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How to terminate a business relationship with a French company?

How to terminate a business relationship with a French company?

French law prohibits the sudden termination of a business relationship with a French company, regardless of whether such relationship is based on a formal written contract or stems from ongoing informal business dealings.

Pursuant to article L. 442-1 II of the French Commercial Code, in the event a party to an established commercial relationship terminates such a relationship without sufficient prior notice given in writing, it must indemnify the other party from the damage suffered as a result of such sudden termination.

What is an “established commercial relationship” within the meaning of Article L. 442-1 II of the French Commercial Code?

It should be noted from the outset that the prohibition to terminate a business relationship without sufficient prior notice laid down in article L. 442-1 II of the French Commercial Code applies to all business relationships of commercial nature.

According to French case law, the purpose of the business relationship is irrelevant: it may consist in the sale of products, the provision of services, etc… Only relationships involving professionals which are not considered as merchants pursuant to French law are excluded from the scope of article L. 442-1 II of the French Commercial Code, such as notaries, lawyers or doctors.

According to the French Supreme Court (Cour de Cassation), a relationship is “established” when it is of “continuous, stable and habitual” nature, and when the party to it could “reasonably anticipate for the future” a certain continuity in the flow of business with its commercial partner.

The existence of an “established commercial relationship” has even been recognized in cases where the business relationship was of short duration and occurred only once a year, but over many years. Thus, the relationship established between a wine merchant and a fair organizer was considered as an established business relationship since the wine merchant participated in the fair every year since 10 years, although only once a year. The refusal by the fair organizer to provide the merchant with a stand at the fair without written prior notice of sufficient duration was considered abusive (Cass., com., Sept. 15, 2009, n°08-19.200).

Article L. 442-1 II of the French Commercial Code therefore covers all “commercial” relationships, and noy only “contractual” ones.

As a result, commercial relationships maintained with a co-contractor by different entities that have succeeded each other in these relationships (following an acquisition, a transfer of funds, a change of activity or partner), can be qualified as “established” commercial relationships, provided that the relationship has continued with the new partner (CA Lyon, March 15, 2002).

Similarly, an “established commercial relationship” can take the form of a succession of fixed-term contracts, or the continuation of commercial relations even though the contract binding the parties no longer exists or has been terminated.

Modalities for terminating an established commercial relationship, as required by article L. 442-1 II of the French Commercial Code

Article L. 442-1 II of the French Commercial Code stipulates that termination must not be “brutal”, but must be preceded by a notice period (i). The notice must be written and unequivocal (ii). The notice does not have to state reasons (iii). Notice must be sufficient (iv). The business relationship must be maintained during the notice period (v).

1. The termination of a business relationship or contract must not be “brutal” and must be preceded by a notice period

Pursuant to article L. 442-1 II of the French Commercial Code, a breach of contract is deemed unlawful if no written notice is given, or if the notice period is insufficient compared to the duration of the established commercial relationship.

According to French case law, “in order to be prejudicial and give entitlement to damages, the termination must be brutal, i.e., unforeseeable, sudden and violent” (Court of Appeal of Montpellier, August 11 1999, Frech Supreme Court Dec. 3, 2002, no. 99-19.822).

The brutality of the termination can be influenced by the period during which it occurs.

Thus, a notice period that would have been considered reasonable may be considered insufficient if it occurs during a production cycle (Com Court of Paris, May 21, 2001), or before a specific commercial event (for example, shortly before Mother’s Day in the perfume sector: French Court of Appeal, April 11, 2002).

Whether the notice period is sufficient or insufficient, and therefore whether the termination is brutal, is assessed on a case-by-case basis, depending on the circumstances.

Partial discontinuation or delisting may also be tantamount to abrupt discontinuation, particularly if the reduction in business volume appears substantial or noticeable (CA Rouen, November 3, 1998), or if it is the prelude to total discontinuation of business (CA Lyon, March 15, 2002).

Similarly, case law considers that a partial breach of commercial relations may be constituted by the modification of essential clauses of the contract, such as the modification of tariffs or terms of payment (French Supreme Court, March 20, 2012).

2. The notice to give upon terminating a commercial relationship or contract with a French company must be in writing and unequivocal

Pursuant to article L. 442-1 II of the French Commercial Code, the termination notice must be given in writing. In the absence of written notice (and even if a sufficient verbal notice was given), the termination will be considered brutal.

A termination notice is sent in France by means of registered letter with acknowledgement of receipt, to secure proof of the date on which the notice was sent.

The notice period begins as soon as the letter is received.

However, in order to constitute notice of termination and start of the notice period, the termination letter must be written unequivocally and the intention to terminate, as well as the date on which the relationship will end, must be clearly stated.

A company was considered not to have given sufficient termination notice in a case where it had notified its counterpart of the termination of an agreement, however had offered to maintain certain prices and payment terms, thus being ambiguous as to the given notice period (French Supreme Court, January 29, 2013, n°11-23.676).

Similarly, the behavior of a party to contract which maintains ambiguity as to its intention to terminate the contract may render the termination notice ineffective.

The notice of termination must therefore be drafted in such a way as to leave no ambiguity as to the terminating party’s intention to terminate the contract, the length of the notice period and the date on which the commercial relationship will cease.

In the event of ambiguity in the terms of the termination letter, there is a risk that the party suffering the termination may consider that the relationship has been terminated without sufficient prior notice, and claim damages for brutal termination.

3. The termination does not have to specify the reasons for terminating the business relationship

According to established French case law, the fact of not giving the reasons why the commercial relationship is terminated is not a fault or breach of the relationship which may give rise to damages (French Supreme Court, January 6, 1987; French Supreme Court, November 30, 1982; French Supreme Court, June 6, 2001). In fact, the requirement to give reasons is not enshrined in law.

French courts even go so far as to consider that “the fact that the given reason to terminate was false does not in any way prevent the terminating party from terminating the commercial relationship” (Court of Appeal of Versailles, June 10, 1999).

The co-contractor wishing to terminate the contract is therefore not required to justify the reasons for the termination or even the circumstances of the termination (French Supreme Court, June 6, 2001).

Conversely, even if the termination is duly motivated, it would not be legitimate under article L. 442-1, II if the conditions laid down by this article are not met (i.e., absence of brutality, sufficient written notice). The Paris Court of Appeal ruled that “the fact that the termination was motivated by a new commercial policy of the group’s management does not relieve the terminating party from its obligation to give written notice” (Paris Court of Appeal, May 4, 2001).

4. The commercial relationship must remain unchanged during the notice period

According to French case law, a brutal breach of contract may be total or partial, with a partial breach occurring when the other party unilaterally imposes “substantial” modifications on the contract which “disrupt its economy”.

The question is which contractual modification should be considered as “substantial” or as “disrupting the economy of the contract” in order to be considered as a partial breach thereof.

According to the French Supreme Court, the assessment of whether or not a contractual modification is substantial is a matter for the trial judges, who assess it according to the circumstances of each case (French Supreme Court, March 31, 2015, n°14-11.329).

French courts have ruled that that the following modifications constitute a “substantial modification” of the contract leading to its partial abrupt termination if such modification was not preceded by sufficient notice:

  • a significant decrease in orders by the co-contractor which leads to a substantial decrease in sales for its counterpart
  • a significant change in rates or discounts
  • a significant change in the terms of payment

However, for the modification to be qualified as a partial breach, it must be imposed by one of the parties. Therefore, a mere proposal by one party to the other of terms which were different that the ones applied until then does not constitute a brutal termination of contract, provided that such a proposal was not non-negotiable (Cass. com., November 6, 2012, n°11-26.554).

5. The notice period must be sufficiently long

Provided that sufficient written notice is given, contracts may be terminated at any time, without cause (subject, however, to specific provisions which may be contained in the concerned contract).

According to article L. 442-1 II. of the French Commercial Code, to assess the sufficiency of the term of the written notice, must be taken into account the duration of the commercial relationship, with reference to trade practices or interprofessional agreements.

The question is therefore how long the period of notice should be, to ensure that the terminating party may not be held liable for sudden termination of the commercial relationship.

Article L. 442-1 II of the French Commercial Code requires that the length of the commercial relationship (i), trade practices and any inter-professional agreements (ii), and other circumstances (iii) be taken into account when assessing whether the written notice period is of sufficient length, it being also specified that the contractually agreed notice period is irrelevant (iv).

  • Length of the business relationship

It is extremely difficult to establish a correlation between the duration of the business relationship and the required notice period. The duration of the business relationship is an essential element in determining the term of the notice period, but judges rarely refer to it alone.

According to French case law, it is impossible to calculate the length of the required notice period on the basis of the sole duration of the business relationship. By way of illustration, however, the following case law may be cited:

Decision Length of business relationship Notice period Main reasons given by the Court
Paris Court of Appeal, Feb. 6, 1997 8 years old 1 year The 6 months’ notice period which had been given was not sufficient, given the duration of the relationship and the quasi-exclusivity of the contract
French Supreme Court, Sept. 21, 2010 9 years old 6 months The one-month notice period provided for in the contract was insufficient.
Rennes Court of Appeal, November 3, 2009 7 years 6 months A 90-day notice period was contractually stipulated, but this was not sufficient because the terminating party accounted for 36% of the business of its counterpart, who needed more time to find an equivalent supplier
French Supreme Court, March 17, 2004 10 years 6 months Despite the absence of economic dependence and a deterioration in the economic relationship over 2 years, the company was abruptly terminated due to a lack of sufficient written notice, which should have been of 6 months.
Versailles Court of Appeal, October 2, 2008 10 years 6 months The court considered that a 3-month notice period was “unreasonable” for a business relationship that had been established for almost 10 years, and which accounted for almost 50% of the sales of the party suffering the termination.
Paris Court of Appeal, Feb. 25, 2009 10 years 6 months The co-contractor’s share of sales was over 50%. There were no specific investments. Consequently, 6 months’ notice was sufficient.
Paris Court of Appeal, December 2, 2011 8 years old 9 months A notice period of 9 months was agreed between the parties. This notice period was respected, but the supplier refused to perform certain services, proposed non-competitive offers and reduced its storage capacity during the notice period, preventing its co-contractor from maintaining the same level of activity. The termination was therefore considered brutal.
Orléans Court of Appeal, June 5, 2014 10 years 12 months The contract was terminated without notice, even though the service provider accounted for 83% of its co-contractor’s sales. A notice of 12 months should have been given.
Court of Appeal, Versailles, June 9, 2011 11 years old 8 months A contractual notice period of 8 months was sufficient, as it gave the other party enough time to find a new business partner, despite the significant investments already made.
Court of Appeal, Paris, July 2, 2014

 

5 years 6 months The 6-month period provided for in the contract was sufficient, since the co-contractor was not in a situation of economic dependence.
  • Professional agreements

Pursuant to article L. 442-1 II. of the French Commercial Code, the “written notice [must] take into account, in particular, the duration of the commercial relationship, with reference to trade practices or interprofessional agreements.[1]

However, according to the French Supreme Court, the existence of professional practices does not exempt judges from verifying whether the notice period, even if it complies with the minimum period set by such practices, takes into account the duration of the commercial relationship and the other circumstances of the case (French Supreme Court, May 3, 2012, no. 11-10.544).

Similarly, the duration set by an interprofessional agreement, if any, is only a minimum, so that compliance with it does not preclude the court from verifying the sufficiency of the notice period with regard to the duration of the commercial relationship (French Supreme Court, December 2, 2008).

In all cases, whether or not there is an interprofessional agreement, the judge has full discretion to assess the adequacy of the notice period, taking into account the duration of the commercial relationship and the need for the party suffering termination to find an alternative solution, taking the contractually agreed period as an indication of what might be reasonable.

  • Other assessment criteria

According to the established case law of the French Supreme Court, “the period of sufficient notice is assessed taking into account the duration of the commercial relationship and other circumstances at the time of notification of the termination” (French Supreme Court, July 9, 2013, n°12-20.468; French Supreme Court, 6 November 2012, n°11-24.570; French Supreme Court, 20 May 2014, n°13-16.398, etc.).

Similarly, article L. 442-1 II. of the French Commercial Code states that “written notice [must] take into account, in particular, the duration of the commercial relationship, with reference to trade practices or interprofessional agreements.”

According to the French Supreme Court, the “circumstances” to be taken into account (referred to by the term “in particular” in the wording of article L. 442-1 II) must make it possible to determine what was the ability of the party suffering termination to find new markets or business opportunities replacing those generated by the terminating party (French Supreme Court,).

In assessing whether or not the notice period is sufficient, French courts take into account circumstances such as (but not limited to) the non-terminating party’s economic dependence on the terminating party, its prospects for retraining and reorganization, the volume of business, any exclusivity enjoyed by the non-terminating party, and the production or distribution cycle.

Economic dependence of the party suffering termination on the terminating party: The notice period must take account of the co-contractor’s state of economic dependence.

Economic dependence is defined as the impossibility, for a company, “to have a solution that is technically and economically equivalent to the commercial relations it has established with another company” (French Supreme Court, 12 February 2013, n°12-13.603).

Thus, a state of dependence results, for example, from a distributor’s difficulty in obtaining equivalent products from other suppliers under comparable economic conditions (Cass. com., 4-10-2016, n°15-14.025).

This state of economic dependence exists, for example, when the victim of the breach was bound by an exclusivity clause with regard to his partner (Cass. com. 12-2-2013, n°12-603; Cass. com. 24-6-2014, n°13-15.953).

Case law considers that economic dependence constitutes an “aggravating factor”. Thus, “the greater the economic dependence, the greater the loss resulting from the brutal nature of the termination” (CA Douai, March 15, 2001). But this context must be clearly analyzed for each victim company and the notice period calculated specifically (Cass. com., October 7, 2014, n°13-19.692).

The state of economic dependence is established in particular when:

  • A company claiming economic dependence generates a significant proportion of its sales with its partner (CA Paris, Sept. 12, 2001);
  • This partner exerts great influence on decision-making bodies;
  • This company has no alternative solution (Cass. com., January 29, 2008);
  • The distributor had a 14-year exclusive distribution relationship with its supplier; consequently, the 7-month notice period was insufficient and was judicially increased to 20 months (Cass. com., November 6, 2012).

However, someone who is faced with a single customer and does not wish to diversify his activities, even though he has the possibility of doing so, cannot be considered to be in a situation of economic dependence, so that the assessment of his loss will be modulated by the judges (Cass. com., June 24, 2014).

To assess the victim’s state of economic dependence, account may also be taken, for example, of:

  • the volume of business flow (Versailles Court of Appeal 27 April 2000 n°99-210; Paris Court of Appeal, 19 April 2017);
  • the product reputation (Paris Commercial Court, 2 April 1999; Avignon Commercial Court, 25 June 1999);
  • the investments made by the party suffering the termination for the benefit of the party having terminated the contract (Versailles Court of Appel 16 September 2004, n° 03-2914; Paris Court of Appeal, 19 April 2017, n°15/24221);
  • the nature of the activity entrusted to the party having suffered the termination by the terminating party, as well as the share it represented in its overall activity (for example, French Supreme Court, 21 March 2018, n°16-17.146).

The state of technological dependence in which a company may be maintained by a business partner should be analysed in a similar way as the state of economic dependence.

The prospects available to the party having suffered the termination to reorganize its activities: French courts also take into account the severed employee’s prospects for retraining and reorganization, to determine how long the notice period should be.

By way of example, according to the Paris Court of Appeal, “compensation for loss in the event of a sudden termination is assessed on the basis of the length of notice that should reasonably have been given“, and that this length “is determined not in terms of lost profit but in terms of the time that would have been necessary for the company to reorganize” (Paris Court of Appeal, January 28, 2016, no. 14/22836).

Similarly, according to the French Supreme Court, when determining the length of the notice period, judges must take into account the time necessary to the party having suffered the termination to reorganize its business and possibly find new partners (French Supreme Court, March 11, 2014, no. 13-11.097).

It was on the basis of this criterion, and taking into account the fact that the market in which the victim worked was captive and made retraining virtually impossible, that a Court of Appeal granted 24 months’ notice even though the relationship had lasted only 3 years (CA Toulouse, September 16, 2009, no. 08/04848).

Business volume: The volume of business made by the party having suffered the termination with the terminating party is regularly taken into account when determining the length of notice that should have been given. For example, a Court of Appeal ruled that the notice period for terminating a 3-year relationship should be 6 months, given that 35% of the sales made by the party having suffered the termination originated from the terminating party (Aix-en-Provence Court of Appel, 1 Octobre 2015, n°14/15898).

Exclusivity: Courts also take into account circumstances such as any exclusivity enjoyed by the party having suffered the termination (termination of a 19-year exclusive distribution contract requiring a 12-month notice period instead of the 8 granted by the supplier: Paris Court of Appel, February 5, 2015; exclusive concession and 35-year relationship requiring a 2-year notice period: Amiens Court of Appeal, June 2, 2015).

Production or distribution cycle: Account is taken of the particular production or distribution cycle in the field concerned (e.g., clothing collections or vineyards). Thus, the Versailles Court of Appeal ruled that “by giving notice in January for the end of the annual seasonal period, the Monoprix company gave sufficient notice in line with custom and the duration of the commercial relationship, enabling the company [the victim of the breach] to find an alternative solution for the next production cycle in the wine sector” (Versailles Court of Appeal, no. 10/08577).

Judges also take into account any other relevant circumstances that may have an impact on the ability or timeframe of the terminated employee to retrain (non-competition clause, reputation of the products distributed, simultaneous termination of several contracts, etc.).

Other circumstances: In all cases, the length of the termination prior notice period must be proportional to the duration of the business relationship, and must take into account the particular circumstances of the relationship, and in particular the partner’s dependence on the relationship and the possibility of finding alternative solutions.

In considering that the notice period is insufficient, case law relies, on a case-by-case basis, on the specific circumstances of each case, including, in addition to the criteria set out above, the nature of the products, the financial importance of the commercial relationship, the investments made for the benefit of the party responsible for the breach, the time required for the other party to reorient its activities or seek new customers or new suppliers, etc….

Doctrine and case law recognize that the notice period must above all enable the victim of the termination “to make arrangements and give a new direction to his activities in good time“. Thus, except in special circumstances, the purpose of granting reasonable notice is to enable the victim of the termination to take advantage of the notice period to reorganize (Cass. com., February 10, 2015, n°13-26.414).

Irrelevance of the contractually specified notice period

According to case law, the contractual notice period is irrelevant to the requirement for sufficient notice under article L. 442-1 II of the French Commercial Code, and can only be taken as an indication.

Thus, according to the French Supreme Court, the existence of a contractual notice stipulation does not exempt the judge, if he is required to do so, from verifying whether the contractual notice period takes into account the duration of the commercial relationship that has existed between the parties and other circumstances (French Commercial Court, May 20, 2014).

Similarly, according to French case law, compliance with the notice period provided for in the contract is not sufficient to relieve the terminating party from liability for sudden termination.

For example, it has been ruled that the notice period should have been set at one year, and not three months, as stipulated in the contract, in view of the length of the relationship and the loss of earning potential for the ousted partner (Rouen Court of Appeal, November 3, 1998).

As a result, the termination notice provided for in the contract must be disregarded, as it may not be sufficient in view of the duration of the relationship and the economic importance of the Contracts.

A terminating party cannot be held responsible for the termination of contract if the provided notice period is 18 months

The provisions of the French Commercial Code relating to the abrupt termination of an established commercial relationship have been amended on several occasions.

Unlike previous versions, which did not specify a maximum period of notice to be given, leading some courts to require notice periods in excess of 22 months, in its latest wording resulting from the Ordinance of April 24, 2019, article L. 442-I, II of the French Commercial Code provides that “in the event of a dispute between the parties over the length of the notice period, the party responsible for the termination may not be held liable on the grounds of an insufficient length of notice, provided that he has complied with a notice period of eighteen months“.

Compliance with such notice is therefore exclusive of any fault.

Ordinance no. 2019-359 of April 24, 2019 does not include any transitional provisions concerning the application over time of the new article L. 442-1, II of the Code de commerce.

Pursuant to article 2 of the French Civil Code, which states that “the law only provides for the future; it does not have retroactive effect”, and the principle of non-retroactivity of new laws, the sudden termination of an established commercial relationship, which is a legal fact that engages the tort liability of its perpetrator, is subject to the law applicable at the time of the disputed termination.

Therefore, if there is any doubt as to what should constitute a sufficient notice, it is recommended that the notice period be 18 months.

Abrupt termination of an established commercial relationship and risk of abuse of dominant position

The termination of an established commercial relationship may in fact constitute an abuse of a dominant position within the meaning of Article L. 420-2 of the same code, provided that such termination has a proven or potential anti-competitive purpose or effects (French Supreme Court, January 19, 2016, n°14-21.670 and 14-21.971), i.e., that it harms or risks harming competition to the detriment of the well-being of customers, users of the products or services in question or consumers (French Competition Authority, N°13-D-07, February 28, 2013).

[1] Currently, there are only four interprofessional agreements which set the length of the notice period in the event of termination of the commercial relationship:

  1. « Accord des usages professionnels de la Fédération de l’imprimerie et de la communication graphique» (January 1998),
  2. Agreement on the lease management of service station businesses operated by oil companies (June 14, 1994)
  3. The agreement concluded in the Do-It-Yorself sector between the Union des industries du bricolage (Unibal) and the Fédération française des magasins du bricolage (January 15, 2002)
  4. The agreement reached between the Fédération des entreprises et entrepreneurs de France (FEEF) and the Fédération des entreprises du commerce et de la distribution (FCD) (March 6, 2013).

Trade practices can be assessed by reference to the following standard contracts in the following industries:

  • Standard contract applicable to public road haulage performed by subcontractors, pursuant to the law of December 30, 1992 (Cass., com., 19-11-2013)
  • Standard advertising contract (CA Versailles 5-2-2009 n°07-6076).

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