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France: Caution when Terminating a Commercial Relationship

Pursuant to section L. 442-6, I, 5° of the French Commercial Code (“Code de Commerce”) an existing business relationship may not be terminated “brutally”. In the event of a breach of this provision, the business partner is liable for the resulting damage. Furthermore, at request of the French Ministry of Economy the business partner can be ordered to pay a fine in the amount of a maximum of 2 million Euros or 5% of its revenues realized in France.

1. What kind of business relationships are affected by this provision?

Every kind of business relationship is affected, regardless of whether it is based on a written contract or merely on continuous orders and deliveries.
A written distribution contract is not necessary. Oral agreements or conduct implying intent is sufficient.

2. What constitutes a „brutal“ termination?

A so-called “brutal” termination is assumed when the business relationship is terminated without an appropriate notice period.

3. How is an „appropriate notice period“ calculated?

An appropriate notice period results from the duration of the business relationship, as well as, if applicable, agreements across industries, from investments which the French business partner may have made to increase the trade, from the use of trademarks, from the possible exclusivity of the business relationships, among others.

4. How is the claim for damages calculated?

The claim for damages is calculated from the gross margin, which the business partner has lost, multiplied by the amount of months, which would have constituted an appropriate notice period.

5. Is it possible to make a contractual agreement with regard to an appropriate notice period? 

No, it is not possible, as the judge generally has the possibility to adjust the notice period to the facts.

6. Is it possible to avoid this liability risk by agreeing on German law?

Unfortunately, it is not possible to avoid liability, as sec. L. 442-6 of the Code de Commerce is a provision of the so-called „ordre public“, which is mandatory, even if the contract is governed by another law than the French.

Furthermore, it should be noted that according to French law, this is a case of tortious liability, which results in the place of jurisdiction being the place where the damage was incurred, i.e. the location of the French business partner.

7. Does this provision also apply to a partial termination or reduction of the order volume, or in the event of a material change in the business relationship, such as an important change in tariff, cancelation of the annual bonus, or similar?

Yes, the party on which the change is imposed unilaterally may rely on sec. L. 442-6 of the Code de Commerce with regard to every material change of the contractual conditions and assert a claim for compensation.

Comment

If you consider terminating any kind of business relationship with a French business, you should exercise absolute caution.

A termination without notice is only permissible, if the business partner is proven to be in serious default.

Economic reasons such as a decrease in sales, restructuring of the business etc., are not sufficient to justify an inadequate notice period.

Before giving notice of termination, or reducing orders or deliveries, changing delivery channels or similar, it is strongly recommended to identify the appropriate notice period, then give a written notice of termination and to continue the business relationship on the existing conditions during the notice period.
Any violation of these provisions may result in very high claims for damages.

Nicola Kömpf
Alerion avocats, Paris

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