International companies with operations in France, or those that conduct regular business with French commercial partners, should be aware that their longtime French commercial partners could be entitled to claim compensation for the termination of the contractual relationship well beyond the scope of the original contractual provisions.
However, recent decisions of the French Supreme Court suggest that judges increasingly take into consideration the existence of economic difficulties as acceptable justification for the termination.
The French Commercial Code provides that the total or partial termination of any kind of longstanding commercial relationship may be qualified as abusive if insufficient notice of termination is given to the contractual partner. This law, considered as a mandatory public policy statute, applies to all existing commercial relationships. As a result, a company that terminates a contractual relationship with a French commercial partner must not only consider the contractual notice period, but must also take into account the notion of “reasonable” notice and the criteria developed by the French courts to be able to fully gauge any potential future claims for compensation against it.
In deciding what the appropriate duration of a “reasonable” notice is and the resulting adequate compensation for the terminated party, French case law provides a rule of thumb: three months is usually acceptable when the commercial relationship between the two companies lasted between two and three years; six months in cases in which the contractual relationship between the commercial parties was longer; and even longer notice periods exceeding 12 months can be accepted under French case law when the terminated party was financially dependent on its terminated partner. Courts then assess the amount of damages based on the loss of profit that the terminated party should have made during the missing months of the “reasonable” notice period.
How can foreign companies mitigate this risk? To mitigate the risk of a contractual termination being considered as abusive by French courts, companies should try to manage the expectations of their commercial partners and inform them of any potential complete or partial termination of their commercial relationship in writing, well before the contemplated date of termination. By providing its commercial partner with such information in advance, it will serve to weaken any potential claims for compensation brought by the French commercial partner that was terminated.
If the termination results from the closure of a site, the timing for providing such information is, however, limited by French employment law, which requires a consultation of employee representatives before the decision to close facilities may be made. Accordingly, it is highly advisable for an international company to consult with legal counsel to ascertain the best approach for handling such a situation.
Nevertheless, the French Supreme Court seems to be increasingly aware that companies face economic circumstances beyond their control, which make terminating the commercial relationship imperative. As a result, under the recent case law of the French Supreme Court, a termination subsequent to a substantial decrease in the volume of orders may not be considered as abusive if the terminating party is able to provide sufficient evidence of a diminished commercial activity and if the external reasons bring about such a decrease in the volume of orders.
Accordingly, if the termination of the commercial relationship results from the closure of a site, which itself is due to economic difficulties, the international company should make clear in the notice it sends to its commercial partner, that the termination was not a deliberate choice but was necessary due to external economic conditions.