|HOW AN AMERICAN COURT LOOKS AT FRENCH LAW
Notes on Contractual Formalities in a Franco-American Context
By Henry Saint Dahl1
Courriel : firstname.lastname@example.org
The following notes describe a true case, In Re: Express One International, Inc., Debtor; Express One International, Inc., Plaintiff v. GIE Balkans Bail, Defendant (Case N0. 95-41189, Chapter 11, Adversary N0. 97-4057). It was decided in December 19992 by the Unites States Bankruptcy Court for the Eastern District of Texas, Sherman Division. 243 B.R.; 199 Bnkr. Lexis 1689.
The case deals with how American and French law interact to determine whether a contract can be orally modified or not, against a specific clause that prohibited oral modifications. The legal reasoning involves touches on French civil and commercial law, as well as their counterpart notions in American law.
This is a case of conflict of laws which is finally decided by the joint application of American and of French law.
Ironically, the French side, who fought for and obtained the applicability of French law in the contract, would have been better served by stipulating to American law. The main elements of the case are the following:
1. The parties. T, a Texas corporation leased an aircraft from F, a French groupement d’intérêt économique.
2. The problem. T terminated the lease before it expired because flying the aircraft was not profitable any more.
3. The setting.
a) T filed for bankruptcy protection, under Chapter 11 of the US Bankruptcy Code.
b) F filed a proof of claim stating that T owed F a certain sum of money because it terminated the contract before it expired.
c) T resisted the claim arguing that the contract was modified orally to expressly allow for an early termination.
4. The contract. It included the following:
a) a clause that stated: “This contract can only be modified by the parties in writing”;
b) a clause for the applicability of French law, and
c) a duration of two years, of which only six months have expired.
5. Issues. Can T legally terminate the contract before it expires?
T bases its position on an alleged oral modification of the contract allowing such early termination.
6. Procedural posture. F argues that according to the clause mentioned in (2.a), above, only modifications in writing are admissible and, consequently, T cannot legally terminate the contract before it expires based on an oral modification. T pleads that under the applicable law (French), oral modifications are valid and have full effect.
The issue is known in American law as “statute of frauds”. It turns on whether a valid contract -or its modification- must necessarily be in writing or not.
II. Some Notions of American Law
The American court first decides two procedural questions: who has the burden of proof and how does the test of “preponderance of evidence” apply.
Whose is the burden of proof? The traditional standard of proof imposed upon a creditor seeking to have its claim allowed is by a preponderance of the evidence. (In re Koch, 83 B.R. 898, 17 Bankr. Ct. Dec. 449 (Bkrtcy.E.D.Pa. 1988)).Although the burden of production shifts to the objecting party, the burden of persuasion by a preponderance of the evidence remains with the claimant: "If, however, evidence rebutting the claim is brought forth, then the claimant must produce additional evidence to 'prove the validity of the claim by a preponderance of the evidence'". (Calif. State Board of Equalization v. The Official Unsecured Creditors' Committee (In the Matter of Fidelity Holding Co., Ltd.,) 837 F.2d 696, 697 (5th Cir. 1988)).
Accordingly, F had the burden of proof.
What does “preponderance of evidence” mean? It means: "Evidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” (Braud v. Kinchen, 310 So. 2d 657, 659 (1st Cir. 1975)).It is evidence which is more credible and convincing than the other evidence brought. The standard is more than a "scintilla" of evidence and less than "clear and convincing". (In re Express One International, Inc., 229 B.R. 129, 133 (Bankr. E.D.Tex., 1999)). A preponderance of the evidence means "by the greater persuasive force thereof, and not the greater volume thereof, or the greater number of witnesses testifying thereto". (Liechti v. Roche, 198 F.2d 174, 177 (5th Cir. 1952)).
Accordingly, it is incumbent upon F whose claim has been objected to by T, to prove the extent and validity of its claims by a preponderance of the evidence.
The Texas court then analyzed the relevant rule of the Texas Business and Commerce Code, the effect of oral modification agreements and, most importantly, it considered whether French or American law should determine if an oral modification should be admissible or not.
Texas law. Section 26.01 of the Texas Business and Commerce Code (Statute of Frauds), which states:
Section 26.1. Promise or Agreement Must Be in Writing.
(a) A promise or agreement described in Subsection (b) of this section is not enforceable unless the promise or agreement, or a memorandum of it, is
(1) in writing; and
(2) Signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.
(b) Subsection (a) of this section applies to:
(6) an agreement which is not to be performed within one year from the date of making the agreement; …
Under Texas law, the “oral amendment” would be rendered unenforceable by said Section 26.1, paragraph 6. Since the contract was for more than one year, any amendment thereto must be made in writing. This would be so, with greater force still, since the contract in question included the need for amendments to be in writing.
Effect of oral modification agreements. In American law an oral amendment may effectively modify any written contract if the new contract is not within the Statute of Frauds Howard O. Hunter, Modern Law of Contracts. Rev. Ed. 1998. Oral modification of a contract may be found despite the existence of a "no oral modification" clause 4 Williston on Contracts, § 591 (3rd Ed. 1961) or 6 Williston on Contracts, § 1828 p. 5179 (Rev. Ed.); 6 Corbin on Contracts § 591 (1962) See also Wagner v. Graziano Construction Company, Inc., 390 Pa. 445, 136 A.2d 82 (PA. S.Court 1957 )and Universal Builders v. Moon Motor Lodge, 430 Pa. 550, 244 A.2d 10 (1968)As the Pennsylvania Supreme Court stated in the Wagner case at page 83, "The most iron clad written contract can always be cut into by the acetylene torch of parol modification supported by adequate proof... even where the contract specifically states that no non written modification will be recognized, the parties may yet alter their agreement by parol negotiation. The hand that pens a writing may not gag the mouths of assenting parties...." See also In re Franks, 95 B.R. 346 (Bkrtcy. E.D.PA 1989).
Parol Evidence Rule leads in this case to French law. In American law the parol evidence rule is the standard that determines if oral testimony can be admissible or not. If it were a matter of procedural law then it would be ruled by the lex fori. If it were a matter of substantive law, then the lex causae would control.
In American law the parol evidence rule is held to be a rule of substantive law rather than procedural law. (Long Island Trust Company v. Dicker, 659 F.2d 641, n.14 (5th Cir. 1981)). Accordingly, since French law applies to this case, as the one chosen by the parties, French law shall determine the extent to which oral testimony can be used in the resolution of this dispute.
III. Some Notions of French Law
as Seen by American Courts
The American court would consider several aspects of French law before reaching its decision. In the first place it would consider the most general rule, from the Civil Code.
Civil Evidentiary Standard
(Evidence in Writing)
Civil Code. Article 1341 of the French Civil Code states as follows: “A notarial act, or private signatures, shall be required for all transactions exceeding a sum of money or a value determined by decree, even for voluntary deposits. No testimonial evidence will be admitted against and beyond the content of the documents, or over what it is alleged to have been said, at the time or after the transaction in question, unless sit concerns a lesser sum of money or a minor value.
The above does not prejudice what is established by commercial laws.”
According to Decree Nr. 80-533, of July 15, 1980, the limit beyond which documentary evidence becomes necessary is FF 5,000).
Since the dispute in question is well over that amount, article 1341 of the Civil Code would have resulted in the victory of F.
Is the Lease of an Aircraft a Civil or a Commercial Contract?
The American court would have to decide if the contract in question is ruled by French civil law, or by French commercial law. If civil law controls, then said art. 1341 solves the question and F wins the case. If the contract is of a commercial nature, then a different rule may apply.
Commercial Code. Art. 632.
“Acts of commerce. The law regards as acts of commerce: …
Every enterprise for rental of movables; …
All obligations between traders, dealers and bankers; …”
The lease (rental) of an aircraft would be a commercial transaction because aircrafts are defined as personalty (moveables) by French law. “Although an aiarcraft is a movable (art. 121-8), it is susceptible of being mortgaged.” (R. Rodière, Droit des Transports Terrestres et Aériens, 1981, p. 99). “An aircraft is considered a movable” (Code Civil d’aviation, art. L. 121-8) … (Encyclopédie Juridique Dalloz, 1972, number 215).
Independently, the commercial nature of the transaction also derives from the qualification of both parties as merchants. A société anonyme (corporation) is a commercial enterprise. Its controlling statute is law Nr. 66-537 of July 24, 1966.
On the other hand, the groupement d’intérêt économique is defined by French law as follows: “Two or more natural or legal persons may organize among themselves an economic interest group for a fixed period. The object of the group is to fecilitate or to promote the economic activity of its members, to improve or to expand the results of this activity; it is not to realize benefits for itself. Its activity must be tied to the economic activity of its members and may not be merely auxiliary thereto.” (Ordinance Nr. 67-821, as amended by Law Nr. 89-377 of June 13, 1989, Art. 1, reproduced in the Commercial Code.)
Consequently, the lease of an aircraft between a Groupement d’intérêt économique and a corporation has at least two grounds to be considered a commercial transaction. First, because it concerns the lease of a peronalty (movable). Second, because it is a transaction made between merchants.
A Civil or a Commecial
The American court would be introduced to the French notion of “civil and commercial acts” as controlled by different rules. Ultimately the court would apply art. 109 of the Commercial Code.
Commercial Code. Art. 109.
“With respect to merchants, acts of commerce may be proved by all means, unless when it is provided otherwise by law.” In commercial matters then, the controlling principle is freedom of evidence (liberté de preuves en matière commerciale).
Article 109 of the Commercial Code. That Article of the French Commercial Code embodies the French freedom of evidence principle. This leaves no doubt that under French law evidence of oral agreements and evidence of the subsequent conduct of the parties in carrying into effect their agreement is admissible to prove whether or not there was an amendment to the contract and the terms of that amendment.
The case was ultimately won by the American side (T) because under this system the “parol evidence rule” is subject to the lex causae which was French law in the case at bar.
In the American proceedings the court was educated about French law by experts appointed by each side. Guided, or not, by said experts the court reached its own conclusions about the content and scope of French law.
From an American point of view it seems strange to see such an important division between “civil and commercial acts”, to the extent that if the Civil Code (art. 1341) applies one party wins, and if the Commercial Code controls (art. 109), that party loses.
It is also noteworthy that the French rules appear to be better crafted than their American counterparts. Whether one accepts as useful or not the distinction between commercial and civil acts, the concepts of French law ring as clear as a bell. This is, of course, one of the main traits of the French Civil Code which probably permeated to the French Commercial Code as well.
American law would be well served by following the example of the French Civil Code as to clarity and conciseness. A tall order indeed.