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Termination of an established commercial relationship in France



An established commercial relationship may not be terminated in France without sufficient

written prior notice. If such notice is not given, or if its duration is insufficient, the terminating party may be held liable for damages for wrongful termination. The terminating party may also incur a fine and a penalty up to 5% of its turnover.


Pursuant to article L. 442-1 II of the French Commercial Code, "Any person engaged in production, distribution or service activities who abruptly terminates, even partially, an established commercial relationship, in the absence of prior written notice that takes into account the duration of the commercial relationship, with reference to trade practices or interprofessional agreements, shall be liable for the damage caused.”


Article L. 442-1 II of the Commercial Code applies to all business relationships of commercial nature, such as sale of products, provision of services, subcontracting agreements, IP license agreements, etc.


The only relationships which are excluded from its scope are those which may not be considered as “commercial”, such as the relationship between a lawyer or a doctor with its client or patient, which is not of a commercial essence.


In addition, it should be noted that article L. 442-1 II of the French Commercial Code refers to a "commercial" relationships and not a "contractual" relationships. A commercial relationship may therefore exist by the mere fact that the parties are in commercial dealings, regardless of whether there is a written contract between them or not.


Pursuant to French case law, the relationship must be considered as "established" when it has a "continuous, stable and habitual" character and when the party who is the victim of the termination could have reasonably anticipated for the future a certain continuity of the flow of business with its commercial partner.


An "established business relationship" may for example be evidenced by a succession of fixed-term contracts, or by the continuation of a business relationship even though the contract binding the parties no longer exists or has been previously terminated.


The termination of an established commercial relationship must not be "brutal" and must be preceded by sufficient prior notice


According to article L. 442-1 II of the French Commercial Code, the abruptness of the termination results from the absence of written notice or from the insufficiency of the duration of the notice with regard to the established commercial relations.


According to French case law, in order to give rise to damages, the termination of the relationship must be brutal, that is to say, unforeseeable, sudden and violent.


The brutality of the termination may also depend upon the period during which it occurs. Thus, a notice period that would have been considered reasonable may be considered insufficient if the termination occurs during a specific production cycle, or before the realization of a specific commercial operation (for example, Mother's Day in the perfume sector).


The assessment of the sufficiency or insufficiency of the notice period, and consequently of the brutality of the termination, is made by French courts on a case-by-case basis, in light of the circumstances.


French case law considers that the modification of certain essential elements of the contract, such as prices or terms of payment, can constitute a partial breach of commercial relations.


The termination notice must be in writing and clearly state the terminating party’s intention to terminate


It is recommended to send the termination notice by registered letter with acknowledgment of receipt, which will enable the terminating party to prove with sufficient certainty the date on which the notice was given and therefore that a sufficient notice period been respected.

In addition, in order to be considered as notification of termination and to start the termination notice period, the termination notice must clearly state the terminating party’s intention to terminate the relationship.


The notice period was considered insufficient in a case in which a company had notified another company by letter of the termination of the agreement, however it had offered to maintain the conditions of purchase and payment (French Supreme Court, January 29, 2013, n°11-23.676).


Likewise, the conduct of the terminating party which shows uncertainty as regards its decision to terminate cannot be considered as notice of termination.


The termination of the established commercial relationship does not have to be for cause


According to established case law, the terminating party is not obliged to give the reasons for the termination of contract.


According to French case law, the fact that the terminating party gave false reasons is not an obstacle to such party terminating the relationship, provided it gave sufficient notice period (CA Versailles, June 10, 1999).


Conversely, even if the termination is duly motivated, it would not be legitimate, if no sufficient written prior notice has been given. (Paris Court of Appeal, May 4, 2001).


The relationship must be maintained “as is” during the notice period


According to French case law, the brutal termination of a commercial relationship can be total or partial. It is partial when one of the parties unilaterally imposes on the other party "substantial" modifications to the contract.


According to French case law, constitute a "substantial modification" resulting in a partial termination of the contract:


  • A significant decrease in orders resulting from the will of the other party (and not from external circumstances) which leads to a substantial drop in the turnover of the party suffering from it

  • A significant change in rates or discounts

  • A significant change in payment terms.


For a modification to be considered as partial breach, such modification must be imposed by one of the parties. Therefore, a proposal for a contractual modification sent by one party to the other does not constitute a partial breach of contract, if it was negotiable (Cass. com. of November 6, 2012, n°11-26.554).


The notice period must be sufficient


According to Article L. 442-1 II. of the 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."


If sufficient written notice is given, the business relationship may be terminated at any time without cause.


In order to assess whether the written notice is of sufficient duration, Article L. 442-1 II of the French Commercial Code requires that the duration of the commercial relationship, trade practices and any interprofessional agreements, and other circumstances be taken into account.


Duration of the business relationship


The longer the duration of the business relationship which must be terminated, the longer the termination notice period which must be given.


However, according to case law, it is impossible to calculate the length of notice required solely on the basis of the duration of the relationship. There is consequently no mathematical correlation between the duration of the relationship and the duration of the notice period.


Termination notice period provided for by the applicable professional agreement, if any


Pursuant to article L. 442-1 II. of the 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."


However, according to the French Supreme Court, the notice period which results from professional trade practices is not necessarily a sufficient notice period if other criteria require that such period be longer (French Supreme Court, May 3, 2012, n° 11-10.544).


Similarly, the duration set by an interprofessional agreement, if there is one, is only a minimum, so that compliance with it does not preclude a concrete verification by the court of the sufficiency of the notice period with regard to the duration of the commercial relationship (Cass. com December 2, 2008).


In all cases, whether or not there is an interprofessional agreement, the judge will assess the sufficiency of the notice period, taking into account the duration of the commercial relationship and the need for the victim of the breach to find an alternative solution, taking the contractually agreed period as an indication of what might be reasonable.


Other assessment criteria


According to a constant jurisprudence of the Court of Cassation, "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, Commercial Chamber, July 9, 2013, n°12-20.468; French Supreme Court, Commercial Chamber, 6-11-2012, n°11-24.570).


Similarly, in its current wording, Article L. 442-1 II. of the Commercial Code states that the "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" that must be taken into account must be those which enable the judge to determine whether the party who suffered the termination was enabled to find new business (French Supreme Court, 21-3-2018, n°16-17.146 F-D).

Thus, in assessing whether or not the notice period is sufficient, case law takes into account, in particular (but not exclusively), the possible economic dependence of the victim on the party who terminated the contract, the prospects for retraining and reorganization of the victim of the termination, the volume of business, any exclusivity enjoyed by the victim, and the production or distribution cycle.


The main circumstances taken into account by the jurisprudence in assessing the sufficiency or otherwise of the notice period are set out below, by way of illustration and not as an exhaustive list:


Economic dependence of the party suffering the termination


The duration of the notice period must take into account the state of economic dependence of the party suffering the termination (French Supreme Court, 15-6-2010 n° 09-66.761). This is defined as the impossibility, for a company, "to have a solution technically and economically equivalent to the commercial relations it has established with another company" (French Supreme Court, 12-2-2013, n°12-13.603).


Economic dependence results, for example, from the difficulty for a distributor to obtain equivalent products from other suppliers under comparable economic conditions (Cass. com., 4-10-2016, n°15-14.025).


Economic dependence exists, for example, when the victim of the breach was bound by an exclusivity clause with respect to its partner (French Supreme Court, 12-2-2013, n°12-13.603)


French case law considers that economic dependence can be analyzed as an "aggravating factor". Thus, "the greater the economic dependence, the greater the prejudice resulting from the brutal nature of the termination" (Court of Appeal of Douai, March 15, 2001).


The prospects for retraining and reorganization of the victim of the rupture


The prospects for retraining and reorganization of the party who has suffered the contract termination are also taken into account by the judges in determining the sufficient duration of the notice period.


Thus, and by way of example, according to the Paris Court of Appeal, "compensation for damages in the event of a sudden termination is assessed with regard to the criterion of the duration of the notice period that should reasonably have been granted", and that this duration "is determined not with regard to a lost profit but with regard to 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, to determine the duration of the notice period which should have been granted, French courts must consider the time necessary to the party having suffered termination to reorganize its activity (Cass. com., March 11, 2014, n°13-11.097).


It is on the basis of this criterion, and taking into account the fact that the market in which the victim was working was captive and made it almost impossible for him to retrain, that a Court of Appeal granted a 24-month notice period even though the relationship had only lasted 3 years (Toulouse Court of Appeal, September 16, 2009, n°08/04848).


Business volume


The volume of business done by the party suffering termination with the terminating party is regularly taken into account to determine the duration of the notice period that should have been given. Thus, a Court of Appeal decided that the duration of the notice period to terminate a relationship that had lasted 3 years should be 6 months in light of the fact that the party having suffered the termination achieved 35% of its turnover with the party having terminated the contract (CA Aix-en-Provence, 1er October 2015, n°14/15898).


Exclusivity


The judges also take into account parameters such as the possible exclusivity enjoyed by the party having suffered the termination (termination of a 19-year exclusive distribution contract justifying a 12-month notice period instead of the 8 granted by the supplier: CA Paris, February 5, 2015; exclusive concession and 35-year relationship justifying a 2-year notice period: CA Amiens, June 2, 2015).


Production or distribution cycle


Account is taken of the particular production or distribution cycle in the field concerned (for example, in the case of a clothing collection or a vineyard). Thus, the Versailles Court of Appeal ruled that "by giving notice in January for the end of the annual seasonal period, Monoprix gave sufficient notice in accordance with custom and the duration of the commercial relationship, allowing the company [victim of the breach] to find an alternative solution for the next production cycle in the wine sector" (Versailles Court of Appeals, n°10/08577).


Judges also take into account any other relevant circumstances that may have an impact on the ability or timeframe of the victim of the breach (non-competition clause, notoriety of the products that were distributed, concomitant breach of several contracts, etc.).


Other circumstances


It is impossible to generalize a method of calculating the length of the notice period because of the variations related to the various circumstances that French courts have had to examine.


In all cases, the length of the notice period must be proportionate to the duration of the business relationship and must take into account the particular circumstances of the relationship, including the dependence of the partner on the relationship and the possibility for the partner to find alternative solutions.


In order to consider that the length of the notice period is not sufficient, case law relies, on a case-by-case basis, on the circumstances specific to 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 to seek out new customers or new suppliers, etc. ....


The doctrine and the case law recognize that the notice period must above all allow the victim of the breach to make arrangements and to give a new direction to his activities in good time. Thus, except in special circumstances, the purpose of granting reasonable notice is to allow the victim of the breach to take advantage of the notice period to reorganize.


To assess the sufficiency of the notice period which should be given, the provisions of the contracted on termination notice are irrelevant


It follows from French case law that the contractual notice period is irrelevant with regard to the requirement of sufficient notice set forth in article L. 442-1 II of the French Commercial Code, and can only constitute an indication of what the parties had in mind as regards termination when they concluded the contract.

Thus, according to the French Supreme Court, the existence of a contractual notice provision 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 existed between the parties and other circumstances (French Supreme Court, May 20, 2014, Commercial Chamber).


Similarly, according to French case law, compliance with the contractual notice period is not sufficient to exonerate the terminating party from liability in respect of brutal termination; even if the contract provides for a one-year notice period, judges are free to consider whether this is sufficient and reasonable (CA Lyon, April 10, 2003) .


Pursuant to article L. 442-1 of the French Commercial Code, liability may not be incurred due to insufficient notice if the termination notice period given to the party suffering termination is 18 months


The provisions of the French Commercial Code relating to the brutal termination of an established commercial relationship have been amended on several occasions. The latest version of article L. 442-I, II of the Commercial Code provides that "in the event of a dispute between the parties as to the duration of the notice period, the party responsible for the termination may not be held liable on the grounds of an insufficient duration once it has complied with an eighteen-month notice period."


Compliance with such notice is therefore exclusive of any fault.


Even though the above-mentioned scope of the text is not perfectly clear, its purpose is to allow the person who has terminated the contract to avoid liability claims from the direct victim of the termination of the established commercial relationship when the notice period given is 18 months.





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Tapan Cho
Tapan Cho
Mar 02, 2023

Informative

Tapan Choudhury Attorney at taps9.

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