Breach of contract in doing business under French law (art. L. 442-6 of the commercial code)

Recently, the French Court of Appeal decided that article L.442-6, I, 5° of the French commercial code is an overriding mandatory provision (“loi de police”) according to article 9 of the European regulation on the law applicable to contractual obligations (Rome I)[1].

This decision is interesting because article L.442-6, I, 5° of the French commercial code can be used to increase the notice period in a contract. Indeed, under this article, a notice period is usually calculated on the basis of one month per year of relationship, which can be longer than the notice period stated in the contract.

For example, in a contract between a French company and a German company, the German company will say that only what is stated in the contract should apply. On the other hand, the French party will say that the duration of the commercial relationship should be taken into account, according to article L.442-6, I, 5° of the French commercial code, no matter what the chosen law is.

I – The unfair breach of contract according to L.442-6, I, 5° of the French commercial code[2]

1)     The relationship

Usually the establishment of a trading relationship will depend on the length of time the parties have been trading. 

For example, the French Supreme Court decided that six (6) determined contracts of one year coming one after the other, does not mean that there are six trade relationships but one well established relationship of six (6) years[3].

On the contrary, the Supreme Court did not recognise a succession of contracts coming after an invitation to tender as an established relationship[4].

2)     The breach

The breach can come from a full or in part termination. The breach can be, for example, a partial delisting or a significant reduction of the order. It will be considered as a partial breach if the bought goods are reduced significantly (eg: from 75.000 to 29.000 unit) and for quite a long period (eg: a reduction ordered for more than 1 month). Removing an exclusivity can also be considered as breach of contract.

Recently, the Parisian Court of Appeal decided that a one-sided price increasing from 25% to 30% without any objective explanation constitutes an unfair breach of contract[5].

In another case, an intermediary brought an action to say that the loss of 50% of its turnover was caused by the other party. The Supreme Court took into consideration the economic crisis that impeded the other party fulfilling its undertaking[6].

3)     The unfairness

The breach will be considered as unfair if notice has not been sent to the other party. Also, if a written notice has been sent, it must be long enough. The period of notice depends on the commercial relationship. In practice, we calculate one (1) month per year of relationship.

The period of notice shall also take into account the possibility of the other party reorganising its business.

4)     The damages

Damages from a breach of contract are calculated according to the margin forecasted by the injured party during the notice period which has not been executed.

The margin can be either the gross margin[7] or the variable cost margin based on the difference between the turnover unmade by the injured party and the cost not supported because of the decline in business[8].

The Supreme Court considered as an unsupported cost, the rent and the wages that the injured party saved because of the unfair breach[9]. The Parisian court, considered as an unsupported cost, the electricity, kilometre allowance, the office supplies and tax[10].

 

II- L.442-6, I, 5° of the French commercial code, an overriding mandatory provision

The European regulation defined the overriding mandatory provisions (art. 9) as being considered “crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.”

It continues, “effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application”.

Even if the article L.442-6, I, 5° of the French commercial code preserves the commercial and private interests of the party more than the public interest, the Parisian Court of Appeal decided, in its decision of January 11th, 2019[11], that it is an overriding mandatory provision according to article 9 of “Rome I”.

In this case, a French retailer brought a claim against the German supplier for unfair breach of the exclusive retail contract. The German supplier denied that article L.442-6, I, 5° of the French commercial code was an overriding mandatory provision and stated that the contract was governed by German law.

The French court of appeal, however, decided it is an overriding mandatory provision, and so rendered the contractual term of jurisdiction unlawful. The judge seemed to consider that this prohibited actions with effect in France shall apply to all parties without discrimination, be they French or foreign.

However, in this case, the contractual parties were European, consequently the European regulation Rome I was applicable. Hence, L.442-6, I, 5° of the French commercial code is an overriding mandatory provision in the European sphere but may be not at an international level.

Indeed, in the case Monster Cable[12] between an American company and a French one, the French Supreme Court decided that only the terms of the contract that stated the jurisdiction as American should apply, despite any overriding mandatory provision.

To sum up for contracts between European parties, the Court [13] will apply Bruxelle 1 bis[14] for the jurisdiction and Rome I[15] to qualify the article L.442-6, I, 5° of the French commercial code as an overriding mandatory provision and so rendered the contractual term of jurisdiction unlawful.

Currently, there is a debate in France. As the DGCCRF proposes to set a one-year notice period limit applicable regardless of the duration of the relationship. For some author, “this proposal provides greater legal certainty and should help to avoid lengthy notice periods, which can be of up to three years[16]

 

Throughout my legal practice as an independent lawyer as well as an inhouse advisor of French supplier, I have gained experience dealing with all the variations of distribution contracts. Please do not hesitate to contact me to be sure you are in compliance with the relevant French law: audrey@pagotavocat.com

You can also choose your working language: English, German, French, Arabic using my partnership http://korte-law.com/

[1] Regulation (EC) n° 593/2008 of the European parliament and of the council, June 17th, 2008 on the law applicable to contractual obligations (Rome I) https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32008R0593&from=FR

[2] La rupture brutale des relations commerciales établie (I) et (II), AJ Contrat, jan. 2019, n°1 & 2

[3] Com. 2015 June. 23rd, n°14-14.687

[4] Com. 2011 Sept. 20th, n°10-15.750 ; Com. 2014 Nov. 4th, n°13-22.726; Com. 2017 Oct. 18th, n°16-15.138

[5] Paris, 2019 Jan. 17th

[6] Cass. Com., 2019 Feb. 6th

[7] Cass.com., 2014 June 24th, n°12-27.908

[8] https://www.cours-appel.justice.fr/sites/default/files/2018-06/Fiche_M%C3%A9thodologique_06.pdf

https://www.cours-appel.justice.fr/sites/default/files/2018-06/Fiche_M%C3%A9thodologique_09.pdf

[9] Cass. Com., 2019 Jan. 23rd, n°17-26.870

[10] Paris, 2019 Jan. 9th, RGn°16/13392

[11] CA Paris, 2019 11 Jan, LawLex194

[12] Com. 2008 Oct. 20nd n°07-15.823 (https://www.legifrance.gouv.fr/)

[13] CJUE. 2016 Jul.14th, C-196/15

[14] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32012R1215&from=FR

[15] https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32008R0593&from=DE

[16] https://www.vogel-vogel.com/en/blog/towards-a-comprehensive-reform-of-the-law-on-abusive-practices-under-article-l-442-6-of-the-french-commercial-code/


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