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The breach of contract in French law: between safety of expectations and efficiencyPierre GarelloFaculte dEconomie Appliquée, Universite de Droit, dEconimie et des Sciences d Aix-Marseille,3 Avenue Robert Schuman, Aix-en-Provence 13628, FranceAccepted 20 August 20021. Introduction: which path will lead us to a better understanding of French contract law?Contracts are marvellous tools to help us to live in a world of uncertainty. They allow us to project ourselves into an unknowable future, to invest. Lawyers who have inspired the French Civil law and contributed to its evolution, as well as most lawyers in the world, have clearly perceived the necessity to protect that institution. “The contract is, as far as the individual is concerned, the best forecasting instrument generating legal security, and the favored path to freedom and responsibility that is necessary for the flourishing of human beings in a society.”1Contracts are far from miraculous tools, however. If they make life easier, they do not necessarily make life easy. As the future unfolds, one or both contracting parties may be tempted, or compelled, to break his or her promise. But, the mere fact that the contract is running into difficulties does not force the law to do something!2 It is only when one of the parties does not perform that the law (the court, the legislation), backed with coercive power, has to give an opinion, to decide the case. In order to do so some principles, or theories, are required to reach a judgment as to what is the best thing to do.The present study of the French contract law is based on the premise that, from a law and economics point of view, there exists basically two possible ways to address this concern: the first approach requires that whenever a problem arises, an assessment be made of all costs and benefits incurred by the parties. In other words, one must attempt to evaluate in a sufficiently precise way the consequences of the court decisionor of the rule of law under considerationfor both parties as well as for third parties (including potential future contractors). The lawthenand more precisely here, contract lawshould aim primarily at providing the right incentives to contracting parties, where by “right incentives” one means incentives to behave in such a way that the difference between social benefits and social costs be maximized. It will be argued below that French contract law sometimes follows this approach.The second possible attitude looks, apparently, pretty much like the first. The guiding principle is again that the law should provide to members of the society the right incentives. But one must immediately add that the judgeor the legislator, or the expertis not in a position to evaluate and compare the social costs and benefits of alternative rules of law. He or she just does not know enough. One does not know, for instance, all the effects of a rule that would allow one party to breach a contract, without the consent of the other party. Indeed, even if the victim of the breach is promised a fair compensation, allowing such a rule globally might have a negative effect on the very purpose of the institution, which is to reduce uncertainty. As a consequence, the law should adopt a goal less ambitious than the maximization of social well being. That goal could be “to protect contracts,” or, in other terms, to create a set of incentives that lead individuals to feel confident that their legitimate expectations will be fulfilled.As pointed out, those two attitudes may appear the same, differing just in degree. The first one assumes more knowledge on the part of lawyers and legislators than the second. However, when it comes to practical decision-making, differences turn out to be important, because the more knowledgeable you think you are, the stronger will be the incentive to regulate the contract, and the lower will be the respect for tradition and customs on which daily expectations are based.The two approaches outlined above are well known to economists. The first one is the so-called “mainstream” (Paretian) approach and underlines most of the existing economic analysis of law.3 The second one, stressing the problem of knowledge, is far less developed.4 We will call it the “safety-of-expectations approach,” or the Austrian approach to law and economics, because it can be found primarily in thework of the Austrian school of economic thought, and especially in Hayeks studies.“The rationale,” says Hayek, “of securing to each individual a known range within which he can decide on his actions is to enable him to make the fullest use of his knowledge, especially of his concrete and often unique knowledge of the particular circumstances of time and place. The law tells him what facts he may count on and thereby extends the range within which he can predict the consequences of his actions. At the same time it tells him what possible consequences of his actions he must take into account or what he will be held responsible for.”5The reason why these two approaches are mentioned at the outset is that, when one studies French contract law, it is difficult to reconcile all of it with a single approach. True, the mainstream, neoclassical approach, based on the assumption that rules be chosen that maximize social wealth (or, at other times, that lead to a Pareto-efficient outcome), can help us to understand an important part of that body of law. But, as will be shown, certain French doctrines cannot be reconciled with neither a Paretian approach, nor a wealth maximizing approach. In some instances, the lawseems to be more concerned with the safety of expectations.In the next two sections we will examine the main doctrines and rules of French contract law trying to identify those that are compatible with both principles and those that are compatible with only one. If none of those sets are empty, it will mean that the French law of contract is not totally coherent; it cannot be brought under a unique unifying principle of explanation. The next natural questionwould then be whether French lawismoving towards one principle and away from the other. However, this paper will not address this question.The paper is organized in two parts. Indeed, for reasons briefly mentioned above, it is important to underline in a first part the many things the law does in order to avoid breach of contract: what can be done in order to save a contract when the parties are having difficulties performing, and what is forbidden? The second part deals directly with the breach of contract. It will be shown that French law differs in some important respects from other contract laws.2. Saving the contract6We will study the various attempts to “save” the contract by looking first at the conditions for invalidity (Section 2.1), then at the various possibilities left to the judge to interpret the terms of the contract (Section 2.2) and end with the study of the cases where the judge is authorized to change the terms of the contract (Section 2.3).2.1. Invalid contractsOne way to save the contract is to prove that there was no valid contract in the first place! Formation defenses as defined in the French law are roughly identical to those found in the contract laws of other countries. The main defenses are: incompetency (incapacité), mistakes (erreur), fraud (dol), duress (violence), absence of cause (reminding us of the doctrine of consideration in the bargaining theory), failure to disclose information, lésion (a defense close to unconscionability),7 or, may be more specific to French law, a conflict between the private agreement and ordre public, i.e. public policy, or “law and order” (see art. 6 and 1134 of the French Civil Code, henceforth C.civ.). In all these instances, an action may be taken for annulment of the contract, the judge being the only one entitled to invalidate a contract.But, what exactly is meant by invalidity in the French law? What are the consequences? The French law distinguishes between absolute invalidity (nullité absolue) and relative invalidity (nullité relative). The first category includes all the contracts that are against what is called ordre public de direction, that is to say, contracts that violate a public policy judged to be beneficial to the society as a whole and not only to those individuals involved in that particular contract. For such contracts nothing can be done and complete nullity cannot be avoided. The second category is made of contracts that violate the ordre public de protection, that is, contracts in which one party does not respect a public policy designed to protect weaker parties. In those circumstances, the victim who the law is trying to protect may choose to let the contract stand after modifications to the contract.8In both cases, however, the result is as if the contract had never existed, and retroactivity with restitution is the general principle: one is supposed to go back to the situation that prevailed before the contract was created: the status quo ante. Parties are relieved of their obligations, and damages can no longer be awarded, but it is still possible to bring a tort law action.9From an economic point of view, most of the formation defenses mentioned have already been analyzed in various places, the bottom line being: any contract that is not voluntary must be considered as invalid. One can see however that, from a strictly Paretian point of view, it is not clear that all involuntary contractse.g. contracts relying on a mistakewill always be dominated by the situation prevailing before the contract. If one chooses the Hayekian, safety-of-expectations point of view, such a dilemma is less likely to occur to the extent that people expect transactions to be voluntary. Consequently, any involuntary transaction violates some “legitimate expectations.” Before leaving the topic of nullity, two interesting facts deserve attention. First, it must be pointed out that exceptions exist to the general principle of retroactivity with restitution. In particular, if the contract is null due to the deliberate action of one of the parties (e.g. In the case of fraud), the principle is softened; the victim sometimes will not have to return the object, or the payment. The action for annulment can even be rejected by the judge if this favors the victim. Finally, because few cases of fraud are brought to court, the legislator has stepped in to regulate the contractual process. This is the case, for instance, with the law of August 1, 1905 on fraud (now part of consumer law, Code de la Consommation, article L. 2131), or the law of December 27, 1973 on advertising (today C. Consommation a. L.1241).10 Legislation sometimes seeks to protect potential victims of fraudulent behaviour. This type of intervention can be easily justified in the Paretian or wealth-maximization frameworks because it reduces some transaction costs. It is better that the law sends clear signals to potential wrongdoers than to correct wrongdoings once they have occurred. From an Hayekian perspective, the benefits of such intervention are less evident because you have to take into account the fact that the potential victims may, as a result, be less careful, and behave in a less responsible way. In any case, one should keep in mind that courts consider invalidity to be something exceptional. “To restrict as much as possible the number of nullity cases seems to fit with the contemporary need to bring more security to business.”11.2.2. Interpreting the contractTo save the contract, the judge may have to interpret its terms or to modify them. When reading legal scholars on the topics, one comes rapidly to the conclusion that there is no unanimity in France about what is the proper role for the judge when performance is problematic. As explains Ghestin: “Hence, always referring to justice, it is possible to forbid to the judge any intervention, or at the opposite, and as is done today, to justify his/her corrective interference, so that he/she can guarantee that there is at least a relative balance between the promises that are being exchanged.”12 This analysis can also be found in Delebecque, Pansier:The role of the judge in appreciating the terms of the contract is a matter of great controversy.On one hand, you may wish to deprive the judge of any power arguing that he is not a party to the contract; consequently, the judge should never intervene, nor modify such and such elements of the contract. On the other hand, one can admit the intervention of the judge in contractual matters in order to introduce a light wind of fairness in the contract. The law is rather based on the first approach.Indeed, as we have noticed already, the legislator allows himself or herself the right to perfect and regulate some contracts, and the judge, stimulated and reassured by such intervention, has decided that he also as a right to step in.13Keeping in mind this controversy, let us see what the French written law says.A major principle of French law is juridical consensualism (consensualisme juridique). Deeply rooted in French traditionit goes back to the 18th century and became prominent in the 15th century14this principle is closely related to a more recent one: the autonomy of the will.15 In contractual matters this means that the contract should be interpreted, not literally, but according to good faith. This is also called the subjective method of interpretation and is grounded in art. 1156 to 1164 C.civ.: “As far as conventions are concerned, one must look for the common intention of the contracting parties rather than look for the literal meaning of the terms” (art. 1156 C.civ.). Now, if to interpret is to try to rediscover what the parties really wanted, does this method make sense from an economic point of view, or should it be changed for the objective method?On the bright side, whether you are Paretian or Austrian, you can argue that this method of interpretation reduces transaction costs since the parties may leave the contract incomplete: if necessary, the judgeor more generally, the law through default ruleswill interpret the contract as they would have written it, if it was not for the cost of writing done a complete contract. Not only that, but the very possibility to leave gaps in the contract may be desirable to allow the parties to signal a high degree of confidence that promises will be performed; in other words, gaps may be useful strategic tools.On the dark side, it may be pointed out that the objective method, chosen in other countries such as Germany, forces the parties to be more explicit on what they expect and this, in turn, may reduce future transaction costs. Also it should be recalled that it is not always easy to interpret the will of the parties, and it is good for that reason to give them strong incentives to fill up as many gaps as poss