France | Arbitration clauses in international contracts with consumers are not enforceable

16 février 2021

  • France
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Under French Law, franchisors and distributors are subject to two kinds of pre-contractual information obligations: each party has to spontaneously inform his future partner of any information which he knows is decisive for his consent. In addition, for certain contracts – i.e franchise agreement – there is a duty to disclose a limited amount of information in a document. These pre-contractual obligations are mandatory. Thus these two obligations apply simultaneously to the franchisor, distributor or dealer when negotiating a contract with a partner.

General duty of disclosure for all contractors

What is the scope of this pre-contractual information?

This obligation is imposed on all co-contractors, to any kind of contract. Indeed, article 1112-1 of the Civil Code states that:

(§. 1) The party who knows information of decisive importance for the consent of the other party must inform the other party if the latter legitimately ignores this information or trusts its co-contractor.

(§. 3) Of decisive importance is the information that is directly and necessarily related to the content of the contract or the quality of the parties. »

This obligation applies to all contracting parties for any type of contract.

Who must prove the compliance with such provision ?

The burden of proof rests on the person who claims that the information was due to him. He must then prove (i) that the other party owed him the information but (ii) did not provide it (Article 1112-1 (§. 4) of the Civil Code)

Special duty of disclosure for franchise and distribution agreements

Which contracts are subject to this special rule?

French law requires (art. L.330-3 French Commercial Code) communication of a pre-contractual information document (in French “DIP”) and the draft contract, by any person:

  • which grants another person the right to use a trade mark, trade name or sign,
  • while requiring an exclusive or quasi-exclusive commitment for the exercise of its activity (e.g. exclusive purchase obligation).

Concretely, DIP must be provided, for example, to the franchisee, distributor, dealer or licensee of a brand, by its franchisor, supplier or licensor as soon as the two above conditions are met.

When the DIP must be provided?

DIP and draft contract must be provided at least 20 days before signing the contract, and, where applicable, before the payment of the sum required to be paid prior to the signature of the contract (for a reservation).

What information must be disclosed in the DIP?

Article R. 330-1 of the French Commercial Code requires that DIP mentions the following information (non-detailed list) concerning:

  • Franchisor (identity and experience of the managers, career path, etc.);
  • Franchisor’s business (in particular creation date, head office, bank accounts, historical of the development of the business, annual accounts, etc.);
  • Operating network (members list with indication of signing date of contracts, establishments list offering the same products/services in the area of the planned activity, number of members having ceased to be part of the network during the year preceding the issue of the DIP with indication of the reasons for leaving, etc.);
  • Trademark licensed (date of registration, ownership and use);
  • General state of the market (about products or services covered by the contract)and local state of the market (about the planned area) and information relating to factors of competition and development perspective;
  • Essential element of the draft contract and at least: its duration, contract renewal conditions, termination and assignment conditions and scope of exclusivities;
  • Financial obligations weighing in on contracting party: nature and amount of the expenses and investments that will have to be incurred before starting operations (up-front entry fee, installation costs, etc.).

How to prove the disclosure of information?

The burden of proof for the delivery of the DIP rests on the debtor of this obligation: the franchisor (Cass. Com., 7 July 2004, n°02-15.950). The ideal for the franchisor is to have the franchisee sign and date his DIP on the day it is delivered and to keep the proof thereof.

The clause of contract indicating that the franchisee acknowledges having received a complete DIP does not provide proof of the delivery of a complete DIP (Cass. com, 10 January 2018, n° 15-25.287).

Sanction for breach of pre-contractual information duties

Criminal sanction

Failing to comply with the obligations relating to the DIP, franchisor or supplier can be sentenced to a criminal fine of up to 1,500 euros and up to 3,000 euros in the event of a repeat offence, the fine being multiplied by five for legal entities (article R.330-2 French commercial Code).

Cancellation of the contract for deceit

The contract may be declared null and void in case of breach of either article 1112-1 or article L. 330-3. In both cases, failure to comply with the obligation to provide information is sanctioned if the applicant demonstrates that his or her consent has been vitiated by error, deceit or violence. Where applicable, the parties must return to the state they were in before the contract.

Regarding deceit, Courts strictly assess its two conditions which are:

Damages

Although the claims for contract cancellation are subject to very strict conditions, it remains that franchisees/distributors may alternatively obtain damages on the basis of tort liability for non-compliance with the pre-contractual information obligation, subject to proof of fault (incomplete or incorrect information), damage (loss of chance of not contracting or contracting on more advantageous terms) and the causal link between the two.

French case law

Franchisee/distributor must demonstrate that he would not have actually entered into the contract if he had had the missing or correct information

Courts reject motion for cancellation of a franchise contract when the franchisee cannot prove that this deceit would have misled its consent or that it would not have entered into the contract if it had had such information (for instance: Versailles Court of Appeal, December 3, 2020, no. 19/01184).

The significant experience of the franchisee/distributor greatly mitigates the possible existence of a defect in consent.

In a ruling of January 20, 2021 (no. 19/03382) the Paris Court of Appeal rejected an application for cancellation of a franchise contract where the franchisor had submitted a DIP manifestly and deliberately deficient and an overly optimistic turnover forecast.

Thus, while the presentation of the national market was not updated and too vague and that of the local market was just missing, the Court rejected the legal qualification of the franchisee’s error or the franchisor’s willful misrepresentation, because the franchisee « had significant experience » for several years in the same sector (See another example for a Master franchisee)

Similarly, the Court reminds that “An error concerning the profitability of the concept of a franchise cannot lead to the nullity of the contract for lack of consent of the franchisee if it does not result from data established and communicated by the franchisor« , it does not accept the error resulting from the communication by the franchisor of a very optimistic turnover forecast tripling in three years. Indeed, according to the Court, « the franchisee’s knowledge of the local market was likely to enable it to put the franchisor’s exaggerations into perspective, at least in part. The franchisee was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the announced results. It was in fact the franchisee’s responsibility to conduct its own market research, so that if the franchisee misunderstood the profitability of the operation at the business level, this error was not caused by information prepared and communicated by the franchisor« .

The path is therefore narrow for the franchisee: he cannot invoke error concerning profitability when it is him who draws up his plan, and even when this plan is drawn up by the franchisor or based on information drawn up and transmitted by the franchisor, the experience of the franchisee who knew the local market may exonerate the franchisor.

Takeaways

  • The information required by the DIP must be fully completed and updated ;
  • The information not required by the DIP but communicated by the franchisor must be carefully selected and sincere;
  • Franchisee must be given the opportunity to request additional information from the franchisor;
  • Franchisee’s experience in the economic sector enables the franchisor to considerably limit its exposure to the risk of contract cancellation due to a defect in the franchisee’s consent;
  • Franchisor must keep the proof of the actual disclosure of pre-contractual information (whether mandatory or not). 

 

In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as « competence-competence », Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the « weak » party.

Resale prices maintenance on the internet is unlawful while ban on resale on third-party platforms seems to be a new lawful option

In a nutshell

On December 3, 2020 the French Competition Authority (the FCA) :

  • reiterated clearly the illegality of behavior aimed at imposing resale prices, especially in e-commerce and then condemned Dammann Frères, a French manufacturer of premium teas, to a € 226,000 fine for imposing minimum online resale prices maintenance on its distributors
  • extended the right of ban on resale on third-party platforms from selective distribution of luxury products to quite common commercial relations, and then rejected the alleged illegality of this ban.

Between “recommended” and “imposed” resale prices: a dangerous game to play

Article L 442-6 of French Commercial Code prohibits « imposing, directly or indirectly, a minimum character at the resale price of a good, at the price of a service or at a commercial margin”. The FCA has ruled that, under the pretext of communicating recommended prices to its distributors, Dammann Frères has in fact imposed resale prices on them, failure to comply with these prices being punishable by retaliations (removal or reduction of the amount of discounts granted to them, delay in deliveries, removal of their contact details from the list of distributors presented on its website, disruption of supply, or even termination of commercial relations).

The supplier justified – vainly – this practice by its will to preserve the image and the positioning of its products but above all to avoid excessive price differences between resales by distributors on the internet and those carried out by network stores (where dealers had more latitude in setting prices).

The restriction of competition resulting from resale price maintenance can be obvious when contractual stipulations directly fix the price; but it can be deduced from a set of indices which is characterized according to a method strictly applied by the FCA :

  • the supplier communicates its (recommended) resale prices to distributors,
  • the latter apply them significantly and,
  • a “price policing” system is put in place to prevent the price agreement from being questioned by deviant distributors. This mechanism results in price monitoring by the supplier (or even by other distributors, etc.),
  • this leads to pressure, or even retaliation, to force distributors to align their prices upwards, such as delivery delays, supply disruptions, removal of discounts, etc.

There is a fine line between a price surveillance mechanism and a price constraint mechanism. This legal insecurity has been criticized and the European Commission could provide, on the occasion of the upcoming reform of the European block exemption regulation on vertical restraints, additional advice on the circumstances in which recommended resale prices should be qualified as imposed resale prices. The reform expected in 2022 could even go further by highlighting the pro-competitive effects of resale price maintenance.

Ban on resale on third-party platforms: a serious option to consider

With regard to the ban on the resale of its products on third-party platforms, openly imposed by Dammann Frères, the FCA took a rather liberal and innovative approach by applying the rules of the Coty case law (ruling of 6 12 2017, Coty Germany GmbH, C 230/16) to decide ultimately that there is no need to prosecute and therefore to fine. If this approach is confirmed later on by French courts, it will have a considerable impact on suppliers ‘policy who seek to control and restrict the terms of resale of their products on third-party platforms such as Amazon or e-Bay.

In this case, the FCA noted that the tea manufacturer’s market share was less than 30% and that this restriction did not constitute a hardcore restriction. Indeed, the FCA noted that this practice (i) did not prohibit distributors from selling products online nor from marketing themselves through third party websites (advertising and use of search engines) and (ii) did not constitute a restriction on the number of distributors, as the prosecution file did not evidence the number of customers of these platforms amongst the group of online buyers.

The FCA’s decision is therefore extends the Coty case law according to which the supplier of a selective distribution network for luxury products can prohibit the resale of its products on third-party platforms in order to preserve the image of its products (see our comments Here).

The FCA had already extended the Coty case law to technical products in a decision of 24 October 2018 (n ° 18-D-23), concerning the practices of the company Stihl, leader in mechanized garden equipment (mainly confirmed on appeal, Paris court of appeal 17 10 19), where the FCA, in a premonitory manner, stated: “it is important to specify that the analysis carried out by the Court of justice in the Coty ruling for the online marketing of luxury products seems likely to be extended to other types of products ”(see our comments Here).

The FCA is now going even further because, even though Dammann Frères teas are “high-end” positioned, they are neither luxury products nor even distributed through a selective distribution network.

Key takeaway

As part of its relations with its distributors, the supplier must ensure:

  • not to stipulate any express minimum resale price clause;
  • not to implement a system, nor tolerate practices, of commercial retaliation against distributors deviating from the minimum « recommended » prices (or even threaten them to do so);
  • not to prohibit them from selling the products online or from advertising online;
  • carefully examine the possibility of prohibiting them from reselling its products on third-party platforms.

Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.

Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in  Charlivari v. Sté Equivalanza, n°17/03703.

It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices;  the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).

Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.

Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.

Under French law, terms of payment of contracts of sale or of services (food excluded) are strictly regulated (art. L441-10.I Commercial code) as follows:

  • Unless otherwise agreed between the parties, the standard time limit for settling the sums due may not exceed 30 days.
  • Parties can agree on a time of payment which cannot exceed 60 days after the date of the invoice.
  • By way of derogation, a maximum period of 45 days from end of the month after the date of the invoice may be agreed between the parties, provided that this period is expressly stipulated by contract and that it does not constitute a blatant abuse with respect to the creditor (e.g. could be in fact up to 75 days after date of issuance).

The types of international contracts concluded with a French party can be:

(a) An international sales contract governed by French law (or to the national law of a country where CISG is in force), and which does not contractually exclude the Vienna Convention of 1980 on the International Sale of Goods (CISG)

In this case the parties may be freed from the domestic mandatory payment time limits, by virtue of the superiority of CISG over French domestic rules, as stated by public authorities,

(b) An international contract (sale, service or otherwise) concluded by a French party with a party established in the European Union and governed by the law of this other European State,

In this case the parties could be freed from the French domestic mandatory payment time limits, by invoking the rules of this member state law, in accordance with the EU directive 2011/7;

(c) Other international contracts not belonging to (a) or (b),

In these cases the parties might be subject to the French domestic mandatory payment maximum ceilings, if one considers that this rule is an OMR (but not that clearly stated).

Can a foreign party (a purchaser) agree with a French party on time limit of payment exceeding the French mandatory maximum ceilings (for instance 90 days)?

This provision is a public policy rule in domestic contracts. Failing to comply with the payment periods provided for in this article L. 441-10, any trader is liable to an administrative fine, up to a maximum amount of € 75,000 for a natural person and € 2,000,000 for a company. In the event of reiteration the maximum of the fine is raised to € 150,000 for a natural person and € 4,000,000 for a legal person.

There is no express legal special derogatory rule for international contracts (except one very limited to specific intra UE import / export trading). This being said, the French administration (that is to say the Government, the French General Competition and Consumer protection authority, “DGCCRF” or the Commission of examination of the commercial practices, “CEPC”) shows a certain embarrassment for the application of this rule in an international context because obviously it is not suitable for international trade (and is even counterproductive for French exporters).

International sales contract can set aside the maximum payment ceilings of article L441-10.I

Indeed, the Government and the CEPC have identified a legal basis authorizing French exporters to get rid of the maximum time limit imposed by the French commercial code: this is the UN Convention on the international sale of goods of 1980 (aka “CISG”) applying to contracts of supply of (standard or tailor-made) goods (but not services). They invoked the fact that CISG is an international treaty which is a higher standard than the internal standards of the Civil Code and the Commercial Code: it is therefore necessary to apply the CISG instead of article L441-10 of the Commercial Code.

  • In the 2013 ministerial response, (supplemented by another one in 2014) the Ministry of Finance was very clear: « the default application of the CISG rules […] therefore already allows French traders to grant their foreign customers payment terms similar to those offered by their international competitors”.
  • In its Statement of 2016 (n°16.12), the CEPC went a little further in the reasoning by specifying that CISG poses as a rule that payment occurs at the time of the delivery of the goods, except otherwise agreed by the parties (art. 58 & 59), but does not give a maximum ceiling. According to this Statement, it would therefore be possible to justify that the maximum limit of the Commercial Code be set aside.

The approach adopted by the Ministry of Finance and by the CEPC (which is a kind of emanation of this Ministry) seems to be a considerable breach in which French exporters and their foreign clients can plunge into. This breach is all the easier to use since CISG applies by default as soon as a sales contract is subject to French law (either by the express choice of the parties, or by application of the conflict of law rules by the judge subsequently seized). In other words, even if controls were to be carried out by the French administration on contracts which do not expressly target the CISG, it would be possible to invoke this “CISG open door”.

This ground seems also to be usable as soon as the international sale contract is governed by the national law of a foreign country … which has also ratified CISG (94 countries). But conversely, if the contract expressly excludes the application of CISG, the solution proposed by the administration will close.

For other international contracts not governed by CISG, is this article L441-10.I an overriding mandatory rule in the international context?

The answer is ambiguous. The issue at stake is: if art. L441-10 is an overriding mandatory rule (“OMR”), as such it would still be applied by a French Judge even if the contract is subject to foreign law.

Again the Government and the CEPC took a stance on this issue, but not that clear.

  • In its 2013 ministerial response, the Ministry of Finance statement was against the OMR qualification when he referred to «foreign internal laws less restrictive than French law [that] already allows French traders to grant their foreign customers payment terms similar to those offered by their international competitors”.
  • The CEPC made another Statement in 2016 (n°1) to know whether or not these ceilings are OMRs in international contracts. A distinction should be made as regards the localization of the foreign party:

– For intra-EU transactions, the CEPC put into perspective these maximum payment terms with the 2011/7 EU directive on the harmonization of payment terms which authorizes other European countries to have terms of payment exceeding 60 days (art 3 §5). Therefore article L441-10.I could not be seen as OMR because it would conflict with other provisions in force in other European countries, also respecting the EU directive which is a higher standard than the French Commercial Code.

– For non intra EU transactions, CEPC seems to consider article L441-10.I as an OMR but the reasoning was not really strong to say straightforwardly that it is per se an OMR.

To conclude on the here above, (except for contracts – sales excluded –  concluded with a non-EU party, where the solution is not yet clear), foreign companies may negotiate terms of payment with their French suppliers which are longer than the maximum ceilings set by article L441 – 10, provided that it is not qualified as an abuse of negotiation (to be anticipated in specific circumstances or terms in the contract to show for instance counterparts, on a case by case basis) and having in mind that, with this respect, French case law is still under construction by French courts.

Summary – According to French case law, an agent is subject to the protection of the commercial agent legal status and therefor is entitled to a termination indemnity only if it has the power to negotiate freely the price and terms of the sale contracts. ECJ ruled recently that such condition is not compliant with European law. However, principals could now consider other options to limit or exclude the termination indemnity.

It is an understatement to say that the ruling of the European court of justice of June 4, 2020 (n°C828/18, Trendsetteuse / DCA) was expected by both French agents and their principals.

The question asked to the ECJ

The question asked by the Paris Commercial Court on December 19, 2018 to the ECJ concerned the definition of the status of the commercial agent who could benefit from the EC Directive of December 18, 1986 and consequently of article L134 and seq. of Commercial Code.

The preliminary question consisted in submitting to the ECJ the definition adopted by the Court of Cassation and many Courts of Appeal, since 2008 : the benefit of the status of commercial agent was denied to any agent who does not have, according to the contract and de facto, the power to freely negotiate the price of sale contracts concluded, on behalf of the seller, with a buyer (this freedom of negotiation being also extend to other essential terms of the sale, such as delivery or payment terms).

The restriction ruled by French courts

This approach was criticized because, among other things, it was against the very nature of the economic and legal function of the commercial agent, who has to develop the principal’s activity while respecting its commercial policy, in a uniform manner and in strict compliance with the instructions given.  As most of the agency contracts subject to French law expressly exclude the agent’s freedom to negotiate the prices or the main terms of the sales contracts, judges regularly requalified the contract from commercial agency contract into common interest mandate contract. However, this contract of common interest mandate is not governed by the provisions of Articles L 134 et seq. of the Commercial Code, many of which are of internal public order, but by the provisions of the Civil Code relating to the mandate which in general are not considered to be of public order.

The main consequence of this dichotomy of status lays in the possibility for the principal bound by a contract of common interest mandate to expressly set aside the compensation at the end of the contract, this clause being perfectly valid in such a contract, unlike to the commercial agent contract (see French Chapter to Practical Guide to International Commercial Agency Contracts).

The decision of the ECJ and its effect

The ECJ ruling of June 4, 2020 puts an end to this restrictive approach by French courts. It considers that Article 1 (2) of Directive of December 18, 1986 must be interpreted as meaning that agents must not necessarily have the power to modify the prices of the goods which they sell on behalf of a principal in order to be classified as a commercial agent.

The court reminds in particular that the European directive applies to any agent who is empowered either to negotiate or to negotiate and conclude sales contracts. The court added that the concept of negotiation cannot be understood in the restrictive lens adopted by French judges. The definition of the concept of « negotiation” must not only take into account the economic role expected from such intermediary (negotiation being very broad: i.e. dealing) but also preserve the objectives of the directive, mainly to ensure the protection of this type of intermediary.

In practice, principals will therefore no longer be able to hide behind a clause prohibiting the agent from freely negotiating the prices and terms of sales contracts to deny the status of commercial agent.

Alternative options to principals

What are the means now available to French or foreign manufacturers and traders to avoid paying compensation at the end of the agency contract?

  • First of all, in case of international contracts, foreign principals will probably have more interest in submitting their contract to a foreign law (provided that it is no more protective than French law …). Although commercial agency rules are not deemed to be overriding mandatory rules by French courts (diverging from ECJ Ingmar and Unamar case law), to secure the choice not to be governed by French law, the contract should also better stipulate an exclusive jurisdiction clause to a foreign court or an arbitration clause (see French Chapter to Practical Guide to International Commercial Agency Contracts).
  • it is also likely that principal will ask more often a remuneration for the contribution of its (preexisting) clients data base to the agent, the payment of this remuneration being deferred at the end of the contract … in order to compensate, if necessary, in whole or in part, with the compensation then due to the commercial agent.
  • It is quite certain that agency contracts will stipulate more clearly and more comprehensively the duties of the agent that the principal considers to be essential and which violation could constitute a serious fault, excluding the right to an end-of-contract compensation. Although judges are free to assess the seriousness of a breach, they can nevertheless use the contractual provisions to identify what was important in the common intention of the parties.
  • Some principals will also probably question the opportunity of continuing to use commercial agents, while in certain cases their expected economic function may be less a matter of commercial agency contract, but rather more of a promotional services contract. The distinction between these two contracts must, however, be strictly observed both in their text and in reality, and other consequences would need to be assessed, such as the regime of the prior notice (see our article on sudden termination of contracts)

Finally, the reasoning used by ECJ in this ruling (autonomous interpretation in the light of the context and aim of this directive) could possibly lead principals to question the French case-law rule consisting in granting, almost eyes shut, two years of gross commissions as a flat fee compensation, whereas article 134-12 of Commercial code does not fix the amount of this end-of-contract compensation but merely indicates that the actual damage suffered by the agent must be compensated ; so does article 17.3 of the 1986 EC directive. The question could then be asked whether such article 17.3 requires the agent to prove the damage actually suffered.

Summary – Whereas cryptocurrency emerged outside of the legal framework thus favouring cyber criminality, France has recently set out rules ensuring investors’ and traders’ security.

Far from being a drawback, this set of rules insures the balance between innovation incentive and investor security.

A recent study published by the French AMF underlined the danger of cyber criminality and its impact on the global market.

The AMF targeted especially, bitcoins scams and cyberattacks aiming online platforms trading cryptocurrency.

This cyber criminality is supposed to be one of the most expensive ones worldwide, close to 0.5 % of the world GDP.

Nevertheless, cryptocurrencies continue to attract the interest of private individuals, due to potential gains and due to the lack of state regulation. In the meantime, the extreme instability of the exchange rate and online fraudulent behaviours (especially in the case of alternative cryptocurrency such as altcoins) often prove disastrous for small investors.

To shield investors, the AMF recently published recommendations and warnings for consumers, as well as several blacklists of websites selling cryptocurrencies.

Cryptocurrency is defined by the AMF as “digital asset relying on blockchain technology, through a decentralized registry and an encrypted protocol”.

A digital asset is neither a currency (its value is not determined by a central bank but through supply and demand) nor a financial instrument.

Faced with the multiplication of new digital assets, France (pioneer in this area) has implemented a legal framework for digital assets.

The Law 2019-486 dated 22 May 2019 relating to companies’ growth and transformation (“PACTE Law”) entered into force 24 May 2019, provides for the general definition of digital assets: “a digital representation of value which is not issued nor guaranteed by a central bank nor a public authority, which is not necessarily attached to a currency with an exchange rate and which does not fall within the legal definition of a currency but which is accepted by natural or legal persons as a means of exchange and which can be transferred, stored or traded electronically” (Article L. 54-10-1 of the French Monetary and Financial Code).

Any DASP will need to abide by the legal rules set up by the Monetary and Financial Code and will be placed under the authority of the AMF.

The Digital Assets Services Provides’ new legal status

The PACTE Law defines a DASP as the one providing, amongst others, the following services:

“1° The service of safekeeping digital assets or the access to digital assets (including through the means of private cryptographic keys) for a third party, for the purposes of holding, storing or trading digital assets;

2° The service of purchasing and selling digital assets in exchange for legal tender currencies;

3° The service of trading digital assets for other digital assets;

4° The service of operating a digital platform trading digital assets (…)”

Providers wishing to attract investors can file for registration and/or optional AMF visa.

In which cases is the registration with the AMF mandatory?

Registration is mandatory for two activities:

  • The service of safekeeping digital assets;
  • The service of purchasing and selling digital assets in exchange for legal tender currencies.

How to register?

Pursuant to article D. 54-10-2 of the Monetary and Financial Code and AMF instruction 2019-23, any supplier wishing to register as digital assets services supplier, will have to submit a registration application file.

The provider will be required to provide certain information relating, amongst others, to the identity, competence and honourability of its officers and shareholding.

The company’s officers are expected to have an experience relating to digital assets, of 6 months minimum, or any equivalent training.

Besides, they must comply with the honourability requirements and must not have been prohibited to practice, according to article L. 500-1 of the Monetary and Financial Code (“MFC).

Information relating to the anti-money laundering and terrorist financing system 


The applicant shall provide details relating to its target clients (characteristics, legal nature, geographical aspects, etc.) and the distribution channel planned for each service. If the company belongs to a group, it shall present the group’s organisation chart, indicating in particular the capital links between the various entities of the group and, for each entity, its company name, the country in which its registered office is located and the nature of its business.

It shall provide:

  • a classification of the money laundering and terrorist financing risks, in accordance with Article L. 561-4-1 of the MFC, taking into account in particular the risks associated with clients, the nature of the products and services provided, the distribution channels planned and the geographical areas of operation; and, where appropriate,
  • the risk classification established at the group level.

One will have to be very careful regarding operations over € 1,000 and operations relating to sums which they know, suspect (or have good reasons for suspecting) are the proceeds of an offence punishable by a custodial sentence of more than one year or are destined for terrorist financing (article L. 561-15 of the MFC).

To this respect, the supplier will be required to provide the name and contact of the persons in charge of reporting the operations to TRACFIN and the devices set up to potentially froze the assets.

What are the delays?

Within 6 months following the filing of the complete documentation by the applicant, the AMF will render its decision.

Within this timeframe, the AMF will consult the Autorité de Contrôle Prudentiel et de Résolution in order to make sure the DASP is compliant with the above-mentioned regulation.

Optional visa

If you provide one or more digital asset services and your company is established in France, you may apply for approval via by the AMF.

This approval is granted for a great number of services, such as safekeeping digital assets, purchasing and selling digital assets in exchange for legal tender currencies, operating a digital platform trading digital assets, etc.

Operators seeking the AMF visa, will be placed under the supervision of the AMF.

The visa procedure before the AMF is similar to the registration one. However, the applicant will have to prove it abides by additional requirements, relating especially to the safety of operations (strengthened internal control, resilient computing security, report of activity for the next two years).

Besides, the applicant will have to provide a professional insurance or a minimum amount of own funds.

To be fully transparent, the DASP will then have to publish, on a regular basis, the volume of transactions and the average price of each transaction.

The publication will have to be made on the operator’s website, no later than the second business day of the following trimester.

Following each procedure, the AMF will publish a list of DASPs which obtained the visa or the registration, for the security of the investors.

Any digital asset supplier has one year to abide by the new requirements set up by the PACTE Law.

The first registration has been delivered by the AMF in March 2020.

The author of this post is Iuliana Babei.

The current situation in Europe and in France in particular has emerged as a major concern for most businesses. The order of governmental authorities to suspend “non-essential” activities has generated business interruption and consequently strongly hit the businesses. The debate is harsh in France on whether insurance companies should cover their insureds’ losses.

Business Interruption (“BI”) coverage (in French “pertes d’exploitation”) is most often included in property insurance contracts. The coverage is usually triggered when the insured’s business is interrupted by a physical damage to the insured’s property. Contamination which spreads to become pandemic does not correspond to a physical damage.

In order to be covered the business should be affected in itself by a physical damage, for instance if a listeria bacteria affects the premises and renders them unusable for the business (one can imagine a food industry plant where sanitary and hygienic constraints are very stringent): in this example, one could most probably consider that there is a physical damage, which is the cause of the BI. However, if the BI is caused by a disease which affects employees to the extent that the business must be interrupted, it is doubtful that it would be covered, considering that the BI is a part of property insurance, which means that the BI is covered provided it is a consequence of a damage affecting the property of the insured (not his employees).

One should consider thoroughly each insurance policy on a case by case basis. Some policies include BI coverage without a physical damage (in French: “sinistre sans dommage”), for instance in case of a “denial of access” due to a physical damage in the “vicinity” of the insured premises, and not in the premises themselves, or if the denial of access is the result of an order of governmental authorities (as is currently the case in relation to COVID 19).

Based on this kind of policies, a court case has been recently initiated before French Courts against AXA by an insured party (source: BFM Business), whereas other insurers (like BPCE) have been reported to accept in principle that these kind of policies could be triggered. Even in this situation, lots of policies provide for exclusion of indemnification in case of pandemic due to viruses.

AXA’s defence against this action, as we know it, is not based on an exclusion clause, but on fundamental principles of insurance, in particular that the coverage should be admitted only when the cause of interruption is not systemic, i.e.  It does not impact all the companies or businesses in one or several countries (or around the world as in the situation we are currently facing) but only some of them in specific places and due to specific events. The reason is that insurance’s function is to mutualise risks. This principle would be flouted if insurance could be triggered in systemic situations. According to Laurent Granier, CEO of GENERALI in France, admitting systemic events such as the COVID 19 pandemic in property insurance would use up equity capital of all insurance companies in France (source: Argus de l’Assurance, 9 April 2020).

Participation of insurance companies in systemic risks is an exception. Therefore, it does not stem from the contracts but from legal dispositions. An example is given in the event of natural disasters.  Article L125-1 of the French Insurance Code stipulates that if an insurance policy covers BI, this cover is extended to natural disasters, provided the event is recognized as such by a decision of the governmental authorities. This example of a systemic risk covered by insurance shows that the coverage does depend on a decision taken by state authorities. From an insurance standpoint, the systemic nature of the event justifies that the government should assess if the insurance sector must be mobilized to cover it, precisely because it is not the purpose of insurance to cover systemic risks. This is why this specific risk is financed by a specific premium, which is added to the standard premium, and a percentage of the premiums are paid by insurers to a special fund set up by the State, which acts as a “last resort insurer” for systemic risks.

From the French perspective again, it is worth noting that there is little of not no doubt that sanitary disasters do not fall within the definition of natural disasters as defined in article L125-1 of the Insurance Code. There are currently discussions going on between the government and insurers to set up a legal regime for pandemics similar to the one for natural disasters, which would be financed by a supplementary premium, the whole system being guaranteed by the State in last resort.

Alexandre Malan

Practice areas

  • Arbitrage
  • Distribution
  • Insurance
  • Commerce international
  • Litiges
Contact Alexandre

Écrire à France | Pre-contractual disclosure in distribution and franchise agreements





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    France: control by the supplier of online resales by its distributors

    31 décembre 2020

    • France
    • Distribution

    Under French Law, franchisors and distributors are subject to two kinds of pre-contractual information obligations: each party has to spontaneously inform his future partner of any information which he knows is decisive for his consent. In addition, for certain contracts – i.e franchise agreement – there is a duty to disclose a limited amount of information in a document. These pre-contractual obligations are mandatory. Thus these two obligations apply simultaneously to the franchisor, distributor or dealer when negotiating a contract with a partner.

    General duty of disclosure for all contractors

    What is the scope of this pre-contractual information?

    This obligation is imposed on all co-contractors, to any kind of contract. Indeed, article 1112-1 of the Civil Code states that:

    (§. 1) The party who knows information of decisive importance for the consent of the other party must inform the other party if the latter legitimately ignores this information or trusts its co-contractor.

    (§. 3) Of decisive importance is the information that is directly and necessarily related to the content of the contract or the quality of the parties. »

    This obligation applies to all contracting parties for any type of contract.

    Who must prove the compliance with such provision ?

    The burden of proof rests on the person who claims that the information was due to him. He must then prove (i) that the other party owed him the information but (ii) did not provide it (Article 1112-1 (§. 4) of the Civil Code)

    Special duty of disclosure for franchise and distribution agreements

    Which contracts are subject to this special rule?

    French law requires (art. L.330-3 French Commercial Code) communication of a pre-contractual information document (in French “DIP”) and the draft contract, by any person:

    • which grants another person the right to use a trade mark, trade name or sign,
    • while requiring an exclusive or quasi-exclusive commitment for the exercise of its activity (e.g. exclusive purchase obligation).

    Concretely, DIP must be provided, for example, to the franchisee, distributor, dealer or licensee of a brand, by its franchisor, supplier or licensor as soon as the two above conditions are met.

    When the DIP must be provided?

    DIP and draft contract must be provided at least 20 days before signing the contract, and, where applicable, before the payment of the sum required to be paid prior to the signature of the contract (for a reservation).

    What information must be disclosed in the DIP?

    Article R. 330-1 of the French Commercial Code requires that DIP mentions the following information (non-detailed list) concerning:

    • Franchisor (identity and experience of the managers, career path, etc.);
    • Franchisor’s business (in particular creation date, head office, bank accounts, historical of the development of the business, annual accounts, etc.);
    • Operating network (members list with indication of signing date of contracts, establishments list offering the same products/services in the area of the planned activity, number of members having ceased to be part of the network during the year preceding the issue of the DIP with indication of the reasons for leaving, etc.);
    • Trademark licensed (date of registration, ownership and use);
    • General state of the market (about products or services covered by the contract)and local state of the market (about the planned area) and information relating to factors of competition and development perspective;
    • Essential element of the draft contract and at least: its duration, contract renewal conditions, termination and assignment conditions and scope of exclusivities;
    • Financial obligations weighing in on contracting party: nature and amount of the expenses and investments that will have to be incurred before starting operations (up-front entry fee, installation costs, etc.).

    How to prove the disclosure of information?

    The burden of proof for the delivery of the DIP rests on the debtor of this obligation: the franchisor (Cass. Com., 7 July 2004, n°02-15.950). The ideal for the franchisor is to have the franchisee sign and date his DIP on the day it is delivered and to keep the proof thereof.

    The clause of contract indicating that the franchisee acknowledges having received a complete DIP does not provide proof of the delivery of a complete DIP (Cass. com, 10 January 2018, n° 15-25.287).

    Sanction for breach of pre-contractual information duties

    Criminal sanction

    Failing to comply with the obligations relating to the DIP, franchisor or supplier can be sentenced to a criminal fine of up to 1,500 euros and up to 3,000 euros in the event of a repeat offence, the fine being multiplied by five for legal entities (article R.330-2 French commercial Code).

    Cancellation of the contract for deceit

    The contract may be declared null and void in case of breach of either article 1112-1 or article L. 330-3. In both cases, failure to comply with the obligation to provide information is sanctioned if the applicant demonstrates that his or her consent has been vitiated by error, deceit or violence. Where applicable, the parties must return to the state they were in before the contract.

    Regarding deceit, Courts strictly assess its two conditions which are:

    Damages

    Although the claims for contract cancellation are subject to very strict conditions, it remains that franchisees/distributors may alternatively obtain damages on the basis of tort liability for non-compliance with the pre-contractual information obligation, subject to proof of fault (incomplete or incorrect information), damage (loss of chance of not contracting or contracting on more advantageous terms) and the causal link between the two.

    French case law

    Franchisee/distributor must demonstrate that he would not have actually entered into the contract if he had had the missing or correct information

    Courts reject motion for cancellation of a franchise contract when the franchisee cannot prove that this deceit would have misled its consent or that it would not have entered into the contract if it had had such information (for instance: Versailles Court of Appeal, December 3, 2020, no. 19/01184).

    The significant experience of the franchisee/distributor greatly mitigates the possible existence of a defect in consent.

    In a ruling of January 20, 2021 (no. 19/03382) the Paris Court of Appeal rejected an application for cancellation of a franchise contract where the franchisor had submitted a DIP manifestly and deliberately deficient and an overly optimistic turnover forecast.

    Thus, while the presentation of the national market was not updated and too vague and that of the local market was just missing, the Court rejected the legal qualification of the franchisee’s error or the franchisor’s willful misrepresentation, because the franchisee « had significant experience » for several years in the same sector (See another example for a Master franchisee)

    Similarly, the Court reminds that “An error concerning the profitability of the concept of a franchise cannot lead to the nullity of the contract for lack of consent of the franchisee if it does not result from data established and communicated by the franchisor« , it does not accept the error resulting from the communication by the franchisor of a very optimistic turnover forecast tripling in three years. Indeed, according to the Court, « the franchisee’s knowledge of the local market was likely to enable it to put the franchisor’s exaggerations into perspective, at least in part. The franchisee was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the announced results. It was in fact the franchisee’s responsibility to conduct its own market research, so that if the franchisee misunderstood the profitability of the operation at the business level, this error was not caused by information prepared and communicated by the franchisor« .

    The path is therefore narrow for the franchisee: he cannot invoke error concerning profitability when it is him who draws up his plan, and even when this plan is drawn up by the franchisor or based on information drawn up and transmitted by the franchisor, the experience of the franchisee who knew the local market may exonerate the franchisor.

    Takeaways

    • The information required by the DIP must be fully completed and updated ;
    • The information not required by the DIP but communicated by the franchisor must be carefully selected and sincere;
    • Franchisee must be given the opportunity to request additional information from the franchisor;
    • Franchisee’s experience in the economic sector enables the franchisor to considerably limit its exposure to the risk of contract cancellation due to a defect in the franchisee’s consent;
    • Franchisor must keep the proof of the actual disclosure of pre-contractual information (whether mandatory or not). 

     

    In an important and very reasoned judgment delivered by the Court of Cassation of France on September 30, 2020, relating to the enforceability of arbitration clauses in international consumer contracts, the Supreme Court judged that these clauses must be considered unfair and cannot be opposed to consumers.  

    The Supreme Court traditionally insisted on the priority given to the arbitrator to decide on his own jurisdiction, laid down in Article 1448 of the Code of Civil Procedure (principle known as « competence-competence », Jaguar, Civ. 1re, May 21, 1997, nos. 95-11.429 and 95-11.427). 

    The ECJ expressed its hostility towards such clauses when they are opposed to consumers. In Mostaza Claro (C-168/05), it referred to the internal laws of member states, while considering that the procedural modalities offered by states should not “make it impossible in practice or excessively difficult to exercise the rights conferred by public order to consumers (“Directive 93/13, concerning unfair terms in consumer contracts, must be interpreted as meaning that a national court seized of an action for annulment of an arbitration award must determine whether the arbitration agreement is void and annul that award where that agreement contains an unfair term, even though the consumer has not pleaded that invalidity in the course of the arbitration proceedings, but only in that of the action for annulment”).  

    It therefore referred to the national judge the right to implement its legislation on unfair terms, and therefore to decide, on a case-by-case basis, whether the arbitration clause should be considered unfair. This is what the Court of Cassation decided, ruling out the case-by-case method, and considering that in any event such a clause must be excluded in relations with consumers.  

    The Court of Cassation adopted the same solution in international employment contracts, where it traditionally considers that arbitration clauses contained in international employment contracts are enforceable against employee (Soc. 16 Feb. 1999, n ° 96-40.643). 

    The Supreme Court, although traditionally very favourable to arbitration, gradually builds up a set of specific exceptions to ensure the protection of the « weak » party.

    Resale prices maintenance on the internet is unlawful while ban on resale on third-party platforms seems to be a new lawful option

    In a nutshell

    On December 3, 2020 the French Competition Authority (the FCA) :

    • reiterated clearly the illegality of behavior aimed at imposing resale prices, especially in e-commerce and then condemned Dammann Frères, a French manufacturer of premium teas, to a € 226,000 fine for imposing minimum online resale prices maintenance on its distributors
    • extended the right of ban on resale on third-party platforms from selective distribution of luxury products to quite common commercial relations, and then rejected the alleged illegality of this ban.

    Between “recommended” and “imposed” resale prices: a dangerous game to play

    Article L 442-6 of French Commercial Code prohibits « imposing, directly or indirectly, a minimum character at the resale price of a good, at the price of a service or at a commercial margin”. The FCA has ruled that, under the pretext of communicating recommended prices to its distributors, Dammann Frères has in fact imposed resale prices on them, failure to comply with these prices being punishable by retaliations (removal or reduction of the amount of discounts granted to them, delay in deliveries, removal of their contact details from the list of distributors presented on its website, disruption of supply, or even termination of commercial relations).

    The supplier justified – vainly – this practice by its will to preserve the image and the positioning of its products but above all to avoid excessive price differences between resales by distributors on the internet and those carried out by network stores (where dealers had more latitude in setting prices).

    The restriction of competition resulting from resale price maintenance can be obvious when contractual stipulations directly fix the price; but it can be deduced from a set of indices which is characterized according to a method strictly applied by the FCA :

    • the supplier communicates its (recommended) resale prices to distributors,
    • the latter apply them significantly and,
    • a “price policing” system is put in place to prevent the price agreement from being questioned by deviant distributors. This mechanism results in price monitoring by the supplier (or even by other distributors, etc.),
    • this leads to pressure, or even retaliation, to force distributors to align their prices upwards, such as delivery delays, supply disruptions, removal of discounts, etc.

    There is a fine line between a price surveillance mechanism and a price constraint mechanism. This legal insecurity has been criticized and the European Commission could provide, on the occasion of the upcoming reform of the European block exemption regulation on vertical restraints, additional advice on the circumstances in which recommended resale prices should be qualified as imposed resale prices. The reform expected in 2022 could even go further by highlighting the pro-competitive effects of resale price maintenance.

    Ban on resale on third-party platforms: a serious option to consider

    With regard to the ban on the resale of its products on third-party platforms, openly imposed by Dammann Frères, the FCA took a rather liberal and innovative approach by applying the rules of the Coty case law (ruling of 6 12 2017, Coty Germany GmbH, C 230/16) to decide ultimately that there is no need to prosecute and therefore to fine. If this approach is confirmed later on by French courts, it will have a considerable impact on suppliers ‘policy who seek to control and restrict the terms of resale of their products on third-party platforms such as Amazon or e-Bay.

    In this case, the FCA noted that the tea manufacturer’s market share was less than 30% and that this restriction did not constitute a hardcore restriction. Indeed, the FCA noted that this practice (i) did not prohibit distributors from selling products online nor from marketing themselves through third party websites (advertising and use of search engines) and (ii) did not constitute a restriction on the number of distributors, as the prosecution file did not evidence the number of customers of these platforms amongst the group of online buyers.

    The FCA’s decision is therefore extends the Coty case law according to which the supplier of a selective distribution network for luxury products can prohibit the resale of its products on third-party platforms in order to preserve the image of its products (see our comments Here).

    The FCA had already extended the Coty case law to technical products in a decision of 24 October 2018 (n ° 18-D-23), concerning the practices of the company Stihl, leader in mechanized garden equipment (mainly confirmed on appeal, Paris court of appeal 17 10 19), where the FCA, in a premonitory manner, stated: “it is important to specify that the analysis carried out by the Court of justice in the Coty ruling for the online marketing of luxury products seems likely to be extended to other types of products ”(see our comments Here).

    The FCA is now going even further because, even though Dammann Frères teas are “high-end” positioned, they are neither luxury products nor even distributed through a selective distribution network.

    Key takeaway

    As part of its relations with its distributors, the supplier must ensure:

    • not to stipulate any express minimum resale price clause;
    • not to implement a system, nor tolerate practices, of commercial retaliation against distributors deviating from the minimum « recommended » prices (or even threaten them to do so);
    • not to prohibit them from selling the products online or from advertising online;
    • carefully examine the possibility of prohibiting them from reselling its products on third-party platforms.

    Unfair commercial behaviours between professionals are sanctioned in Sections L442-1 and seq. of the French Commercial Code. French Courts tend to consider that those dispositions of the Commercial Code are mandatory, in particular Section L442-1, II of the Code on abrupt termination of commercial relationships. Based on this section, an operator can be held liable if he terminates a commercial relationship without respecting a prior notice which duration depends on the duration of the relationship.

    Although this is considered to be a mandatory law, the French Supreme Court considers that it does not preclude to bring a dispute before foreign Courts in compliance with a jurisdiction clause (Civ.1, 8 July 2010, Doga, n°09-67013). Moreover, Courts have ruled for a long time now that arbitrators are entitled to apply national mandatory laws (Court of Appeal of Paris, 19 March 1993, Labinal, n°9221091). In the case Doga above quoted, the Court concluded that arbitrators are also entitled to apply Sections 442-1, II of the Commercial Code related to the conditions of termination of commercial relationship. Therefore, if a contract contains an arbitration clause, the judge is obliged to give priority to the arbitrators to decide on their own jurisdiction to decide on the case (principle « compétence-compétence ») in conformity with Section 1465 of the French Procedural Code. This solution was confirmed in a recent decision rendered on 5 September 2019 by the Court of Appeal of Paris in  Charlivari v. Sté Equivalanza, n°17/03703.

    It is noteworthy to underline that two sets of sanctions are considered under Sections 442-1 and seq. of the Commercial Code: the first sanction allows the victim of unfair practice to seek damages (for instance for abrupt termination of commercial relationship) against the author of unfair practices;  the second sanction is decided by the public administration, under the authority of the Ministry of Economics : the Ministry is entitled to bring the case to Courts, which can then decide to fine the party who is liable of unfair practices (the fine can be up to 5% of the turnover made in France by the person liable or 5 Million EUR).

    Therefore, one single matter can give rise to two procedures at the same time, the first one initiated by the victim and the second one at the request of the Ministry of Economics (Section L442-4 of the Code). In a case Apple v. Ministre de l’Economie, the Supreme Court (Civ.1, 6 juillet 2016, n° 15-21811) considered that the action of the Ministry of Economics cannot be decided by arbitrators, even if the contract contains an arbitration clause, because of the specificity of this action, which is not based on the contract by itself but on powers that the Ministry draws from the law.

    Therefore, a clear distinction must be made between the two procedures: one is subject to the application of the dispute resolution clause (either national Courts, even foreign, or arbitration tribunals), when damages are sought from the author of unfair practices, including abrupt termination; the other one can be brought only before French national Courts, and the dispute resolution clause has no effect, in cases which are brought by the Ministry of Economics for administrative sanctions against the same author.

    Under French law, terms of payment of contracts of sale or of services (food excluded) are strictly regulated (art. L441-10.I Commercial code) as follows:

    • Unless otherwise agreed between the parties, the standard time limit for settling the sums due may not exceed 30 days.
    • Parties can agree on a time of payment which cannot exceed 60 days after the date of the invoice.
    • By way of derogation, a maximum period of 45 days from end of the month after the date of the invoice may be agreed between the parties, provided that this period is expressly stipulated by contract and that it does not constitute a blatant abuse with respect to the creditor (e.g. could be in fact up to 75 days after date of issuance).

    The types of international contracts concluded with a French party can be:

    (a) An international sales contract governed by French law (or to the national law of a country where CISG is in force), and which does not contractually exclude the Vienna Convention of 1980 on the International Sale of Goods (CISG)

    In this case the parties may be freed from the domestic mandatory payment time limits, by virtue of the superiority of CISG over French domestic rules, as stated by public authorities,

    (b) An international contract (sale, service or otherwise) concluded by a French party with a party established in the European Union and governed by the law of this other European State,

    In this case the parties could be freed from the French domestic mandatory payment time limits, by invoking the rules of this member state law, in accordance with the EU directive 2011/7;

    (c) Other international contracts not belonging to (a) or (b),

    In these cases the parties might be subject to the French domestic mandatory payment maximum ceilings, if one considers that this rule is an OMR (but not that clearly stated).

    Can a foreign party (a purchaser) agree with a French party on time limit of payment exceeding the French mandatory maximum ceilings (for instance 90 days)?

    This provision is a public policy rule in domestic contracts. Failing to comply with the payment periods provided for in this article L. 441-10, any trader is liable to an administrative fine, up to a maximum amount of € 75,000 for a natural person and € 2,000,000 for a company. In the event of reiteration the maximum of the fine is raised to € 150,000 for a natural person and € 4,000,000 for a legal person.

    There is no express legal special derogatory rule for international contracts (except one very limited to specific intra UE import / export trading). This being said, the French administration (that is to say the Government, the French General Competition and Consumer protection authority, “DGCCRF” or the Commission of examination of the commercial practices, “CEPC”) shows a certain embarrassment for the application of this rule in an international context because obviously it is not suitable for international trade (and is even counterproductive for French exporters).

    International sales contract can set aside the maximum payment ceilings of article L441-10.I

    Indeed, the Government and the CEPC have identified a legal basis authorizing French exporters to get rid of the maximum time limit imposed by the French commercial code: this is the UN Convention on the international sale of goods of 1980 (aka “CISG”) applying to contracts of supply of (standard or tailor-made) goods (but not services). They invoked the fact that CISG is an international treaty which is a higher standard than the internal standards of the Civil Code and the Commercial Code: it is therefore necessary to apply the CISG instead of article L441-10 of the Commercial Code.

    • In the 2013 ministerial response, (supplemented by another one in 2014) the Ministry of Finance was very clear: « the default application of the CISG rules […] therefore already allows French traders to grant their foreign customers payment terms similar to those offered by their international competitors”.
    • In its Statement of 2016 (n°16.12), the CEPC went a little further in the reasoning by specifying that CISG poses as a rule that payment occurs at the time of the delivery of the goods, except otherwise agreed by the parties (art. 58 & 59), but does not give a maximum ceiling. According to this Statement, it would therefore be possible to justify that the maximum limit of the Commercial Code be set aside.

    The approach adopted by the Ministry of Finance and by the CEPC (which is a kind of emanation of this Ministry) seems to be a considerable breach in which French exporters and their foreign clients can plunge into. This breach is all the easier to use since CISG applies by default as soon as a sales contract is subject to French law (either by the express choice of the parties, or by application of the conflict of law rules by the judge subsequently seized). In other words, even if controls were to be carried out by the French administration on contracts which do not expressly target the CISG, it would be possible to invoke this “CISG open door”.

    This ground seems also to be usable as soon as the international sale contract is governed by the national law of a foreign country … which has also ratified CISG (94 countries). But conversely, if the contract expressly excludes the application of CISG, the solution proposed by the administration will close.

    For other international contracts not governed by CISG, is this article L441-10.I an overriding mandatory rule in the international context?

    The answer is ambiguous. The issue at stake is: if art. L441-10 is an overriding mandatory rule (“OMR”), as such it would still be applied by a French Judge even if the contract is subject to foreign law.

    Again the Government and the CEPC took a stance on this issue, but not that clear.

    • In its 2013 ministerial response, the Ministry of Finance statement was against the OMR qualification when he referred to «foreign internal laws less restrictive than French law [that] already allows French traders to grant their foreign customers payment terms similar to those offered by their international competitors”.
    • The CEPC made another Statement in 2016 (n°1) to know whether or not these ceilings are OMRs in international contracts. A distinction should be made as regards the localization of the foreign party:

    – For intra-EU transactions, the CEPC put into perspective these maximum payment terms with the 2011/7 EU directive on the harmonization of payment terms which authorizes other European countries to have terms of payment exceeding 60 days (art 3 §5). Therefore article L441-10.I could not be seen as OMR because it would conflict with other provisions in force in other European countries, also respecting the EU directive which is a higher standard than the French Commercial Code.

    – For non intra EU transactions, CEPC seems to consider article L441-10.I as an OMR but the reasoning was not really strong to say straightforwardly that it is per se an OMR.

    To conclude on the here above, (except for contracts – sales excluded –  concluded with a non-EU party, where the solution is not yet clear), foreign companies may negotiate terms of payment with their French suppliers which are longer than the maximum ceilings set by article L441 – 10, provided that it is not qualified as an abuse of negotiation (to be anticipated in specific circumstances or terms in the contract to show for instance counterparts, on a case by case basis) and having in mind that, with this respect, French case law is still under construction by French courts.

    Summary – According to French case law, an agent is subject to the protection of the commercial agent legal status and therefor is entitled to a termination indemnity only if it has the power to negotiate freely the price and terms of the sale contracts. ECJ ruled recently that such condition is not compliant with European law. However, principals could now consider other options to limit or exclude the termination indemnity.

    It is an understatement to say that the ruling of the European court of justice of June 4, 2020 (n°C828/18, Trendsetteuse / DCA) was expected by both French agents and their principals.

    The question asked to the ECJ

    The question asked by the Paris Commercial Court on December 19, 2018 to the ECJ concerned the definition of the status of the commercial agent who could benefit from the EC Directive of December 18, 1986 and consequently of article L134 and seq. of Commercial Code.

    The preliminary question consisted in submitting to the ECJ the definition adopted by the Court of Cassation and many Courts of Appeal, since 2008 : the benefit of the status of commercial agent was denied to any agent who does not have, according to the contract and de facto, the power to freely negotiate the price of sale contracts concluded, on behalf of the seller, with a buyer (this freedom of negotiation being also extend to other essential terms of the sale, such as delivery or payment terms).

    The restriction ruled by French courts

    This approach was criticized because, among other things, it was against the very nature of the economic and legal function of the commercial agent, who has to develop the principal’s activity while respecting its commercial policy, in a uniform manner and in strict compliance with the instructions given.  As most of the agency contracts subject to French law expressly exclude the agent’s freedom to negotiate the prices or the main terms of the sales contracts, judges regularly requalified the contract from commercial agency contract into common interest mandate contract. However, this contract of common interest mandate is not governed by the provisions of Articles L 134 et seq. of the Commercial Code, many of which are of internal public order, but by the provisions of the Civil Code relating to the mandate which in general are not considered to be of public order.

    The main consequence of this dichotomy of status lays in the possibility for the principal bound by a contract of common interest mandate to expressly set aside the compensation at the end of the contract, this clause being perfectly valid in such a contract, unlike to the commercial agent contract (see French Chapter to Practical Guide to International Commercial Agency Contracts).

    The decision of the ECJ and its effect

    The ECJ ruling of June 4, 2020 puts an end to this restrictive approach by French courts. It considers that Article 1 (2) of Directive of December 18, 1986 must be interpreted as meaning that agents must not necessarily have the power to modify the prices of the goods which they sell on behalf of a principal in order to be classified as a commercial agent.

    The court reminds in particular that the European directive applies to any agent who is empowered either to negotiate or to negotiate and conclude sales contracts. The court added that the concept of negotiation cannot be understood in the restrictive lens adopted by French judges. The definition of the concept of « negotiation” must not only take into account the economic role expected from such intermediary (negotiation being very broad: i.e. dealing) but also preserve the objectives of the directive, mainly to ensure the protection of this type of intermediary.

    In practice, principals will therefore no longer be able to hide behind a clause prohibiting the agent from freely negotiating the prices and terms of sales contracts to deny the status of commercial agent.

    Alternative options to principals

    What are the means now available to French or foreign manufacturers and traders to avoid paying compensation at the end of the agency contract?

    • First of all, in case of international contracts, foreign principals will probably have more interest in submitting their contract to a foreign law (provided that it is no more protective than French law …). Although commercial agency rules are not deemed to be overriding mandatory rules by French courts (diverging from ECJ Ingmar and Unamar case law), to secure the choice not to be governed by French law, the contract should also better stipulate an exclusive jurisdiction clause to a foreign court or an arbitration clause (see French Chapter to Practical Guide to International Commercial Agency Contracts).
    • it is also likely that principal will ask more often a remuneration for the contribution of its (preexisting) clients data base to the agent, the payment of this remuneration being deferred at the end of the contract … in order to compensate, if necessary, in whole or in part, with the compensation then due to the commercial agent.
    • It is quite certain that agency contracts will stipulate more clearly and more comprehensively the duties of the agent that the principal considers to be essential and which violation could constitute a serious fault, excluding the right to an end-of-contract compensation. Although judges are free to assess the seriousness of a breach, they can nevertheless use the contractual provisions to identify what was important in the common intention of the parties.
    • Some principals will also probably question the opportunity of continuing to use commercial agents, while in certain cases their expected economic function may be less a matter of commercial agency contract, but rather more of a promotional services contract. The distinction between these two contracts must, however, be strictly observed both in their text and in reality, and other consequences would need to be assessed, such as the regime of the prior notice (see our article on sudden termination of contracts)

    Finally, the reasoning used by ECJ in this ruling (autonomous interpretation in the light of the context and aim of this directive) could possibly lead principals to question the French case-law rule consisting in granting, almost eyes shut, two years of gross commissions as a flat fee compensation, whereas article 134-12 of Commercial code does not fix the amount of this end-of-contract compensation but merely indicates that the actual damage suffered by the agent must be compensated ; so does article 17.3 of the 1986 EC directive. The question could then be asked whether such article 17.3 requires the agent to prove the damage actually suffered.

    Summary – Whereas cryptocurrency emerged outside of the legal framework thus favouring cyber criminality, France has recently set out rules ensuring investors’ and traders’ security.

    Far from being a drawback, this set of rules insures the balance between innovation incentive and investor security.

    A recent study published by the French AMF underlined the danger of cyber criminality and its impact on the global market.

    The AMF targeted especially, bitcoins scams and cyberattacks aiming online platforms trading cryptocurrency.

    This cyber criminality is supposed to be one of the most expensive ones worldwide, close to 0.5 % of the world GDP.

    Nevertheless, cryptocurrencies continue to attract the interest of private individuals, due to potential gains and due to the lack of state regulation. In the meantime, the extreme instability of the exchange rate and online fraudulent behaviours (especially in the case of alternative cryptocurrency such as altcoins) often prove disastrous for small investors.

    To shield investors, the AMF recently published recommendations and warnings for consumers, as well as several blacklists of websites selling cryptocurrencies.

    Cryptocurrency is defined by the AMF as “digital asset relying on blockchain technology, through a decentralized registry and an encrypted protocol”.

    A digital asset is neither a currency (its value is not determined by a central bank but through supply and demand) nor a financial instrument.

    Faced with the multiplication of new digital assets, France (pioneer in this area) has implemented a legal framework for digital assets.

    The Law 2019-486 dated 22 May 2019 relating to companies’ growth and transformation (“PACTE Law”) entered into force 24 May 2019, provides for the general definition of digital assets: “a digital representation of value which is not issued nor guaranteed by a central bank nor a public authority, which is not necessarily attached to a currency with an exchange rate and which does not fall within the legal definition of a currency but which is accepted by natural or legal persons as a means of exchange and which can be transferred, stored or traded electronically” (Article L. 54-10-1 of the French Monetary and Financial Code).

    Any DASP will need to abide by the legal rules set up by the Monetary and Financial Code and will be placed under the authority of the AMF.

    The Digital Assets Services Provides’ new legal status

    The PACTE Law defines a DASP as the one providing, amongst others, the following services:

    “1° The service of safekeeping digital assets or the access to digital assets (including through the means of private cryptographic keys) for a third party, for the purposes of holding, storing or trading digital assets;

    2° The service of purchasing and selling digital assets in exchange for legal tender currencies;

    3° The service of trading digital assets for other digital assets;

    4° The service of operating a digital platform trading digital assets (…)”

    Providers wishing to attract investors can file for registration and/or optional AMF visa.

    In which cases is the registration with the AMF mandatory?

    Registration is mandatory for two activities:

    • The service of safekeeping digital assets;
    • The service of purchasing and selling digital assets in exchange for legal tender currencies.

    How to register?

    Pursuant to article D. 54-10-2 of the Monetary and Financial Code and AMF instruction 2019-23, any supplier wishing to register as digital assets services supplier, will have to submit a registration application file.

    The provider will be required to provide certain information relating, amongst others, to the identity, competence and honourability of its officers and shareholding.

    The company’s officers are expected to have an experience relating to digital assets, of 6 months minimum, or any equivalent training.

    Besides, they must comply with the honourability requirements and must not have been prohibited to practice, according to article L. 500-1 of the Monetary and Financial Code (“MFC).

    Information relating to the anti-money laundering and terrorist financing system 


    The applicant shall provide details relating to its target clients (characteristics, legal nature, geographical aspects, etc.) and the distribution channel planned for each service. If the company belongs to a group, it shall present the group’s organisation chart, indicating in particular the capital links between the various entities of the group and, for each entity, its company name, the country in which its registered office is located and the nature of its business.

    It shall provide:

    • a classification of the money laundering and terrorist financing risks, in accordance with Article L. 561-4-1 of the MFC, taking into account in particular the risks associated with clients, the nature of the products and services provided, the distribution channels planned and the geographical areas of operation; and, where appropriate,
    • the risk classification established at the group level.

    One will have to be very careful regarding operations over € 1,000 and operations relating to sums which they know, suspect (or have good reasons for suspecting) are the proceeds of an offence punishable by a custodial sentence of more than one year or are destined for terrorist financing (article L. 561-15 of the MFC).

    To this respect, the supplier will be required to provide the name and contact of the persons in charge of reporting the operations to TRACFIN and the devices set up to potentially froze the assets.

    What are the delays?

    Within 6 months following the filing of the complete documentation by the applicant, the AMF will render its decision.

    Within this timeframe, the AMF will consult the Autorité de Contrôle Prudentiel et de Résolution in order to make sure the DASP is compliant with the above-mentioned regulation.

    Optional visa

    If you provide one or more digital asset services and your company is established in France, you may apply for approval via by the AMF.

    This approval is granted for a great number of services, such as safekeeping digital assets, purchasing and selling digital assets in exchange for legal tender currencies, operating a digital platform trading digital assets, etc.

    Operators seeking the AMF visa, will be placed under the supervision of the AMF.

    The visa procedure before the AMF is similar to the registration one. However, the applicant will have to prove it abides by additional requirements, relating especially to the safety of operations (strengthened internal control, resilient computing security, report of activity for the next two years).

    Besides, the applicant will have to provide a professional insurance or a minimum amount of own funds.

    To be fully transparent, the DASP will then have to publish, on a regular basis, the volume of transactions and the average price of each transaction.

    The publication will have to be made on the operator’s website, no later than the second business day of the following trimester.

    Following each procedure, the AMF will publish a list of DASPs which obtained the visa or the registration, for the security of the investors.

    Any digital asset supplier has one year to abide by the new requirements set up by the PACTE Law.

    The first registration has been delivered by the AMF in March 2020.

    The author of this post is Iuliana Babei.

    The current situation in Europe and in France in particular has emerged as a major concern for most businesses. The order of governmental authorities to suspend “non-essential” activities has generated business interruption and consequently strongly hit the businesses. The debate is harsh in France on whether insurance companies should cover their insureds’ losses.

    Business Interruption (“BI”) coverage (in French “pertes d’exploitation”) is most often included in property insurance contracts. The coverage is usually triggered when the insured’s business is interrupted by a physical damage to the insured’s property. Contamination which spreads to become pandemic does not correspond to a physical damage.

    In order to be covered the business should be affected in itself by a physical damage, for instance if a listeria bacteria affects the premises and renders them unusable for the business (one can imagine a food industry plant where sanitary and hygienic constraints are very stringent): in this example, one could most probably consider that there is a physical damage, which is the cause of the BI. However, if the BI is caused by a disease which affects employees to the extent that the business must be interrupted, it is doubtful that it would be covered, considering that the BI is a part of property insurance, which means that the BI is covered provided it is a consequence of a damage affecting the property of the insured (not his employees).

    One should consider thoroughly each insurance policy on a case by case basis. Some policies include BI coverage without a physical damage (in French: “sinistre sans dommage”), for instance in case of a “denial of access” due to a physical damage in the “vicinity” of the insured premises, and not in the premises themselves, or if the denial of access is the result of an order of governmental authorities (as is currently the case in relation to COVID 19).

    Based on this kind of policies, a court case has been recently initiated before French Courts against AXA by an insured party (source: BFM Business), whereas other insurers (like BPCE) have been reported to accept in principle that these kind of policies could be triggered. Even in this situation, lots of policies provide for exclusion of indemnification in case of pandemic due to viruses.

    AXA’s defence against this action, as we know it, is not based on an exclusion clause, but on fundamental principles of insurance, in particular that the coverage should be admitted only when the cause of interruption is not systemic, i.e.  It does not impact all the companies or businesses in one or several countries (or around the world as in the situation we are currently facing) but only some of them in specific places and due to specific events. The reason is that insurance’s function is to mutualise risks. This principle would be flouted if insurance could be triggered in systemic situations. According to Laurent Granier, CEO of GENERALI in France, admitting systemic events such as the COVID 19 pandemic in property insurance would use up equity capital of all insurance companies in France (source: Argus de l’Assurance, 9 April 2020).

    Participation of insurance companies in systemic risks is an exception. Therefore, it does not stem from the contracts but from legal dispositions. An example is given in the event of natural disasters.  Article L125-1 of the French Insurance Code stipulates that if an insurance policy covers BI, this cover is extended to natural disasters, provided the event is recognized as such by a decision of the governmental authorities. This example of a systemic risk covered by insurance shows that the coverage does depend on a decision taken by state authorities. From an insurance standpoint, the systemic nature of the event justifies that the government should assess if the insurance sector must be mobilized to cover it, precisely because it is not the purpose of insurance to cover systemic risks. This is why this specific risk is financed by a specific premium, which is added to the standard premium, and a percentage of the premiums are paid by insurers to a special fund set up by the State, which acts as a “last resort insurer” for systemic risks.

    From the French perspective again, it is worth noting that there is little of not no doubt that sanitary disasters do not fall within the definition of natural disasters as defined in article L125-1 of the Insurance Code. There are currently discussions going on between the government and insurers to set up a legal regime for pandemics similar to the one for natural disasters, which would be financed by a supplementary premium, the whole system being guaranteed by the State in last resort.

    Christophe Hery

    Practice areas

    • Agence
    • Antitrust
    • Arbitrage
    • Distribution
    • e-commerce
    Contact Christophe