Unilateral termination of a contract under Article 1226 of the Civil Code: advantages and ambiguities

Unilateral termination of a contract under Article 1226 of the Civil Code: advantages and ambiguities

Article 1226 of the Civil Code, in force since Ordinance No. 2016-131 of 10 February 2016, provides that:

“The creditor may, at its own risk, terminate the contract by way of notification. Save in cases of urgency, it must first give the defaulting debtor formal notice to perform its obligation within a reasonable period of time.

The formal notice must expressly state that, should the debtor fail to perform its obligation, the creditor will be entitled to terminate the contract.

Where the non-performance persists, the creditor notifies the debtor of the termination of the contract and the reasons on which it is based.

The debtor may at any time bring the matter before the court to challenge the termination. The creditor must then prove the seriousness of the non-performance.”

The report to the President of the Republic relating to this ordinance reforming contract law explains that the legislator's objective with Article 1226 is to offer “an autonomous option … to the creditor who, being the victim of non-performance, will henceforth have the choice, in particular in the absence of an express termination clause, between the two modes of termination, judicial or unilateral. This innovation is part of a perspective of economic efficiency of the law. It is indeed based on the idea that the creditor who is the victim of non-performance, rather than enduring the uncertain wait of litigation and bearing the costs inherent in the court's intervention, may, immediately or within a reasonable period, enter into a new contract with a third party.”

Given the often excessive delays of judicial proceedings, this objective of “economic efficiency of the law” is indeed commendable. However, this provision contains areas of ambiguity that confer on the judges responsible for interpreting it a broad discretionary power that they do not appear inclined to limit.

On the seriousness of the breach

Article 1226 provides that the non-performance must be sufficiently serious to justify termination of the contract. This wording immediately raises questions as to the precise meaning of seriousness, the text remaining incomplete in this respect and the case law still limited.

The development of case law on this issue has been gradual. Originally, the Court of Cassation referred to the seriousness of the debtor's conduct to justify termination. This subjectivist approach was based on the debtor's bad faith and disloyalty. Nevertheless, with the Tocqueville judgment of 1998, the Court began to pay greater attention to the seriousness of the contractual non-performance itself, adopting a more objective perspective.

The reform of the law of obligations consolidated this orientation by objectifying the notion of seriousness. Henceforth, the creditor may proceed with termination if the seriousness of the breach is established, whether by reason of the importance of the obligation breached or of the considerable harm suffered by the creditor.

A 2016 judgment of the Court of Cassation (Cass. com. 6 Dec. 2016, No. 15-12.981) provides relevant guidance on this issue. The Court there holds that “the seriousness of the breach by one of the parties may justify the other party putting an end to the engagement unilaterally at its own risk.” This recent decision reiterates that the requirement to focus henceforth on the seriousness of the contractual non-performance does not exclude the possibility of assessing that seriousness by taking into account the debtor's conduct.

Nevertheless, the element of fault (the “seriousness of the non-performance”) requires an assessment that is necessarily subjective, depending on the facts of each case, which leaves the judge considerable latitude in assessing seriousness, thus presenting a degree of judicial uncertainty. In this respect, judicial review is of course necessary, since it is the only safeguard against abuses.

On the conditions of termination

Article 1226 sets out explicitly the steps required to achieve termination of a contract. It is nonetheless essential to note that termination is not an obligation for the creditor, but rather an option.

First, the creditor must establish a non-performance of the contractual obligation that is, in its view, sufficiently prejudicial. It must then send the debtor a formal notice, granting it a reasonable period to comply with its obligations. The Civil Code does not provide a precise definition of a reasonable period, leaving this assessment to the judge's discretion.

In a very recent judgment of 18 October 2023, the Court of Cassation (Appeal No. 20-21.579) held that it was not necessary for the Court of Appeal to examine whether a formal notice had previously been given where the conduct of the contracting party was of such seriousness as to make the continuation of the relationship manifestly impossible.

Nevertheless, where the seriousness is not such that the continuation of the relationship is manifestly impossible, we consider that this period must be sufficiently long to allow the debtor, if it considers that the non-performance is not sufficiently serious, to comply or respond to the allegations and, if necessary, to bring the matter before the courts, including in summary proceedings.

By contrast, if, after the formal notice, the debtor fails to comply or the court (on the merits or in summary proceedings) has not been seised, the creditor has the option of terminating the contract by notification. The Civil Code does not impose any specific form for this notification. Termination takes effect upon notification, from which point the parties may proceed with restitution if necessary.

On the consequences of termination

Questions nonetheless remain:

- If the court holds that the debtor's non-performance was not sufficiently serious, is the contract nevertheless effectively terminated?

- If the termination is justified, but its effectiveness requires a further decision (for example an eviction following the termination), may the court paralyse it or render it ineffective?

An essential point of Article 1226 is the statement that termination is carried out “at the creditor's own risk.” In our view, this expression means that a termination under Article 1226 is in any event acquired by the creditor, who will have to demonstrate the seriousness of the non-performance, but can only face an award of damages for wrongful termination of the contract.

The fourth paragraph of Article 1226 of the Civil Code indeed provides that: “The debtor may at any time bring the matter before the court to challenge the termination. The creditor must then prove the seriousness of the non-performance.”

Now, in our view, this provision implies that the termination, if challenged, is already effective. The debtor can then hope only for damages if the creditor is unable to prove the seriousness of the non-performance.

Indeed, the scope of this provision, as well as its objective of economic efficiency, would be greatly reduced if the contract were not deemed terminated as from the creditor's notification of termination. Likewise, what would be the scope of a justified termination of a lease if the court subsequently refused to order the eviction of the tenant?

Thus, a termination under Article 1226 of the Civil Code represents a significant judicial uncertainty, since the judge has a broad power of assessment regarding the seriousness of the non-performance, and a question remains as to the fate of a terminated contract whose non-performance has not been found sufficiently serious.

Nevertheless, this article confers on the creditor the unilateral power to terminate a contract in the event of substantially prejudicial non-performance, a welcome provision in view of the current delays in judicial proceedings and the need to reconcile contract law with economic efficiency.