Five Eyes”

There have been several press reports concerning the possible expansion of the “Five Eyes” intelligence-sharing alliance into a strategic economic relationship that pools key strategic reserves such as CRM and develops NCSC amongst its members.

In its March 2021 Report, the Polar Research and Policy Initiative recommended the creation of a Five Eyes Critical Minerals Alliance with a particular focus on Greenland’s CRM deposits.

Conclusion

It is early days yet to assess the effectiveness of these policies in the development of NCSC to produce permanent magnets that will be price competitive with Chinese producers. There is considerable private sector activity around “the development of a critical mineral midstream” (with government support) but, as The Times’ editorial on 5 April warns, “[T]o reduce reliance on Beijing, the first step is to mine rare earths in new locations”, an issue we consider in the next article in this series.

Laetitia Amzallag

New Article 82-1 of the French Code de procédure civile

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Article 82-1 of the French Code de procédure civil and challenge of the competence of the new judicial tribunal (tribunal judiciaire)

Decree n°2019-1333 dated 11 December 2019 (Article 2) has this year introduced a new Article 82-1 in the French Code de procédure civile, which is said to simplify incompetence exceptions (heading of the Section 2 of the said decree : the simplification of incompetence exceptions).

This new Article 82-1 came into force on 1 January 2020 and establishes a new derogatory scheme creating a possibility to challenge the competence of the judicial tribunal. The judicial tribunal was recently created with the merger of the TGI (Tribunal de Grande Instance) and the TI (Tribunal d’Instance), such jurisdictions dealing with civil matters. Due to the coronavirus Covid-19 sanitary crisis, legal practitioners did not really have the time to test this new regime.

As a general rule (Article 74 of the French Code de procédure civile), an incompetence exception has to be raised in limine litis, that is to say, at the first hearing, before any discussions on the ground of the case, and by way of principle, before the same judge ruling on the case. On the contrary, and by way of derogation, the new scheme sets up a possibility to raise an incompetence exception, before the first hearing, either the parties or the judge raising it. If trigged, the parties or their lawyers are informed right away by any means giving fixed date (date certaine). In this perspective, the file is transmitted to the registry (greffe) of the judicial tribunal, which in turn, transfers the case to a designated judge. The competence of this newly appointed judge may also be challenged, by him or the parties, during a period of 3 months, by the transfer of the case to the President of the judicial tribunal. According to the new regulation, the President of the judicial tribunal has to transfer the case to a new appointed judge, and such a decision cannot be challenged. However, the competence of this new appointed juge may be challenged before this new judge by the parties, and the decision ruling on the competence may be appealled within a period of 15 days, as of the date of the notification of the decision.

The President of the judicial tribunal appears to be the keystone of the scheme, which is in line with the role usually attributed to him, as already in charge for example of summary proceedings (e.g. référé). The fixed date (date certaine) and the 3 months timeframe appear to be crucial, and purport to avoid endless discussions on the competence.

However, and surprisingly, this new scheme creates a very sophisiticated legal architecture, not to mention the potential right to call the case before the French Cour de cassation (Supreme Court). In such a context, these new rules may unfortunately be used to artificially challenge a procedure and lenghten it. An author has recently described this mecanism as a potential Trojan Horse, allowing dilatory procedures (Katia Bennadji, Dalloz actualité, 22 July 2020, « L’article 82-1 du Code de procédure civile : cheval de Troie au service de manœuvres dilatoires »). This remains true to a certain extent, as this new Article 82-1 has been introduced in a context where, on the contrary, a lot of other procedural rules are aimed at streamlining the procedure e.g. concentration of the legal means (concentration des moyens), estoppel or prohibition of dilatory procedures.

In a constant movement, the French Cour de cassation draws the outlines of the concentration of the legal means principle. The French Cour de cassation (C. cass. civ. 2, 11 April 2019, n°17-31785), recently stated that the plaintiff, before any rulling on the case, has to expose all the legal means considered as the ground for the claim. This means that, in a same instance, an overruled legal claim cannot be raised again in connection with another ground based on the same object, as the one on which the tribunal has already definitly stated. According to this case law, the rule of the concentration of the legal means, uses the same underpined concept as the fin de non-recevoir (i.e. res judicata pro veritate habetur), but is not an exception procedure as rather deals with the ground of the case. It remains to be seen however how this case law and all the case law hereof, will be used by legal practioners to limit the import of this new Article 82-1. In this perspective, it is reasonnable to think that they may wish to use the concentration of the legal means principle, also in connection with procedure exceptions, such as incompetence.

In addition, the estoppel theorie, albeit originally English law concept, is now part of the French legal system. In a considerably important decison, the French Cour de cassation, recognised and introduced into French law, this anglo-saxon concept (C. cass. Ass. Plen., 27 February 2009 (n°07-19.841)) and considers it as a fin de non-recevoir (i.e. a legal mean aiming at having declared the claim of the other party as not recevable). In this respect, the French Cour de cassation has stated that actions of the same nature based on the same conventions, opposing the same parties may give rise to a sanction, provided that a party kept contradicting itself, at the expenses of others. More specifically, the French Cour de cassation, Civ. 2, dated 15 March 2018 (n°17-21.991) reitereted this position, ruling that « (…) the principle according to which no one may contradict itself at the expenses of others, sanctions the procedural attitude consisting, for a party, during a same instance, to adopt contrary or incompatible positions leading the adversary in error as to its intentions ». Thus, it is reasonnable to think that legal practioners will use, inter alia, the estoppel theory to limit the possibility to use incompetence exceptions. In addition, even if the contradiction may occur in the same instance, it cannot be excluded that a judge may wish to streamline the procedure and prevent a party from utilising incompetence exceptions several times, in a same context.

A judge would also have the possibility to use article 32-1 of the French Code de procédure civile, which states that a person acting in justice in a dilatory manner may be convicted to a civil fine up to 3.000 euros, without prejudice of dammages that would be claimed. In that event, the amount related to the civil fine is paid to the French Trésor Public.

To remain in the real trend of the procedure regulation, i.e. constant equilibrium between defense rights and efficiency of the legal system, judges and legal practioners are in the position to put forward a strict construction of Article 82-1 of the French Code de procédure civile. Constructions rules are clear in this respect : exceptions or derogations have to be interpreted strictly, and the scheme created is created by way of exception. This means that each time a lawyer would invoke a competence exception on the basis of this new Article 82-1, the judge would have to conduct a teleological construction, in the view of maintining a sufficient level of efficiency of the procedure, especially in a context where (i) ECHR (European Convention of Human Rights) already imposes an effective recourse in every steps of the procedure and (ii) numerous litigations deal with international matters, allowing the parties to raise incompetence exceptions, also on the ground of judicial international private law.

Up to date as of 22 July 2020.

 

Football and administrative decisions

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French regulation of football is permeated with administrative law. This is particularly true in respect of decisions and sanctions applicable to football clubs.

This is the reason why the Conseil d’Etat remains one of the ultimate French jurisdictions entitled to control the regulation produced by French agencies dedicated to football. In this perspective, the Conseil d’Etatoverseas the production of norms in the field of sports law and can be considered as the key team player in this wide and complex legal environnement.

In a very interesting case, available at the beginning of March 2020, the Conseil d’Etat (Conseil d’Etat case, Fédération Française de Football, Req. 424347) confirmed the possibility for the executive committee of the FFF (Fédération Française de Football) to accept the propositions of the CNOSF (Comité National Olympique et Sportif Français) given in the course of a conciliation and to additionally ask the DNCG (Direction Nationale du Contrôle de Gestion) to convene and to take other substitution administrative measures. In such a context, to create rights with a decision qualifying as an administrative decision (acte unilatéral), the FFF has to take a new decision containing its own legal and fact reasons (motifs de droit et de fait), this later cancelling the first one of the DNCG. This decision of the Conseil d’Etat deals with not only the way a decision qualifies as an administrative act, but also with the way the administrative judge will control its legality under the hierarchy of norms. What can be the intensity of this control over the administrative act (see e.g. Didier Truchet, Droit administratif, puf, 8th ed. 2019, p. 237, n°723 et seq.) ? This case illustrates, amongst others, the power of regulation of the administrative judge and his key function in the football economy.    

In this case, for financial reasons, the first measure ruled by the DNCG prohibited Racing Club de Lens from accessing Ligue 1. The DNCG is an entity granted by law an independent power of assessment ensuring the administrative, legal and financial control of sport associations and companies. More precisely, the aim by law of the DNCG is not only to ensure the financial sustainability of associations and companies but is also to encourage the respect of sport equity and to contribute to the economic regulation of competitions. Albeit considered as independent, the DNCG does not have the legal personality and forms part of the FFF.

After a mandatory conciliation before the CNOSF on 25 July 2014, other measures were instead proposed by such entity: (i) limitation of the number of employees and / or (ii) recruitment control. On 28 July 2014, the executive committee of the FFF thereafter decided to accept these other administrative substitution measures and additionally asked the DNCG to convene in order to determine how Racing Club de Lens would play in Ligue 1. In such a context, this latest decision was challenged by a relegated team from Ligue 1 to Ligue 2 (Sochaux) (being ranked 18 after the championship and hoping staying in Ligue 1).

Such claim is dismissed by the Conseil d’Etat for the second time.

One of the main subjects arising from this case and developed in the report of the public draftsman (rapporteur public – see conclusions M. G. Odinet, rapporteur public available on the website of the Conseil d’Etat) deals with the qualification of the second decision dated 28 July 2014 issued by the FFF and the correlative cancellation of the first decision dated 26 June 2014 of the DNCG.

To rule the case, the Conseil d’Etat uses the manifest error legal means (erreur manifeste d’appréciation) to control the legality of the new decision issued by the FFF after the conciliation on 28 July 2014, and dated the same date.

In this respect, the Conseil d’Etat followed the conclusions of the public draftsman: the executive committee of the FFF did not take an inconsiderable risk in cancelling the first decision of the DNCG dated 26 June 2014 and in deciding instead on 28 July 2014 the limitation of the number of employees and / or the recruitment control. No EMA (erreur manifeste d’appréciation) can derive from this new decision.

Even if not raised in the present case, it might be argued that a claim based on the lack of interest to act (intérêt à agir) of Sochaux could also have solved this case. In this perspective, the interest to act of Sochaux could have successfully been challenged in the first instance as these two teams were playing in different leagues. In this perspective, it is not because Racing Club de Lens would have stayed in Ligue 2 (due to financial reasons) that Sochaux would had won the right to stay in Ligue 1. Assuming that Racing Club de Lens would have stayed in Ligue 2, due to financial reasons, another team of Ligue 2 woud had been upgraded instead of Racing Club de Lens and Sochaux would had gone to Ligue 2 anyway, due to its bad ranking in Ligue 1. In other words, it might be argued that the financial difficulties of Racing Club de Lens do not have an impact on the ranking of Sochaux in Ligue 1, but, instead, have an impact on another team of Ligue 2. As such, Sochaux could also have lost the case on the ground of lack of grievance (défaut de grief) of the FFF decision. In addition, it can also be argued that Sochaux cannot be considered as representing the collective interest of the whole profession. 

By this decision, the Conseil d’Etat hopefully confirms the latitude of French sport agencies vested with public power prerogatives (prérogatives de puissance publique), but remains, with the ECHR (European Convention of Human Rights) one of the ultimate regulation entities.

Up to date 10 March 2020.

Ludovic Timbal Duclaux de Martin

Rights and Liberties, Liability of the French State and Judicial Review

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On 24 December 2019 the Conseil d’Etat ruled that indemnification can be granted under French law on the ground of a prejudice suffered due to the application of a law ruled contrary to the Constitution by the Conseil Constitutionnel.

The Conseil d’Etat now leaves the door open to a new possibility for indemnification, within the framework of a QPC examination (Question Prioritaire de Constitutionnalité)) or by application of Article 61 of the Constitution (subject to conditions). Based on the hierarchy of norms, this new kind of liability of the State is stated in three decisions dated 24 December 2019 (req. N°425981, N° 425983 and N°428162).

This new regime lives now next to the already existing liability due to the application of the law (responsabilité du fait des lois) based on equal treatment before public burdens (principe d’égalité des usagers devant les charges publiques).

A QPC is a question raised by a tribunal or a court aiming at determining the conformity of a law to the Constitution. Article 61-1 of the French Constitution states in this respect that during an instance before a tribunal or a court (private or public), a plaintiff can support the view that a law contravenes rights and liberties guaranteed by the French Constitution. In such a situation, the Conseil Constitutionnel can be seized after remand of the case by the Conseil d’Etat or the Cour de Cassation.

The general principle under French administrative law is that the French State can be sued simply because of the application of a law, provided that (i) the plaintiff has suffered a prejudice qualifying as important and specific (grave et special) and (ii) the law in question does not exclude the possibility for a plaintiff to be indemnified. This type of liability is applicable even if the French State is not considered as being in default with the application of the law and is named liability without misconduct (responsabilité sans faute de l’administration).

This possibility started in France at the beginning of the 20th century (Conseil d’Etat, case Couitéas – 1923), with the admission of liability without misconduct of the French State due to an administrative decision of non-enforcement of judicial decisions. In such a case, in the general interest, the French State may decide not to enforce a judicial decision, but in turn, has to indemnify the plaintiff. The ground for indemnification is the breach of equal treatment before public burdens principle (principe d’égalité des usagers devant les charges publiques). This principle is taken from the French 1789 declaration of the human rights and the citizen: each member of the community has to bear a certain amount of public burdens, but equal treatment shall prevail.

This principle has expanded thereafter with the admission of such a claim against a law (and not against an administrative decision only) by the Conseil d’Etat in 1938 (Conseil d’Etat, case Société la Fleurette – 1938). Such a case establishes that, in the silence of the said law, a plaintiff shall not bear a charge created by a law that he/she would not normally lie with, it being specified that, in the event of silence of the said law, such law shall not be considered as excluding the liability of the French State (Conseil d’Etat case Coopérative Agricole Ax’ion – 2005).

The liability of the French State can also be triggered due to its obligations to ensure the application of its international conventions, to indemnify all the prejudices resulting from the application of a law passed illegally because contrary to an international convention (e.g. ECHR) (Conseil d’Etat, case Gardelieu – 2007).

Now, according to the new decisions of the French Conseil d’Etat dated 24 December 2019, the other grounds for indemnification are (1) that the decision of the Conseil Constitutionnel does not decide that no indemnification shall be granted either (i) by excluding it expressly or (ii) by letting alive all or only a part of pecuniary effects caused by the law, that an indemnification would challenge, (2) the existence of a prejudice and (3) the link between the prejudice and the unconstitutional application of the law.

As a consequence, a plaintiff may be indemnified in the following conditions : (i) no express exclusion of indemnification by the Conseil Constitutionnel (ii) no all or part of pecuniary effects left alive by the Conseil Constitutionnel that an indemnification would challenge (iii) and (iv) a link between the prejudice and the unconstitutional application of the law.

According to the decision of the Conseil d’Etat, certain pecuniary effects of the law declared unconstitutional may prevail upon an indemnification. In this respect, it is reasonable to think that an administrative judge would apply an economic balance check between the necessity of indemnifying the plaintiff and the profit of letting alive all or only a part of pecuniary effects caused by the unconstitutional law. An economic balance check is already applied in other circumstances (expropriation with the application of the théorie du bilan coûts / avantages), by the Conseil d’Etat (Conseil d’Etat case Ville Nouvelle Est – 1971).

In this perspective, it is reasonable to think that the application of an unconstitutional law may survive if it is more interesting from an economic point of view. This mentioned carve out is quite important as it gives the possibility to the Conseil Constitutionnel to let alive, even if the law is declared unconstitutional, and then cancelled, parts of its pecuniary effects.

In addition to the breach of equal treatment before public burdens principle (principe d’égalité des usagers devant les charges publiques), it can be suggested that other principles may underpin this kind of liability: preservation of legal safety (sécurité juridique) and /or  granted rights (préservation des droits acquis), and / or economic balance check, to take into account all the adverse financial effects that an indemnification would cause.

The claim for indemnification can obviously be barred by effluxion of time, it being specified that the 4 (four) years period during which such a claim can be brought only starts if the prejudice resulting from the application of the law may be known in its reality and its scope by the plaintiff, without the possibility for him or her to be regarded as ignoring the existence of his / her right to claim until the declaration of unconstitutionality.

The indemnification request has to be brought before the administrative judge (Tribunal Administratif). It remains however to be seen whether legal practioners will try to use these decisions of the Conseil d’Etat to sue the French State before the judicial order (ordre judiciaire). Under French law, the French Conseil d’Etat is the highest court entitled to address administrative cases and is part of the administrative order (ordre administratif) whereas the judicial order (ordre judiciaire) is composed of judiciary tribunal and courts (jurisdictions judiciaires) and is competent for private matters. How dealing with the fact that a tribunal or a court may apply deliberately after the declaration of unconstitutionality a law previously declared unconstitutional outside the scope of the carve out of the ratio decidendi of the Conseil d’Etat? Would Article 141-1 of the Code de l’organisation judiciaire, which gives competence to the judicial order in the event of indemnification of a prejudice due to malfunction of judicial public service, apply? It is reasonable to think that such indemnification would not be allowed even if legal practitioners may wish to test it, and may be, open this possibility, for the residual adverse effects on the plaintiff of the law declared unconstitutional.

A lack of indemnification by the French State may also give rise to a lawsuit before the ECHR (European Convention on Human Rights), a plaintiff would still have in fine, the right to be indemnified on the basis of the application of a law declared unconstitutional. From a theoretical point of view, and on the basis of the hierarchy of norms, letting a country member of the European Council apply a law declared unconstitutional could raise issues.

Up to date 24 December 2019.

Ludovic Timbal Duclaux de Martin

Ludovic Timbal Duclaux de Martin

Leader Announcement

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Me Ludovic Timbal Duclaux de Martin is shortlisted by Global Law Experts for the following award:

Sports Law – Lawyer of the Year in France – 2019.

Ludovic Timbal Duclaux de Martin

Increase in share capital (football club – by extension)

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The French Supreme Court related to private matters (Cour de cassation) ruled as a ratio decidendi on 28 November 2018 that the single vote on the resolution related to an increase in share capital reserved to employees is considered satisfactory to regularize an increase in share capital not subject to a vote on a preceding general meeting. This allows the possibility for a general meeting to ratify an increase in share capital reserved to employees (due to the relativity of the nullity – nullité relative). The legal concept that may be considered as underpinning the ratio decidendi is the French appearance theory: the ratification is being made possible by the subscribers (employees) having legitimately believed that the increase in share capital was regularly made.

This is in line with the spirit of company law to allow ratification as much as possible to ensure legal safety. In light of this, it is reasonable to think that this ratio decidendi can therefore be extended to other types of increase in share capital (not only reserved to employees). In particular, this ratio decidendi would be used (with an analogical reasoning) for an increase in share capital in the field of sports law (or IPOs), such as in football. In this respect, an increase in share capital of a football club would be subject to a ratification in the same manner.

Author: Ludovic Timbal Duclaux de Martin