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02 June 2014
France has specific, mandatory rules governing the termination of commercial relationships. Even in an international context, commercial operators should be aware of the risk of liability in tort for the sudden termination of a commercial relationship (rupture brutale de relations commerciales).
In a ruling issued on March 25 2014 (1) the Supreme Court considered that a foreign distributor (in this particular case, a Chilean company) could make a claim in tort against its French supplier which had suddenly terminated their commercial relationship, under the specific regime of Article L 442-6 I 5° of the Commercial Code, on the basis that the loss had occurred in France.
The court held that as the commercial relationship between the parties had existed for over 12 years and had been formalised in an agreement entered into in Paris, governed by French law and submitted to the jurisdiction of the Paris Commercial Court, the loss had occurred in France.
A sudden termination often goes hand in hand with a wrongful termination of commercial relationships (rupture abusive de relations commerciales), which forms another basis for liability and applies when, for example, the counterparty is led to believe that the contractual relationship will continue.
Economic partners must demonstrate fairness in how they terminate their commercial relationships. Under Article L 442-6 I 5° of the Commercial Code, a business operator is liable in tort if it suddenly terminates, even partially, an established commercial relationship without adequate prior written notice. The length of the notice period must take into account the length of the commercial relationship between the parties and must comply with the minimum required notice period, by reference to business practice and applicable inter-professional agreements. However, there is no liability in tort if a relationship is terminated without notice on the ground that the other party did not perform its obligations or force majeure.
The rules on sudden termination of an established commercial relationship were initially designed to prevent sudden so-called 'de-referencing' by large retailers (ie, removing a supplier's products that were referenced by a distributor). The rules have since been applied extensively by the courts. The regime now represents one of the major sources of litigation before the French commercial courts.
The rules' rationale is that operators must anticipate changes to their commercial dealings and give their partners sufficient time to prepare for those changes.
Article L 442-6 I 5° is mandatory and applies regardless of the provisions of any written agreement that the parties may have entered into. Today, the courts determine on a case-by-case basis whether a partner could legitimately expect a longer notice of termination than the agreement had envisaged.
In order to establish liability on the basis of Article L 442-6 I 5°, there must be an established commercial relationship and a sudden termination.
Established commercial relationship
Article L 442-6 I 5° of the Commercial Code applies to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.
The provisions apply to both sales of goods and provision of services.
The commercial relationship need not be based on a written agreement. The relationship is considered as a whole, particularly if there are successive contracts.
In determining whether a commercial relationship is established, particularly in the absence of any written agreement, the courts look at a number of factors, such as the length of the relationship between the parties, whether the relationship has been continuous, how much turnover has been generated and how this has developed over time.
The courts consider that a termination falls foul of Article L 442-6-I 5° if it is "unforeseeable, sudden and harsh". The rules apply to both total and partial terminations of commercial relationships.
The key element of the analysis of the sudden nature of the termination is whether adequate prior notice of termination was given, particularly in light of the length of the relationship. The courts may also take into account other factors, such as business practices in the relevant sector and applicable inter-professional agreements which may fix the notice period.
A court may consider that the notice period is inadequate even if it complies with the termination provisions of the parties' contract. The courts will assess each case on its own merits, determining whether the notice period is sufficient with regard to the length of the commercial relationship, but also any other relevant factors, such as:
The main loss caused by a sudden termination of a commercial relationship is loss of earnings. The victim is compensated for the effective loss resulting from the loss of profit, but not the lost turnover. This is evaluated on the basis of the pre-tax gross margin that would have been realised during the required notice period, had sufficient notice been given.
However, the loss may extend to certain unamortised investments and restructuring costs, indemnities paid to third parties or even reputational damage.
The courts can also impose a civil fine, although this is extremely rare.
Foreign business partners that have dealings in France or with French partners are often unaware that a termination of their business relationship could lead to liability in tort under French law, even if there is no breach of contract or the business relationship has been performed outside of France. Business relationships that have links with France should therefore be managed carefully - all the more so given that Article L 442-6 I 5°, which creates a liability in tort, may apply even if the parties have not chosen French law as the governing law of their contract.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00), fax (+33 1 44 05 80 54) or email (email@example.com or firstname.lastname@example.org). The Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com.
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