06 Jul Breach of contracts
International Distribution Contract; French law applicable to the contract – public order; court having jurisdiction; substantial modification of the contract at the time of renewal; sudden termination of an established business relationship; compensation.
A contractual commercial relationship is established between a supplier company from the European Union and a French distributor. The contract provides that the applicable law and the court having jurisdiction are those of the State of the supplier.
At the time of renewal, the supplier proposes substantial amendments to the contract.
Is there a sudden termination of the established commercial relationship?
French law protects the French distributor against a sudden termination and it is a mandatory provision.
First of all, in the case of established commercial relations, there is in France a mandatory provision; former article L.418.104.22.168 ° of the French Commercial Code, now article L.442-1-II since April 24, 2019 (Court of Cassation Expedia case, 8/07/2020, n°17-31.536). This French overriding mandatory law therefore has the effect of setting aside the law chosen by the parties to the contract if the latter should be unfavourable to the French company, in accordance with the provisions of the European Regulation “Rome I” n°593/2008.
It provides for a notice period of 18 months.
French law (article L.442-1-II of the French Commercial Code) requires compliance with a notice period of 18 months so that the author of the termination, the latter previously notified in writing, does not see their liability engaged when the sudden termination of a commercial relationship is characterised by a substantial modification of the contract. The granting of reasonable notice assumes the maintenance of the commercial relationship under the previous conditions, including the territorial exclusivity granted in the contract (Court of Cassation, 10/02/2015, n°13-26.414).
The substantial change in the conditions of the established commercial relationship can be qualified as a termination when the economy of the contract is disrupted (CA Paris, May 6, 2015 n°13/01886).
Contract maintained during the notice.
In such a situation of termination, an emergency procedure is possible in favour of the debtor. They may ask the judge to maintain the terminated contract in order to prevent damage resulting from the possibly unlawful termination of contractual relations (Court of Cassation, June 24, 2020, No. 19-12.261).
Granting of compensation
In the event of a sudden termination of the established commercial relationship, the amount of damages awarded to the victim is defined according to the gross margin (Court of Appeal of Paris CA 02/02/2017, n ° 15/04850) but case law has also been based in recent years on the margin on variable costs (CA Paris 04/04/2018, n ° 15/13123). It is important to remember that only the damage caused by the brutality of the termination is repairable and not the termination itself.
What if the court having jurisdiction is foreign?
If the contract includes a jurisdiction clause for the benefit of a foreign court, the latter must comply with the French mandatory provisions (Monster Cable Cassation judgment 22/10/2008, n°07-15.823).
Action by the French Minister of the Economy.
Added to this is the autonomous action of the French Minister of the Economy and the Public Prosecutor’s Office on the basis of article L.442-4 of the Commercial Code. This action allows a return to the French courts only for the defense of the general interest and economic public order. A clause conferring jurisdiction is therefore unenforceable against the Minister of the Economy and the Public Prosecutor’s Office.
A word of advice: a well-drafted contract is good "insurance".
The importance attached to negotiations with the other party takes on its full meaning in such a situation, be it at the time of drafting the contract to provide for the applicable law and the court having jurisdiction, but also after the dispute has arisen, in order to find a compromise on a reasonable period of notice.