By Marion Dieval with assistance from Zachary Jellson and Aïcha Tazi Hnyine, University of Montpellier
Overview
This Quick Overview analyzes how a party, under French law, can terminate an established business relationship.
Article L. 442-6,I,5° of the French commercial code dictates that when there is an established business relationship, there must be timely notification of termination. This provision is an overriding mandatory rule that can be exercised for every established relationship in France regardless of the law chosen by the parties.
- When analyzing the termination of a business relationship, the law requires one to consider whether: There was an established business relationship, It was terminated, and Whether the termination of the relationship was wrongful.
If this analysis proves wrongful termination, one will assess the possible remedies.
The Established Business Relationship
Under French law, a relationship can be born out of contracts, pre-contractual negotiations, or post-contractual dealings. Thus, any activity undertaken in expectation of a contract will provide proof of a relationship. Even the continued performance of expired contractual obligations will also help to prove the existence of a relationship. Nevertheless, in the absence of a contract, the course of dealings between the parties may also suffice to prove a relationship. French law further qualifies a relationship as a business relationship when the parties are companies or associations.
Under Article L. 442-6,I,5° of the French commercial code, a business relationship carries specific legal obligations when the relationship is "established". Even though this Article does not provide any indicators of how a business relationship is established, the length of the parties' relationship may be sufficient proof. When analyzing what length of time amounts to an "established" business relationship, the courts have consistently evaluated the length and intensity of the relationship together. This provides a holistic approach in determining the existence of an "established" relationship.
An additional way to find an "established" business relationship is to look for multiple contracts between the entities. The court may be persuaded to find an established business relationship when the only linking factor between the parties is several short-term contracts. The French Court of Cassation has even held that the length of the relationship begins with the first contract signed between the parties even when that initial contract was signed with a different company of the same parent organization.
The profits jointly realized by the parties also help to determine the intensity of the business relationship. Where parties have expended a significant amount of money or gained significant profit, there is strong evidence of an "established" business relationship. All of these points help to decipher whether there is in fact an "established" business relationship.
The Termination
The termination of a business relationship may either be complete or partial. Complete termination occurs when either party terminates or fails to renew the contract. A partial termination occurs when either party diminishes their obligation. This partial termination may also include an alteration of the method of payment that results in the disenfranchisement of the other party.
The Wrongfulness of the Termination
Providing Proper Notification of Termination to Avoid Wrongful Termination
When a party decides to terminate a relationship, they must provide notification. Article L. 442-6,I,5° of the French commercial code states that the notification should be in writing, indicating that it is the party's unequivocal and definitive intention to terminate the contract. It is also good practice that the party not only provides written notification, but also delivers it to the other party by certified mail.
When to Provide Notification to Avoid Wrongful Termination?
Article L. 442-6,I,5° of the French commercial code states that the timing of the notification should respect the trade usages and collective agreements of the trade. These practices and agreements consider the length of the parties' relationship in determining the reasonable timing for notification of termination. The judge must also evaluate whether a party was economically dependent on the other party.
The reasonable timing for notification is determined according to the parties' past relationship, the length of their previous relationship, the importance of the contractual activity and the parties' investments. In fact, where the court finds that a party has invested a significant amount of time and money, wrongful termination is more probable as the parties stand to lose more money.
There is thus a minimum amount of time for the party to furnish notification of termination to avoid wrongful termination. This minimum may even override the explicit timing provided for in the parties' contract, as a party may not contract to a notification smaller than what justice requires.
In the specific case of contracts for the supply of store brands (marque de distributeur), parties should be especially conscious of the minimum time for notification. Considering the fact that store brands are produced in such a high quantity, a severe alteration on either of these sides would have dramatic effects on a party. In response to this reality, Article L. 442,6,I,5° of the French commercial code states that a party should provide notification twice as early as they would have normally.
How to Justify the Wrongful Termination?
Article L. 442-6,I,5° of the French commercial code does provide two instances in which termination is justified:
- Force majeure and The terminated party violated an obligation.
As in-house counsel, it is important to note that the best way to terminate a relationship is to do so in writing.
Remedies for Wrongful Termination
Damages
Article L. 442-6,I,5° of the French commercial code provides that the terminated party to a contract may seek damages as a result of wrongful termination of a business relationship.
Also, a third party may be indemnified under Article 1382 of the French Civil code, which is a general tort provision. This provision allows for recovery where an entity's negligent action has harmed another. The courts have used this provision to allow a third party to seek damages for indirect harm. A third party must demonstrate that there was in fact a wrongful termination, that the termination harmed this third party through a loss of profits, and that the termination and harm are directly linked. For example, when a supplier wrongfully terminates the established business relationship with an exporter, Article 1382 of the French civil code allows the third party distributor to recover.
Article L. 442-6, III of the French commercial code also allows for the Minister of the Economy and Finance and the Áutorite de la concurrencé to seek damages. The rationale behind this is that the wrongful termination of a contract harms the economy and thus the government can seek damages to correct this loss.
Damages Recoverable
The parties to a business relationship or a third party of a wrongfully terminated established business relationship could seek damages for the loss of profits and for the actual harm suffered. For example the harm recoverable may be injury to the entity's reputation, the redundancy cost, and the marketing expenses. The judge can also take into account the loss resulting from the winding up of the company or the investments realized to maintain its clientele. However, if a party's action could have reduced the available damages, the court may proportionately reduce the available damages.
Finally, the assessment of damages is calculated along the loss margin that could have been realized between the time when proper notification would have been issued and proper termination effectuated.
Injunctive Relief
A party to the relationship or the Minister of Economy and Finance may also seek an emergency injunction to preserve the relationship until proper notification becomes effective. These emergency injunctions are designed to allow the parties to properly terminate the contract.
Comparative Law
The wrongful termination of a business relationship is also regulated in Spain by the Competencia Desleal Act of January 3, 1991. Article 16 paragraph 3 of this act provides that termination, either complete or partial, of an established business relationship without a written notice amounts to an act of disloyal competition, if it is due to a severe non-fulfillment by a party of its obligations or a force majeure. Moreover, contrary to the French law, the Spanish legislator has fixed the minimum time notice has to be given which is of six months.
Conclusion
In France, there is a unique type of business relationship: the "established business relationship". Article L. 442,6,I,5° of the French Commercial Code provides the proper manner to terminate this type of relationship. The notification to terminate a relationship needs to be done in due time and in writing, especially to avoid damages. Thus, counsels should ensure that when dealing with business relationships in France, a party should always terminate it properly to avoid damages.
Additional resources
- Rupture des relations commerciales : menace de rupture et rupture brutale (DGCCRF France 2012)
- Rupture brutale de relation commerciale etablie (Chronos Vivaldi Avocats 2012)
- Les abus dans la relation commerciale : sur la rupture brutale meme partielle de relations commerciales etablies (Commissions d´Examen des Pratiques Commerciales 2011)
- La rupture brutale des relations commerciales (Chambre Commercial et d´Industrie Paris 2010)
- Rupture brutale d'une relation commerciale : faites valoir vos droits! (L'Express Enterprise 2007)