Financial leasing: what developments for the principles of interdependence and caducity?

Marc Susini and Muriel Puyau authored an article on financial leasing, published in the August–September 2019 issue of AJ Contrat.

Contracts that are concluded concurrently or successively as part of an operation involving a financial lease are considered interdependent; consequently, the termination of any one of them results, by operation of law, in the caducity (automatic extinction) of the others, except for the party responsible for the destruction of the contractual framework, who must compensate the loss caused by their fault.

Such are the principles established by case law in the field of financial leasing, following a two‑step evolution that has been widely commented on (“Interdependent Contracts: What Future for the Recognition of Fault‑Based Caducity?”, Thomas Génicon, Revue des contrats 2017 – No. 4, p. 11; “Location financière”, Dominique Legeais, RTD Com. 2017, p. 671).

In two initial decisions dated 17 May 2013, the Mixed Chamber of the French Cour de cassation first laid down the principle of interdependence between contracts concluded concurrently or successively as part of an operation involving a financial lease. In both rulings, the Court set aside independence or severability clauses intended to exempt the financial institution from any liability in the event of the supplier’s or service provider’s default, and which had the effect of obliging the customer/lessee to continue paying future rents, or even a penalty clause, despite no longer receiving any counter‑performance (Cass. Ch. mixte, 17 May 2013, No. 11‑22927; Cass. Ch. mixte, 17 May 2013, No. 11‑22728).

Subsequently, in two further decisions dated 12 July 2017, the Commercial Chamber of the Cour de cassation, reiterating the same principle that concurrent or successive contracts forming part of an operation involving a financial lease are interdependent, held that the termination of any one of these contracts triggers, by consequence, the caducity (automatic extinguishment) of the others, “except for the party responsible for the destruction of this contractual group, who must compensate the loss caused by their fault” (Cass. com., 12 July 2017, No. 15‑23552; Cass. com., 12 July 2017, No. 15‑27703). In doing so, the Commercial Chamber clarified both the nature of the mechanism—caducity—resulting in the disappearance of the interdependent contracts once one of them is terminated, and the sanction applicable to the party whose fault caused the breakdown of the contractual framework comprising the financial lease.

The principles thus established—highlighted by commentators for their mandatory and objective nature—appear particularly strict toward financial institutions, for whom a financial lease is purely a financing operation and who can no longer contractually protect themselves against defaults affecting the relationship between the supplier/service provider and the customer/lessee, even though they have no control over the proper performance of that relationship. Moreover, a financial institution that has already paid the price of the equipment and/or services to the supplier or service provider will, in the event of caducity of the financial lease, be required to reimburse the customer/lessee for all or part of the rents it has received. At the same time, its right to recover the amount paid or to be compensated by the party responsible for the collapse of the contractual group will often be theoretical, as the supplier’s or service provider’s default typically results from insolvency and liquidation proceedings.

Given such a situation, the position of financial institutions appears delicate, as it depends on the financial health and operational capacity of their partners, particularly suppliers and service providers. However, the case law stemming from the decisions of 17 May 2013 and 12 July 2017 is bound to evolve and should undergo a rebalancing:

– first, because despite the strength of the principles they establish, these rulings raise numerous questions to which courts must still provide answers;
– second, because paradoxically, the decisions based on the concepts of interdependence and caducity were rendered in cases not governed by Ordinance No. 2016‑131 of 10 February 2016, which introduced these concepts for the first time into the French Civil Code. Yet the legislative choices made do not perfectly align with those adopted by the Cour de cassation.
We will therefore endeavour below, without claiming to be exhaustive, to explore the possible developments in case law concerning the fate of contracts forming part of an operation involving a financial lease, through the lens of three key issues:
– the scope of contractual interdependence and the field of application of caducity;
– the effects of caducity;
– the nature and amount of the compensable loss suffered by the party responsible for the destruction of the contractual whole.

It is first necessary to consider the scope of interdependence between contracts forming part of a financial leasing transaction and, consequently, the field of application of caducity. In other words, which contracts may be regarded as interdependent with one another and therefore subject to caducity in the event that one of them is terminated or rescinded?

In the four decisions dated 17 May 2013 and 12 July 2017, the French Cour de cassation adopted a purely objective approach to interdependence, based solely on the existence of a common economic link and purpose. Contracts are deemed interdependent because they form part of the same economic transaction, and this rule excludes any examination of the explicit or implicit intentions of the parties (“Contrats interdépendants : quel avenir pour la consécration de la caducité fautive?”, Thomas Génicon, Revue des contrats 2017, No. 4, p. 11).

A noteworthy decision of the Commercial Chamber of the Cour de cassation dated 13 February 2019 confirms this approach and illustrates an expansive understanding of the scope of interdependence (Cass. com., 13 February 2019, No. 17‑19223).

In the case submitted to the Court, Mr. M.R., who operated a garage, had concluded on 24 June 2010 a contract with the company Odevia for the creation and maintenance of a website, and simultaneously a leasing agreement with the company Locam for a 48‑month period at a monthly rent of €180 to finance these services. On the same date, he also entered into a contract with Publiciweb for the provision of advertising space on the website in exchange for a monthly payment of €180.

After ceasing to pay the rents, Mr. M.R. was sued by Locam, which had terminated the lease and sought payment of due and future rents, along with enforcement of a penalty clause. In his defence, Mr. M.R. argued that the common representative of Odevia and Publiciweb had presented the overall scheme to him as cost‑neutral, with the advertising revenue intended to cover the rent. Since this promised neutrality had not materialised due to Publiciweb’s failure, the contracts lacked a cause.
This argument did not convince the Lyon Court of Appeal, which held that the obligation to pay rent to Locam derived from the website service itself, not the advertising revenue, which the lessor had not guaranteed. Consequently, the advertiser’s insolvency did not deprive the lease of its cause, and the disappearance of the supposed “free‑of‑charge” nature of the operation could not justify the caducity of a successive‑performance lease contract that had already been validly terminated for non‑payment.

After recalling the principles that concurrent or successive contracts forming part of an operation involving a financial lease are interdependent, that clauses incompatible with such interdependence must be deemed unwritten, and that the termination of any one of these contracts triggers the caducity of the others, the Commercial Chamber overturned the appellate judgment for lack of legal basis. It held that the Court of Appeal had failed to examine whether the cessation by Publiciweb of its advertising services—and thus of the corresponding payments—had deprived both the website‑service contract and the lease of their cause, thereby justifying the lessee’s cessation of rent payments.

This decision confirms that the non‑performance of a service contract may lead to the caducity of a financial lease agreement, even when the lease does not directly finance that service, provided both contracts form part of the same economic operation.
The judgment of 13 February 2019 thus reinforces the purely objective approach taken by the Cour de cassation, based on an exclusively economic analysis of the contractual scheme, in determining the interdependence of contracts within a financial leasing operation.

The approach adopted by the new Article 1186 of the French Civil Code appears different, as it combines an objective criterion—based on the economic operation at stake—with a subjective criterion—focused on the parties’ intentions. Indeed, paragraphs 2 and 3 of this article provide that: “Where the performance of several contracts is necessary for the completion of a single operation and one of them disappears, the contracts whose performance has become impossible as a result, as well as those for which the performance of the disappeared contract was a determining condition of a party’s consent, become caduc. However, caducity may only be invoked against a contracting party who knew of the existence of the overall operation when giving consent.”

Article 1186 therefore requires the judge to conduct a twofold inquiry: first, into the parties’ consent (paragraph 2); second, into the parties’ knowledge of the overall operation in which they were engaged (paragraph 3).

When assessing whether the plurality of contracts was an essential element of consent, it is the consent of the customer/lessee that will generally be scrutinized (“Les contrats interdépendants dans l’ordonnance du 10 février 2016”, Sarah Bros, La Semaine Juridique – Édition Générale, No. 38, 19 September 2016). Was the performance of the supply or service contract a determining condition for the customer/lessee’s consent to the financial lease agreement concluded with the financing institution? The answer will generally be obvious in cases where the financial leasing operation follows a simple tripartite structure involving only a supplier/service provider, a customer/lessee, and a financing lessor. However, financial leasing arrangements often take more complex forms and may involve other actors or generate a broader, more intricate contractual framework.

The inquiry into the parties’ knowledge of the scope of the overall operation relates more specifically to the financing institution/lessor. Caducity may only affect the financial lease contract if the lessor knew of the existence of the contract that was terminated or rescinded. This will always be the case regarding the supply or service contract directly financed through the leasing agreement. However, it may not apply to other contracts that, while economically linked to the operation, are concluded with parties other than the supplier/service provider and are not financed through the leasing contract. Thus, to take the example addressed by the Cour de cassation in its decision of 13 February 2019, the caducity of the financial lease could only have been pronounced under the new law if it had been established that the lessor knew of the existence of the advertising‑space agreement concluded between the customer/lessee and a third party—a fact that was not at all evident, given that the leasing agreement did not finance this specific service.

The application of paragraphs 2 and 3 of the new Article 1186 of the French Civil Code—provisions that introduce a partially subjective approach to contractual interdependence by requiring judges to consider, on the one hand, the parties’ consent and, on the other, their knowledge of the overall operation—will necessarily temper the strictness of the principles established in the decisions of 17 May 2013 and 12 July 2017.

However, it is far from certain that this subjective approach will make matters any simpler. Judges will have to engage in contractual interpretation to determine the parties’ common intention, a task that may prove particularly challenging in the context of complex transactions involving multiple parties and interrelated contracts (see Articles 1188 et seq. of the Civil Code).

When the termination or rescission of a contract that forms part of an operation involving a financial lease leads to the caducity of the other contracts within the same operation, it becomes necessary to consider the legal consequences of such caducity. In particular, since the contract that is terminated or rescinded is most often the supply or service contract — due to the supplier’s or service provider’s default — the question arises as to whether the financial institution/lessor is required to reimburse the rents retroactively from the beginning of the leasing agreement, or only from the moment caducity is established.

On this issue of the effects of caducity, the decisions of 17 May 2013 and 12 July 2017 provide no guidance. It is therefore necessary to examine subsequent lower‑court rulings. These show that, once the caducity of the financial lease has been declared, judges tend to order the financial institution/lessor to reimburse the lessee for the entirety of the rents paid since the effective date of the lease.

In a decision dated 28 February 2019, the Nîmes Court of Appeal held that “as a result of the caducity of the financial lease, the company Lixxbail must reimburse all rents received, amounting to €121,176, to the company Citis” (CA Nîmes, 1st Chamber, 28 February 2019, No. 16‑05407).

Likewise, the Paris Court of Appeal opted for full restitution of rents by the financial institution/lessor in a case where the supplier had never delivered the equipment that was the object of the lease (CA Paris, Pôle 5, Chamber 10, 10 September 2018, No. 16/21982).

In a decision of 18 December 2018, the Versailles Court of Appeal, ruling on remand after cassation, considered that “the caducity of the lease would normally entail the restitution of all sums paid under it,” but added that “matters differ where the creditor of the restitution is responsible for the destruction of the contractual whole; their fault prevents the restitution of the sums paid and also requires them to compensate the loss suffered by their co‑contracting party” (CA Versailles, 12th Chamber, 18 December 2018, No. 17‑04521).

In addition, the counterpart to the restitution of rents by the financial institution/lessor to the lessee — resulting from the caducity of the financial lease — is the obligation of the lessee to return the equipment provided under the agreement (CA Paris, Pôle 5, Chamber 10, 3 December 2018, No. 17‑09994; CA Aix‑en‑Provence, 2nd Chamber, 13 December 2018, No. 16‑11884).

What contributions does Ordinance No. 2016‑131 of 10 February 2016 make regarding the effects of caducity? The new Article 1187 of the French Civil Code, which specifically addresses the effects of caducity, provides that “caducity terminates the contract. It may give rise to restitution under the conditions set out in Articles 1352 to 1352‑9.”

The statement that caducity “terminates the contract” is rather terse and, at first sight, not particularly illuminating. However, this brevity is deliberate: the report submitted to the President of the Republic concerning the Ordinance explains that “the Ordinance provides that caducity terminates the contract but, for pragmatic reasons, does not decide the question of retroactivity: retroactivity is not excluded in certain cases, since caducity may give rise to restitution. It is for judges to determine whether retroactivity is appropriate in light of the circumstances of each case.”

Thus, the retroactive effect of caducity is only a possibility, to be assessed by the judge based on the circumstances before them. It seems logical, in this regard, that the effects of caducity should depend on the fate of the supply or service contract. If that contract is rescinded with retroactive effect, then caducity should likewise produce a retroactive effect—potentially requiring the financial institution to reimburse all rents received since the inception of the leasing agreement. Conversely, if the supply or service contract is terminated without retroactive effect, the restitution of rents should only apply to the period following the effective date of the termination.
As for Article 1187’s reference to the restitution rules laid out in Articles 1352 to 1352‑9 of the Civil Code, this deserves particular attention.

Indeed, restitution of rents received by the financial institution/lessor from the customer/lessee will be governed by Article 1352‑6, which states that “the restitution of a sum of money includes legal interest and taxes paid into the hands of the recipient.” Article 1352‑7 further provides that a recipient in good faith owes interest “only from the day of the demand.”

More importantly, the restitution of equipment by the customer/lessee to the financial institution/lessor will be subject to the rules governing restitution of goods in kind under Articles 1352‑1 and 1352‑5. Particular attention must be paid to Article 1352‑3 paragraph 2, under which “restitution includes the fruits and the value of use enjoyed from the thing. The value of use is assessed by the judge on the date of their decision.”
It is worth recalling that before the 10 February 2016 Ordinance, case law held that, in the event of annulment or rescission producing retroactive effects, “the seller is not entitled to compensation corresponding solely to the use of the goods by the buyer” (Cass. 1st Civ., 11 March 2003, No. 01‑2003; Cass. Mixed Chamber, 9 July 2004, No. 02‑16302).

The new Article 1352‑3 paragraph 2 now establishes the opposite solution for caducity, allowing the value of use of the returned equipment to be taken into account.

Thus, even though caducity may or may not have retroactive effect depending on the judge’s assessment, it appears that, in all cases, pursuant to Article 1352‑3, the financial institution/lessor may claim compensation from the customer/lessee corresponding to the value of use of the equipment for the duration of its actual use. And the economic value of use will, in practice, likely be close to the amount of the rent.

As previously noted, in its two decisions of 12 July 2017, the Commercial Chamber of the French Cour de cassation held, in nearly identical statements of principle, that “when contracts are interdependent, the termination of any one of them results, by consequence, in the caducity of the others, except for the party responsible for the destruction of the contractual whole, who must compensate the loss caused by their fault” (Cass. com., 12 July 2017, Nos. 15‑23552 and 15‑27703).
Accordingly, the question arises whether the financial institution, which is subject to the strict consequences of caducity, can at least seek compensation from the party whose fault caused the destruction of the contractual framework that includes the financial lease.

The author of such fault may be the supplier or service provider, where they commit a breach in performing the principal contract (e.g., defective equipment, failure to deliver services), or the lessee (e.g., failure to pay for services). It has also been held that the lessee commits a fault engaging their liability toward the financial institution when signing a delivery report “while knowing that the equipment had not been delivered” (CA Paris, Pôle 5, Chamber 10, 10 September 2018, No. 16/21982). That same lessee was furthermore found to have acted with culpable “negligence” by informing the financial institution late of the supplier’s failure to perform under the principal contract (CA Paris, Pôle 5, Chamber 10, 10 September 2018, No. 16/21982).

Finally, it has been held that the termination of the principal contract due solely to the lessee’s fault “is sufficient to demonstrate that the initiative taken by the latter was unfounded and therefore wrongful, and that this fault caused both the termination of that contract and, by consequence, the caducity of the leasing contract” (CA Versailles, 18 December 2018, No. 17/04521).
Since these breaches arise from the performance of the principal contract — to which the financial institution is not a party — any action by the latter seeking compensation for its loss must necessarily be based on tort liability (Cass. Ass. Plén., 6 October 2006, No. 05‑13255).

The loss suffered by the financial institution “results in a loss of rent” and is “made up of the amounts it should have received had the agreement continued until the agreed term, in view of the capital invested and the gains it could have expected, namely the amount of the rents due and unpaid” (Versailles Court of Appeal, 12th Chamber, 18 December 2018, No. 17/04521). Since the financial institution was “entitled to expect a return on its investment,” it suffers a “loss of profit,” in this case the price of the equipment that it was no longer able to recover from the supplier, who had been placed in liquidation proceedings (Paris Court of Appeal, Pole 5-Ch.10, 10 September 2018, No. 16/21982).

Furthermore, even though, in principle, “the termination of the lease agreement would normally imply the restitution of all sums paid under that agreement,” it has been held that the financial institution may retain “the rents already paid before or even after the termination” “as damages for the loss suffered” (Versailles Court of Appeal, 12th Chamber, 18 December 2018, No. 17/04521; same solution in Paris Court of Appeal, Pole 5‑Ch.10, 10 September 2018, No. 16/21982).
Conversely, the financial institution that, instead of seeking compensation for its loss, requests indemnification and guarantee from the supplier against the order to return the rents received, has been found inadmissible. In its aforementioned decision of 28 February 2019, the Nîmes Court of Appeal held that “the loss suffered by [the financial institution] as a result of the lack of conforming delivery and the termination of the supply contract is for the most part repaired by the restitution of the sale price and consists solely in the fact that it was unable to amortize its acquisition, not in the fact that it was ordered to repay the rents received” (Nîmes Court of Appeal, 28 February 2019, No. 16/05047).

Thus, an action seeking compensation for the loss suffered appears to be the only way for the financial institution to limit the effects of the termination; an action for a guarantee brought against the supplier to obtain payment of the rents to be reimbursed to the lessee is not available to it.

It is also necessary to consider whether the financial institution may contractually provide, through a penalty clause, for compensation of its losses when the termination results from the wrongful failure of one of the parties. Established case law holds that “the termination of a document does not affect the penalty clause it contains, which must precisely take effect in the event of wrongful failure by one of the parties” (French Supreme Court, Commercial Chamber, 22 March 2011, No. 09‑16660; 2nd Civil Chamber, 6 June 2013, No. 12‑20352).

The new provisions of the Civil Code relating to penalty clauses (Article 1231‑5) and termination (Articles 1186 and 1187) do not codify this case law and therefore provide no guidance on the fate of penalty clauses in the event of termination.

However, the Mixed Chamber of the French Supreme Court recently held, in two decisions concerning equipment leasing contracts and after recalling its case law on financial lease agreements, that “the clauses provided for in the event of termination of the contract,” in this case guarantee and waiver‑of‑recourse clauses, were “inapplicable” due to the termination of the equipment leasing contract (Mixed Chamber of the French Supreme Court, 13 April 2018, Nos. 16‑21345 and 16‑21947). These decisions do not, however, appear to preclude any contractual arrangement for compensating the financial institution in the event of termination of the financial lease agreement. They concern only the inapplicability of clauses provided for termination and do not address the fate of clauses provided for termination due to caducity, such as a penalty clause
.
The financial institution therefore has every interest in providing for a penalty clause, the purpose of which must specifically be to compensate its losses in the event of termination due to the fault of its contracting party, within the performance of the principal contract.

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