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Economic Justification in the Assessment of Abusive Terminations of Longstanding Commercial Relationships

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 [...]

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Cœur Défense: the Chronicle of a Foretold Reform of the French Safeguard Proceedings

The end of a legal saga

On April 7, 2014, the Commercial Court of Paris put an end to the Coeur Défense’s legal saga by acknowledging the implementation of the two safeguard plans adopted for Heart La Défense (HoLD), a French corporation, and Dame Luxembourg S.à r.l. (Dame), HoLD’s sole shareholder.  As a reminder, HoLD subscribed to a 1.64B-Euro loan in July 2007 in order to purchase “Coeur Défense”, the largest office building in Europe.  In 2008, further to Lehman Brothers’s bankruptcy, safeguard proceedings were initiated to the benefit of HoLD and Dame.  Under the safeguard plans, HoLD had to repay the principal of the loan on July 10, 2014 to Windermere XII, a French securitization mutual fund.  From the beginning of these proceedings, Coeur Défense has attracted the attention of French courts, authors and specialists due to its potential impact on French bankruptcy proceedings.

The reform of the French safeguard proceedings: the rebalancing of powers between debtors and creditors

The end of Coeur Defense’s legal proceedings happened to occur at the same time as the introduction of Order No. 2014-326 dated March 12, 2014, modifying the French safeguard proceedings and due to enter into force on July 1, 2014 (the Order).  This reform aims at restoring balance in the powers of the debtor and its creditors, and grants the latter a significant role in the preparation of a safeguard plan implemented by a distressed company.  One would say this reform is creditor-friendly and makes French bankruptcy laws closer to U.S. laws.

Mainly, the Order modifies Article L. 626-30-2 of the French Commercial Code and enables creditors to take part in the preparation of the safeguard plan.  As a consequence, in the presence of creditors’ committees, creditors are now allowed to submit their own plan to the court.  In introducing a countervailing strength to the debtor’s power to elaborate a safeguard plan, the reform should foster discussions between creditors and debtors, and prevent debtors from forcing an inefficient plan onto creditors by threatening them to implement a more traditional 10-year plan.  In fact, one of the issues in Coeur Défense was that Windermere XII, the main creditor, had failed to introduce to the court modifications that HoLD had previously refused to integrate in its plan.

In addition, as of the entry into force of the Order, if creditors’ committees fail to adopt a safeguard plan and if closure of the proceedings would lead, in a short period of time, to a “cessation of payments” (or inability of the company to meet its financial obligations), the safeguard proceedings may be converted into reorganization proceedings at the request of the court-appointed officers or the public prosecutor (in addition to the debtor, as provided prior to the reform).  Taken together with Article 55 of the Order, which allows the court to order the sale of all or part of a debtor company in the event the submitted safeguard plans seem clearly unlikely to lead to a recovery of the company or in the [...]

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