Here Sylvie Gallage-Alwis and Deborah Azerraf from Signature Litigation, examine this and discuss how the reform aims at making France more attractive to foreign investments again by reducing the legal uncertainty around the enforcement of contract provisions, and may in turn reduce the number of litigations in this space.
Before doing business in France, there are three main specificities we would like to draw your attention to. These are the common pitfalls we see foreign companies discover the hard way, as fines or damages tend to be ordered quite automatically and can be significant.
Termination of business relations
The first specificity relates to litigation arising from alleged sudden termination of business relations. When professionals enter into contractual relations, they can reasonably consider that the contract will be the binding law between the parties, including the termination clause. However, in France, it is not possible to terminate established business relations whenever you want or whenever you think you are contractually able to do so. The notice period determined in the contract will not necessarily be enforceable. Indeed, the party wishing to terminate the contract will have to respect a certain period of time depending on the duration of the business relations and the economic dependency between the parties. If the applied notice period does not comply with the above, the victim will be able to claim damages on the ground of the sudden termination of business relations.
As such, French Courts will not hesitate to enforce a much longer notice period that the one you have signed for by contract (e.g. 90 days), the idea being that the weaker party needs protection in order to get organized. The weaker party can claim for damages which would correspond to the loss of contribution margin (i.e. difference between the turnover from which the victim was deprived after deducting the expenses that were not incurred as a result of the decline in activity resulting from the termination).
By Order no. 2019-359 dated April 24, 2019, the legislator has decided to provide some clarity by stating that an 18-month notice period would allow businesses to avoid liability. This period is presented as a maximum, beyond which it will no longer be possible to hold the party at the origin of the termination liable. This exemption from liability if the parties comply with an 18-month notice period is intended to apply regardless of the duration of the business relations. This is particularly interesting in the scope of very long business relations, as until now companies faced a risk of having to comply with a notice period of more than 18 months. It is, however, a very long period for short business relations and we will have to monitor how French courts will apply it.
Payment terms enforcement
Companies are also closely monitored in their relationships with other companies and in particular their suppliers. The French authorities are well known for their strict approach aiming at protecting French small and medium businesses against larger international groups. Conditions around payment terms are an easy way to carry out such controls and sanction them.
In 2018, 263 companies were sanctioned in France, representing a total fine of €17.2 million. These figures are much higher than in 2017 (155 fines representing €8.6 million). Just in April of this year, two companies were fined record sanctions in the amount of €510,000 and €670,000. More importantly, the French authorities have created a specific webpage that lists all the penalties and the names of the penalized companies. This is not usual practice in France and can be at the origin of difficulties for companies trying, for instance, to develop their business in France.
It is therefore not sufficient to have the right payment terms conditions mentioned in the contract. The French authorities will check that it is enforced all the time.
Contractual Imbalance
On June 12, 2019, the Paris Court of Appeal condemned for the first time a foreign company to a fine of €2 million for having provided in its contract, terms which led to a contractual imbalance against the suppliers of that company.
The French market surveillance authorities who are at the origin of this litigation have commented the following on this decision: "Besides the specific case to which it relates, this decision (…) is particularly important because, having been asked to rule on this question for the first time, it considered that the [authorities] could use, in legal proceedings, statements from companies who are victims of unfair commercial practices without revealing their identity. Indeed, the victims of such unfair commercial practices generally fear being the target of economic retaliation if they give testimonies in the scope of proceedings (…). By making it possible for claimant companies to remain anonymous, this case law further strengthens the revelation and punishment of unfair commercial practices.”
One can already imagine the consequence of such a decision when reading the French authorities' reaction.
The above shows that companies doing business in France should not assume that their contract will protect them against a claim for the latter to be amended or deemed inappropriate. Therefore, do not assume that if a French company agrees with your terms and conditions, the latter will be enforceable. In addition, beware that sanctions can either come from the other party and from the French authorities which will analyse your contracts.
