France – Sudden termination of international contract

Article 442-1.II of the French Commercial Code (former Article L. 442-6.I.5 °) sanctions the termination by a trader of a written contract or an informal business relationship without giving sufficient written prior notice. Over the last twenty years, this article became the recurring legal basis for all compensation actions (up to 18 months of gross margin, plus other damages) when a commercial relationship or a contract ends (totally or even partially).

Therefore, a foreign trader who contracts with a French company should try not to fall under the aegis of this rule (part I) and, if it cannot, should understand and control its implementation (part II).

In a nutshell:

How can a foreign company avoid or control the risk linked to the “sudden termination of commercial relations” set by French law? Foreign companies doing business with a French counterpart should:

– enter, as soon as possible, into a written (frame) agreement with their French suppliers or customers, even for a very simple relation and;

– stipulate a clause in favour of foreign court or arbitration and foreign applicable law while, failing to choose it, they would rather be subject to French courts and laws;

How can a foreign company master the risk linked to the “sudden termination of commercial relations” set by French law? Foreign companies doing business with a French counterpart should:

• know that this article applies to almost all type of commercial relationship or contracts, whether written or not, fixed-term or not;
• check whether its relation/contract is sufficiently long, regular and significant and whether the other party has a legitimate belief in the continuation of this relation/contract;
• give a written notice of termination or non-renewal (or even of a major modification), which length takes mainly into account the duration of the relation, irrespectively of the length of the contractual notice;
• invoke, with cautiousness, force majeure and gross negligence of the party, to set aside “sudden termination”;
• anticipate, in case of insufficient notice, a compensation which amount is the product of the average monthly gross margin per the length of non-granted prior notice.

How to avoid the application of the French “Sudden Termination” rule?

In international matters, a foreign company must anticipate whether its relationship will be subject or not to French law before terminating a contract or a business relationship and, in case of dispute, whether it will be brought before a French court or not.

What will be the law applicable to “Sudden Termination”?

It is quite difficult for a foreign company to correctly grasp the French legal framework of conflict of laws rules applicable to “sudden termination”. In a ruling of September 19, 2018 (RG 16/05579, DES/ Clarins), the Court of appeal of Paris made, by an implicit reference to the Granarolo EU ruling (07 14 16, N°C196/15) an extension of the contractual qualification to most of the business relationships which will improve foreseeability in order for a foreign company to try to exclude French law and its “sudden termination” rule.

Sudden termination of a written contract or of a “tacit contractual relationship”

According to Rome I Regulation (EC No 593/2008, June 17 2008) on the law applicable to contracts:

– In case of choice of a foreign law by the parties: The clause selecting a foreign applicable law will be valid and respected by French judges (subject to OMR, see below), provided that the choice of law by the parties is express or certain.

– In case of no choice by the parties: French law will likely to be declared applicable as it might be either the law of the country where is based the distributor/franchisee, etc. or the law of the country where the party who is to provide the service features of the contract has its domicile.

Sudden termination of a “non-tacit contractual relationship”

In case of informal relationship (i.e. orders placed from time to time), French judges would retain the tort qualification and will refer to the Rome II Regulation (No 864/2007, July 11 2007) on the law applicable to non-contractual obligations..

– In case of choice of a foreign law by the parties: a properly drafted choice of foreign law clause should be implemented by a French judge, provided that it expressly includes tort cases.

– In case of no choice of law by the parties: French law will likely to be declared applicable as it might be the law of the country where the damage occurs (regardless of the place of the causing event or that of the indirect consequences), which is the place of the head office where the French victim suffers the consequences of the termination.

“Sudden Termination” rule, a French Overriding Mandatory Rule?

The position of French courts is quite vague and unsatisfactory, and this has been the case for a long time. To make it short: the Commercial Court of Paris judges that “sudden termination” is not an OMR, the Court of appeal of Paris (sole French appellate court in charge of “sudden termination” cases) is also not in favour of the OMR qualification on the grounds that the text “protects purely private economic interests” (CA Paris, pôle 5, ch. 5, Feb 28. 2019, n° 17/16475 / CA Paris, pôle 5, ch. 5, Oct 8. 2020, n°17/19893). Recently, the Paris Court of Appeal reaffirmed that the rules on sudden termination of established commercial relations are not an OMR (Court of appeal Paris, March 11, 2021, n° 18/03112).

The French Supreme Court has never explicitly addressed the issue (OMR or not OMR). Indeed, the French Supreme Court ruled in the Expedia case (Cass. com., July 8, 2020, n°17-31.536) that the provisions of the former article L. 442-6, I, 2º and II, d), about “significant imbalance” (which is in the same set of rules than “Sudden termination”) are OMR. However, this qualification should be limited to the specific action brought by the Ministry of Finance and not be applicable to an action by a private party. Moreover, some courts may be tempted to invoke the provisions of French law n°2023-221 (March 30, 2023, aka Egalim III) to qualify Sudden termination rule as an OMR, however this text (article L 444-1.A Commercial code) does not quote expressly OMR and set no justification whatsoever to set such a qualification.

Consequently, if a claim for “sudden termination” is brought to a French court, there is still a  risk that the latter would exclude the applicable foreign law and replace it with the regime resulting from the “sudden termination” of Article L 442-1. II. However, to avoid this risk, a foreign company would better not only choose a foreign governing law but also stipulate that the dispute will be brought before a foreign judge or an arbitral tribunal.

How to avoid jurisdiction of French court over a “Sudden Termination” claim?

“Sudden Termination” claim and intra EU co-contractor

The ECJ ruling (Granarolo, July 14, 2016, N°C196/15) created a distinction between claims occurring from:

– written framework contract or tacit contractual relationship (existing only if the body of evidences listed by the ECJ are identified by national judges, i.e. length of relation and commitments recognized to each other, such as exclusivity, special price or terms of delivery or payment, non-competition, etc.): such claim has a contractual nature according to conflict of jurisdiction rules under Brussels I recast Regulation;

– informal relationship which is a non–tacit contractual relationship (i.e. orders placed from time to time): such a request has a tort nature under Brussels I recast ;

To be noted: the so-called Egalim III law has no impact on the EU rules on jurisdiction clauses.

(a) Who is the Judge of the “sudden termination” of a written contract or of a “tacit contractual relationship”?

– Jurisdiction clause for the benefit of a foreign court will be enforced by French courts, even though it is an asymmetrical clause (Court of cassation, October 7, 2015, Ebizcuss.com / Apple Sales International).

– In case of lack of choice of court clause, French courts are likely to have jurisdiction if the French claimant bringing a case based on “sudden termination» is the service provider, such as distributor, agent, etc. (see ECJ Corman Collins case, 19 12 13, C-9/12, and article 7.1.b.2 of Brussels I recast°).

(b) Who is the Judge of the “sudden termination” of a “non- tacit contractual relationship”?

– We believe that French courts may continue to give effect to a jurisdiction clause in tort case, especially when it expressly encompasses tort litigation (Court of cassation, 1° Ch. Civ., January 18, 2017, n° 15-26105, Riviera Motors / Aston Martin Lagonda Ltd).

– In case of lack of choice of court clause, French courts will have jurisdiction over a “sudden termination” claim as the judge of the place where the harmful event occurred (art. 7.3 of Brussels I recast), which is the place where the sudden termination has effect…i.e. in France if the French company is the victim.

“Sudden Termination” claim and Non-EU co-contractor

The Granarolo solution will not ipso facto apply if a French victim brings a claim to French courts, based on a “sudden termination” made by a non-EU company. In non-EU relations, French judges could continue to retain only the tort qualification. In such a case, French courts may keep their jurisdiction based on the place where the harmful event occurs.

Jurisdiction clause to a foreign court may be recognized in France (even for tort-based claims), provided that this jurisdiction clause is valid according to either a bilateral international convention or to the Hague Convention of 30 June 2005 on choice of court agreements. Otherwise, according to Egalim III law, imperative jurisdiction might be attributable to French courts.

“Sudden Termination” claim and arbitration

Stipulating an ad hoc or institutional arbitration clause is probably the safest solution to avoid the jurisdiction of French courts. Ideally, the clause will fix the seat of the arbitral tribunal outside France. According to the principle of competence-competence of the arbitrators, French courts declare themselves incompetent, unless the arbitration clause is manifestly void or manifestly inapplicable, regardless of contract or tort ground (see, in particular, Paris Court of Appeal, 5 September 2019, n°17/03703). The so-called “Egalim III” law has no impact on arbitration clauses.

Conclusion: Foreign companies should not leave open the Jurisdiction and governing Law issues. They must negotiate a safe harbour, otherwise a French victim of a termination will likely to be entitled to bring a “sudden termination” claim in front of French judges (see what happen below in Part 2)

How to master the “Sudden Termination” French rules?

When French law is applicable, the foreign company will face the legal regime of article L442 -1.II of the French Commercial Code sanctioning “sudden termination”. As a preliminary remark, it is important to know, above all, that the implementation of the liability for “sudden termination” is the consequence of the lack of a notice or a too short notice. Thus, this scheme does not lay down an automatic compensation rule. In other words, as soon as reasonable notice is given by the author of the termination, liability on that basis can be dismissed.

The prerequisite for “Sudden Termination”: an established commercial relationship

All contracts are covered by this legal regime, except for contracts whose regulations provide for a specific notice of termination, like commercial agency contracts and transport of goods by road subcontracts.

First, there must be a relationship that can be proven by a written contract or de facto, by behaviour of the parties. Article L.442-1 II of the French Commercial Code covers all “commercial” relationships and not only “contractual ones so that such relationship may be based on a succession of tacitly renewed contracts or a regular flow of business, materialized by multiple orders. This was recently recalled by the Supreme Court (Supreme Court, February 16, 2022, n° 20-18.844)

Second, this relationship must have an established character. There is no legal definition, but this notion has been defined year after year by case law which has established an objective criterion and a more subjective one.

(a) The objective criterion implies a sufficiently long, regular and significant relationship between the two parties. The duration of the relationship is the most important criterion. The relationship must also be regular, that is, it must not have been interrupted (too often or too long). The relationship must ultimately be meaningful and represent a serious flow of business between the parties, in volume or value.

(b) The subjective test focuses primarily on the legitimate belief of the victim of the rupture in the continuation of the contract / the relationship that is based on factual elements, such as investment requests, budgets over several years, etc. Conversely, it is on the basis of the finding of a lack of legitimate belief in a common future that the terminating party can prove the absence of a stable character when he has resorted, on several occasions, a call for tenders (unless it is a trick).

Anticipating a “Sudden Termination” claim

(a) The termination may be total or partial

The total rupture is materialized by a complete stop of the relations, for example ending the contract, stopping the sending of orders by the purchaser or the recording of orders by the supplier.

The Supreme Court recently recalled that a significant drop in sales with a partner must be considered as a partial rupture of the relationship (February 16, 2022, n° 20-18.844, cited above). But the most complicated situation to deal with is the so-called partial rupture that will be deduced from a modification of elements that partly impacts the relationship but does not reduce it to nothing (ex.: a price increase or decrease, a change in the terms of payment or delivery).

(b) The termination must be subject to a reasonable written prior notice

The notice must be notified in writing. The absence of written notice is already a breach in itself. The notification must clearly reflect the willingness of a party to sever the relationship in whole or in part, which must be clearly identified. The notification must also clearly identify the date on which the relationship will end.

Thus, an ambiguity on the notice period (e.g if the termination of an agreement is notified, whilst offering to maintain certain prices and payment terms, in the meantime) is considered as an insufficient termination notice (French Supreme Court, January 29, 2013, n° 11-23.676).

Parties must distinguish between the letter of formal notice for default and the subsequent notification of the breach, giving notice (if applicable). During the period of notice, parties must fully comply with all contractual conditions.

This principle also applies to distribution contracts subject to specific French rules imposing annual or multi-year negotiation obligations. In fact, the Court of cassation has ruled that “when the conditions of the commercial relationship established between the parties are subject to annual negotiation, modifications made during the notice period which are not so substantial as to undermine its effectiveness do not constitute a brutal breach of that relationship” (Cass. com., Dec. 7, 2022, n° 19-22.538).

However, it’s not necessary to mention the reasons why the commercial relationship is terminated is not a fault or breach of the relationship. In fact, French courts consider that “the fact that the given reason to terminate was false does not in any way present the terminating party from terminating the commercial relationship” (Versailles Court of Appeal, June 10, 1999).

The duration of the prior notice to be respected is not defined by French law which did not pose precise rule until the reform 2019. If several criteria are stated by case law, it should be noted that the most important criterion is the duration of the relationship. Judges also take into account the share of turnover achieved by the victim, the existence or not of a territorial exclusivity, the nature of the products and the sector of activity, the importance of the investments made by the victim especially to the relationship in question, and finally the state of economic dependence. Economic dependence is defined as the impossibility for a company to have a solution that is technically and economically equivalent to the contractual relations it has established with another company. Case law considers this to be an aggravating factor justifying a longer termination notice.

The minimum notice period must be notified at the time of notification of termination. As a consequence, events that affect the victim after the notification, both positively (conclusion of a new contract) and negatively (loss of another custome), will not be taken into account by the judge, at the time of ruling, when assessing the “brutality” of the termination.

The length of the notice given by the judges is very variable. The appreciation of notice is made on a case-by-case basis. It is very difficult to give a golden rule, even though roughly for each year of relationship, a month’s notice might be due (to modulate up or down depending on the other criteria in the relationship). But way of illustration, however, the following case law may be cited:

• Paris Court of Appeal , Feb.9, 2022: 16-year relationship with 15 months’ notice;
• Paris Court of Appeal, Jan.20, 2022: 12-year relationship with 8 months’ notice;
• Paris Court of Appeal, Oct. 25, 2022: 16-year relationship with 18 months’ notice;
• Paris Court of Appeal , Feb. 23, 2022: 17-year relationship with 11 months’ notice;
• Paris Court of Appeal, Sept. 21, 2022: 5-year relationship with 14 months’ notice.

Since the Order of April 24, 2019, which limits the length of reasonable notice to a maximum of 18 months, if the notice period granted by a party is 18 months, it cannot be held liable for a sudden termination. However, much of the litigation remains uncertain, as only exceptionally long or particularly sensitive relationships led, prior to 019, to the award of more than 18 months’ notice. Ordinance of April 24, 2019, limits to 18 months the maximum period of notice reasonably due under Article L 442-1.II. But much of the litigation will remain uncertain since only relations of exceptional longevity or particularly sensitive, could have led to the allocation of a notice higher than 18 months.

Judges are not bound by the contractual notices stipulated in the contract. But if the author of the breach also violated the terms and conditions of termination provided for by contract, the victim may seek the responsibility of the author both on the tort basis of the sudden rupture and also on the basis of the breach of a contractual obligation.

Cases in which “Sudden Termination” is ruled out

The legal regime provides for two cases, and the case-law seems to have imposed others.

(a) The two legal exceptions are Force majeure (very rarely consecrated by the courts) and the fault of the victim of the termination, case-law having added that it must be a serious violation (“faute grave”) of a contractual commitment or a legal provision (such as non-respect of an exclusivity, a non-compete, a confidentiality or a change of control duty, or non-payment of amounts due contractually).

The judges consider themselves, of course, not bound by a termination clause defining what constitutes serious misconduct. In any case the party who terminates for serious misconduct must clearly notify it in its letter of termination. Above all, serious misconduct leads to a lack of notice, therefore, if the terminating party alleges serious misconduct but grants notice, whichever it may be, judges may conclude that the fault was not serious enough.

Thus, the seriousness of the misconduct must be motivated by judges in their rulings. Noting that the contract was breached after two formal notices is not sufficient (Cass. com., Feb 16. 2022, n° 20-18.844).

However, the Court of Cassation considers that “even in the case of serious misconduct justifying the immediate termination of the commercial relationship, the other party remains free to give the other party a notice” (Cass. Com., Oct. 14 2020, n°18-22.119).

(b) In recent years, case-law has added other cases of liability waiver. This is the case when the rupture is the consequence of a cause external to the author of the rupture, such as the economic crisis, the loss of its own customers or suppliers, upstream or downstream.

For example, in 2021 the Court of cassation has ruled that “the business partner is not entitled to an unchanged relationship and cannot refuse any adaptation required by economic changes” (Com, Dec 01, 2021, n°20-19.113). In fact, to be attributable to an economic player, a termination must be free and deliberate. This is not the case if termination is imposed by the economic situation.

However, adding a liability exemption clause in a contract, aimed at waiving destinated to escape the penalties of article L. 442-1, is without consequences on the judge’s appreciation.

Judges have also excluded “sudden termination” in the hypothesis of the end of the first period of a fixed-term contract, whatever its duration is: the first renewal of a contract, constitutes a foreseeable event for the victim of the rupture, which excludes the very notion of brutality; but once the contract has been renewed at least once, judges can subsequently characterize the victim’s legitimate belief in a new tacit renewal.

Compensation for “Sudden Termination”

Judges only compensate for the detrimental consequences of the brutality itself of the breach but do not compensate, at least in the context of article L442 -1.II, for the consequences of the breach itself.

The basic rule is very simple: it is necessary to determine the length of the notice which should have been granted, from which the notice actually granted is deducted. This net notice is multiplied by the average monthly gross margin of the victim, or more often the so called margin on variable costs (i.e. the turnover minus costs disappearing with non-performance of the contract/relation). Defendant should not hesitate to ask for the full accountancy evidences, especially to identify (lower) margin rates, or even for a judicial expertise on those accounting elements. In general, the base of the average monthly margin consists of the last 24 or 36 months.

The compensation calculated on the average margin is, in general, exclusive of any other compensation. However, the victim can prove that it has suffered other losses as a consequence of the brutality of the rupture. Such as dismissals directly caused by this brutality or the depreciation of investments made recently by the victim.

Some practical tips when considering to anticipate “Sudden Termination”

Even though the legal regime is still ambiguous and the case-law terribly casuistic which prevents to release strong guidelines, here are some practical tips when a company plans to terminate a relationship / contract:

• in the case of a fixed-term contract renewable tacitly, the notification of non-renewal must be anticipated well in advance of the beginning of the contractual notice in order to avoid being in a situation where it is necessary to choose between not renewing the contract with a notice that is not sufficient or agree to see the contract renewed itself for a new term;
• commercial teams must be made aware of the risk of partial sudden termination when they change the conditions of execution of a commercial relationship / contract too radically;
• in some cases, it may be useful to send a pre-notice of termination with a “notice proposal” in order to try to validate this notice with the other party;
• it may also be useful, in certain relationships, to notify the end of the relationship with different lengths of notice depending on the nature of the product lines;
• Finally, the best way is to conclude an end-of-relation protocol, fixing the duration of the notice as well as, if necessary, the progressive decline of the orders, the whole within the framework of a settlement agreement which definitively waives any claim, including “sudden termination”.

Sudden termination regime shall be taken into consideration when entering into the final phase of a duration relationship: the way in which the contract (or de facto relationship) is terminated must be carefully planned, in order to manage the risk of causing damages to the counterparty and being sued for compensation.