Considerations in Commercial Contracting: Abrupt termination of an established commercial relationship
Le May 12, 2020 Par Johanna SCHWARTZ MIRALLES
In many respects, French contract law should not feel all that foreign to those of us from common law jurisdictions. Basic concepts like contract formation by mutual consent, a contract’s binding effect, and the elements of breach are shared across these legal systems.
When it comes, however, to the termination of a longstanding business relationship, French law might bring surprises to the unwary.
Unlike in common law systems, where parties are allowed to terminate contractual relationships with little or no prior notice so long as the termination takes place in accordance with the terms of the parties’ contract, under French law, an established commercial relationship can only be terminated with adequate notice. Otherwise, the terminating party can be sued for damages.
Concretely, this means that a party may be required to give notice that extends beyond the contractual termination date, thereby prolonging the contract’s effective dates. It also means that a French court will disregard a contractual provision establishing a notice period if the judge considers it too short.
Let’s take a closer look at these issues.
Established commercial relationship. The rule prohibiting the abrupt termination of an established commercial relationship (“relation commerciale établie”) is found in Article 442-1 of the French Commercial Code. While the Commercial Code does not define “established commercial relationship”, courts tend to find that there is an established commercial relationship where contracting parties are engaged in the production or distribution of goods or the provision of services and have a longstanding contractual relationship that is subject to regular renewal. Relationships that have only lasted several months or that are still in the negotiation stage are likely not “established” (Cass. com., 18 déc. 2007, no 06-10.390, Cass. com., 25 avr. 2006, no 02-19.577). Similarly, it is more likely for a court to find an “established commercial relationship” when a contract has been renewed than when it is for a fixed term and has never been renewed (CA Paris, 12 janv. 2005). The rule is designed to protect parties from an unexpected, detrimental change to their supply or distribution chain, and so the key question is whether the party subject to the termination could reasonably have expected that the relationship would continue.
Adequate notice. If parties have an “established commercial relationship”, then the abrupt termination (“rupture brutale”) of this relationship is prohibited, giving rise to a claim for damages. What constitutes an “abrupt” termination varies from case to case, and depends on the nature and length of the parties’ business relationship and its importance to the non-terminating party. All things being equal, for example, a contract that makes up 25% of a seller’s annual revenue will call for a longer notice period than one that makes up only 5%. Similarly, a contractual relationship that has lasted for 10 years will call for a longer pre-termination notice period than one that has lasted for 5 years.
It is important to underline that the legally adequate notice period does not depend on the parties’ explicit agreement. In fact, French courts freely disregard contractual provisions concerning pre-termination notice, judicially imposing longer notice periods if the judge deems it appropriate. That said, pursuant to Article 442-1 of the Commercial Code, a notice period of at least 18 months will be considered adequate as a matter of law. Notice periods of less than 18 months can also be sufficient, depending on the circumstances. And in any event, notice of termination must be clear and in writing.
In addition, the rule prohibiting the abrupt termination of an established commercial relationship is of mandatory character. As such, parties cannot contract around it, whether by expressly excluding the application of Article 442-1 of the Commercial Code or by selecting a foreign law to govern the parties’ agreement. French courts consider Article 442-1 of the Commercial Code to be a source of tort-based liability, and if the relevant choice-of-law rules lead to the application of French law to the termination, then Article 442-1 will necessarily apply.
Remedies. Where a plaintiff establishes that the defendant has abruptly terminated an established commercial relationship, French courts have relatively broad powers in crafting a remedy. They can order the defendant to continue performing the contract for the duration of the judicially-imposed notice period, either via an interim injunction or a final order. They can also award damages, including lost profits and consequential damages.
Defences. A terminating party can avoid liability either by proving that the non-terminating party committed a serious breach of contract, such that continuing the relationship was effectively impossible, or by proving that continuing the contractual relationship was prevented due to a force majeure event. As a general matter, however, French courts have shown themselves reticent to find that these defences apply.
Given the rules surrounding the abrupt termination of an established commercial relationship under French law, contracting parties can keep the following recommendations in mind:
For a party negotiating a contract and seeking to avoid potential future liability for abrupt termination, the parties might expressly stipulate that they are not entering into an “established commercial relationship” and further acknowledge that their relationship will come to an end when their contract expires. The same stipulations could be made at the time of renewal. While this mechanism is not guaranteed to prevent a French court from finding that an “established commercial relationship” exists, it could help a party to prove that the counterparty did not have a reasonable expectation that the relationship would continue indefinitely.
For a party seeking to terminate a commercial contract, deciding to terminate a longstanding contractual relationship should be taken with caution. The terminating party should keep in mind that it may be required to continue performing the contract for some time, or else compensate its counterparty for losses. If the decision to terminate is made, notice of termination should generally be given as rapidly as possible. Notice should always be given in writing, preferably by certified mail. Care should also be taken not to take any action that could harm the reputation of the contracting partner (as, for example, by contacting the partner’s customers to advise them of the termination), which could give rise to a claim for additional damages.
For a party whose commercial contract has been terminated, it is important to remember that the notice period established by contract is not necessarily binding. The party subject to termination can seek to negotiate continued performance for a reasonable time period of up to 18 months and/or compensation for losses. If negotiations fail, legal action can be considered, including an emergency injunction.
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