Sudden termination of established business relationships: Is there a need for reform?

The offence of termination of commercial relations has existed since the Galland Law of July 1st, 1996. The idea was to protect “small business” against large distribution. It was therefore a law very strongly marked by the desire to intervene and regulate the economy. Paradoxically, France had a neoliberal Balladur government but with a very electoralist vision of interventionism….

This law extends the list of restrictive practices by introducing, in particular, a prohibition on the sudden termination of an established commercial relationship.

This is the most quantitatively implemented restrictive practice of competition; it is contained in article L.442-6 I 4° of the French Commercial Code.

Several hundred decisions are rendered per year on the basis of this legislative provision and nearly twenty decisions of the Court of Cassation are issued per year in good order.

However, the regime remains uncertain in three respects:

  1. A period of notice that is always uncertain….

There is no clear and precise answer to the question of the duration of the notice period before terminating an established commercial relationship. This is assessed in concreto, with regard to the “nature, duration and importance of the relationships” (Cass. Com 11/07/2006, n°04-20592).

To remedy this legal uncertainty, part of the academic literature suggests setting time limits of advance notice to be respected depending on the duration of the commercial relationship; to cap the period at six, twelve or eighteen months, regardless of the duration of the relationship’s seniority depending on the type of contract concerned: lower for all commercial relationships; higher for distribution contracts involving major investments.

  1. New grounds for exemption from case law for abrupt termination of commercial relations….

In a judgment dated November 8th, 2017, the Commercial Chamber of the Court of Cassation ruled that the consequences of the economic crisis in a sector of activity are likely to justify the termination of the commercial relationship, unless there is abuse. The Court of Cassation validated the reasoning of the judges of the merits by holding in particular that Dorsey’s decline in orders, “inherent in a market in crisis, did not engage its responsibility”. However, can we consider that the economic crisis would be a new cause of exoneration for the author of a sudden breakdown in an established commercial relationship?

Nothing is less certain… because it would only open the door to all abuses…

In the absence of notice, a sudden termination is, as every commercial lawyer knows, admitted only in two cases provided for by law: failure by the other party to perform its obligations or force majeure characterized by an unforeseeable, external and irresistible event.

So there is no salvation until the Legislator has made a decision…

  1. An inconsistent compensation calculation….

Traditionally, case law compensates for the loss of “gross margin”, which corresponds to the difference between turnover and the cost of purchasing products (turnover – purchases + stocks).

In practice, the Court of Cassation does not provide any specific calculation method to be followed.

Nevertheless, the vast majority of the judges of the merits agree with the idea that the material damage that can be compensated corresponds to the loss of gross margin on turnover that the victim of the termination could have expected to achieve.

However, one part of the academic literature considers that the loss of gross margin would be inappropriate if it compensated the victim for the sudden termination by ignoring the fact that, since the contract had not been maintained, some costs would not have been incurred by the victim party. In the event of the termination of a relationship, many variable costs are no longer incurred since the distributor no longer has any activity or it decreases. For example, advertising costs that are no longer incurred, product preparation before sale, etc.

Some solutions are put forward:
– Deduction of variable costs from gross margin.
– Deduct variable and fixed costs from gross margin

These divergences on prejudice as well as on the causes of exoneration force us to rethink the legal regime… it is true that litigators prefer breakdownsto better denounce or defend them, but in the meantime companies are confronted with an unstable legislative framework. The legal regime governing the termination of commercial relations therefore needs to be adjusted and clarified without question.