Article 442-1.II of the French Commercial Code (former Article L. 442-6.I.5 \u00b0) 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).<\/p>\n
Therefore, a foreign trader who contracts with a French company should try not to fall under the aegis of this rule (part I<\/strong>) and, if it cannot, should understand and control its implementation (part II<\/strong>).<\/p>\n How can a foreign company avoid or control the risk linked to the \u00absudden termination of commercial relations\u00bb set by French law? <\/strong>Foreign companies doing business with a French counterpart should:<\/p>\n How can a foreign company master the risk linked to the \u00absudden termination of commercial relations\u00bb set by French law? <\/strong>Foreign companies doing business with a French counterpart should:<\/p>\n 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.<\/strong><\/p>\n It is quite difficult for a foreign company to correctly grasp the French legal framework of conflict of laws rules applicable to \u201csudden termination\u201d. In a ruling of September 19, 2018 (RG\u00a016\/05579<\/a>, DES\/ Clarins), the Court of appeal of Paris made, by an implicit reference to the Granarolo EU ruling (07 14 16, N\u00b0C196\/15<\/a>) 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 \u201csudden termination\u201d rule.<\/p>\n Sudden termination of a written contract or of a \u00abtacit contractual relationship\u201d<\/strong><\/p>\n According to Rome I Regulation (EC No\u00a0593\/2008, June 17 2008<\/a>) on the law applicable to contracts:<\/p>\n – In case of choice of a foreign law by the parties: <\/strong>The clause selecting a foreign applicable law<\/strong> will be valid <\/strong>and respected by French judges (subject to OMR, see below), provided that the choice of law by the parties is express or certain.<\/p>\n – In case of no choice by the parties: French law will likely to be declared applicable<\/strong> 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.<\/p>\n Sudden termination of a \u201cnon-tacit contractual relationship\u201d<\/strong><\/p>\n 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<\/a>) on the law applicable to non-contractual obligations..<\/p>\n – In case of choice of a foreign law <\/strong>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.<\/p>\n – In case of no choice of law by the parties: French law will likely to be declared applicable <\/strong>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.<\/p>\n \u201cSudden Termination\u201d rule, a French Overriding Mandatory Rule?<\/strong><\/p>\n 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 \u201csudden termination\u201d is not an OMR, the Court of appeal of Paris (sole French appellate court in charge of \u201csudden termination\u201d cases) is also not in favour of the OMR qualification on the grounds that the text \u00abprotects purely private economic interests\u00bb (CA Paris, p\u00f4le 5, ch. 5, Feb 28. 2019, n\u00b0 17\/16475 \/ CA Paris, p\u00f4le 5, ch. 5, Oct 8. 2020, n\u00b017\/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\u00b0 18\/03112).<\/p>\n 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\u00b017-31.536<\/a>) that the provisions of the former article L. 442-6, I, 2\u00ba and II, d), about \u201csignificant imbalance\u201d (which is in the same set of rules than \u201cSudden termination\u201d) 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\u00b02023-221 (March 30, 2023, aka Egalim III<\/a>) to qualify Sudden termination rule as an OMR, however this text (article L 444-1.A Commercial code<\/a>) does not quote expressly OMR and set no justification whatsoever to set such a qualification.<\/p>\n Consequently, if a claim for \u201csudden termination\u201d is brought to a French court, there is still a \u00a0risk that the latter would exclude the applicable foreign law<\/strong> and replace it with the regime resulting from the \u00absudden termination\u00bb of Article L 442-1. II. However, to avoid this risk, a foreign company would better not only choose a foreign governing law<\/strong> but also stipulate that the dispute will be brought before a foreign judge or an arbitral<\/strong> tribunal.<\/p>\n \u201cSudden Termination\u201d claim and intra EU co-contractor<\/strong><\/p>\n The ECJ ruling (Granarolo, July 14, 2016, N\u00b0C196\/15<\/a>) created a distinction between claims occurring from:<\/p>\n – written framework contract<\/strong> or tacit contractual relationship (<\/strong>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<\/strong> according to conflict of jurisdiction rules under\u00a0Brussels I recast Regulation<\/a>;<\/p>\n – informal relationship which is a non<\/strong>–tacit contractual relationship<\/strong> (i.e. orders placed from time to time): such a request has a tort nature<\/strong> under Brussels I recast ;<\/p>\n To be noted: the so-called Egalim III law has no impact on the EU rules<\/strong> on jurisdiction clauses.<\/p>\n (a) Who is the Judge of the \u201csudden termination\u201d of a written contract or of a \u00abtacit contractual relationship\u201d?<\/strong><\/p>\n – Jurisdiction clause<\/strong> for the benefit of a foreign court will be enforced by <\/strong>French courts, even though it is an asymmetrical clause (Court of cassation, October 7, 2015, Ebizcuss.com \/ Apple Sales International<\/a>).<\/p>\n – In case of lack of choice of court<\/strong> clause, French courts are likely to have jurisdiction<\/strong> if the French claimant bringing a case based on \u201csudden termination\u00bb is the service provider, such as distributor, agent, etc. (see ECJ Corman Collins case, 19 12 13, C-9\/12<\/a>, and article 7.1.b.2 of Brussels I recast\u00b0).<\/p>\n (b) Who is the Judge of the \u201csudden termination\u201d of a \u00abnon- tacit contractual relationship\u201d?<\/strong><\/p>\n – We believe that French courts may continue to give effect to a jurisdiction clause<\/strong> in tort case<\/strong>, especially when it expressly encompasses tort litigation (Court of cassation, 1\u00b0 Ch. Civ., January 18, 2017, n\u00b0 15-26105, Riviera Motors \/ Aston Martin Lagonda Ltd<\/a>).<\/p>\n – In case of lack of choice of court<\/strong> clause, French courts will have jurisdiction over a \u201csudden termination\u201d 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<\/strong>\u2026i.e. in France if the French company is the victim.<\/p>\n \u201cSudden Termination\u201d claim and Non-EU co-contractor<\/strong><\/p>\n The Granarolo solution will not ipso facto apply if a French victim brings a claim to French courts, based on a \u00absudden termination\u00bb 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<\/strong>.<\/p>\n Jurisdiction clause<\/strong> 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.<\/p>\n \u201cSudden Termination\u201d claim and arbitration<\/strong><\/p>\n Stipulating an ad hoc or institutional arbitration clause is probably the safest solution<\/strong> 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<\/strong>, 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\u00b017\/03703). The so-called \u201cEgalim III\u201d law has no impact on arbitration clauses.<\/p>\n 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 \u201csudden termination\u201d claim in front of French judges (see what happen below in Part 2)<\/p><\/blockquote>\n When French law is applicable, the foreign company will face the legal regime of article L442 -1.II of the French Commercial Code sanctioning \u201csudden termination\u201d. As a preliminary remark, it is important to know, above all, that the implementation of the liability for \u00absudden termination\u00bb is the consequence of the lack of a notice or a too short notice<\/strong>. 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.<\/p>\n 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.<\/p>\n First, there must be a relationship that can be proven by a written contract or de facto<\/em>, by behaviour of the parties. Article L.442-1 II of the French Commercial Code covers all \u201ccommercial\u201d relationships and not only \u201ccontractual 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\u00b0 20-18.844<\/a>)<\/p>\n 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.<\/p>\n (a) The objective criterion implies a sufficiently long, regular and significant relationship between the two parties. <\/strong>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.<\/p>\n (b)<\/strong> The subjective test focuses primarily on the legitimate belief of the victim<\/strong> 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).<\/p>\n (a) The termination may be total or partial<\/strong><\/p>\n The total rupture is materialized by a complete stop<\/strong> of the relations, for example ending the contract, stopping the sending of orders by the purchaser or the recording of orders by the supplier.<\/p>\n The Supreme Court recently recalled that a significant drop in sales with a partner<\/strong> must be considered as a partial rupture of the relationship (February 16, 2022, n\u00b0 20-18.844, cited above). But the most complicated situation to deal with is the so-called partial rupture<\/strong> 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).<\/p>\n (b) The termination must be subject to a reasonable written prior notice<\/strong><\/p>\n The notice must be notified in writing<\/strong>. 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.<\/p>\n 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\u00b0 11-23.676<\/a>).<\/p>\n 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.<\/p>\n 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 \u00abwhen 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\u00bb (Cass. com., Dec. 7, 2022, n\u00b0 19-22.538<\/a>).<\/p>\n However, it\u2019s 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 \u201cthe fact that the given reason to terminate was false does not in any way present the terminating party from terminating the commercial relationship\u201d (Versailles Court of Appeal, June 10, 1999).<\/p>\n The duration of the prior notice<\/strong> 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<\/strong>. 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.<\/p>\n 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 \u201cbrutality\u201d of the termination.<\/p>\n 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<\/strong> (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:<\/p>\n 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.<\/p>\n 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.<\/p>\n The legal regime provides for two cases, and the case-law seems to have imposed others.<\/p>\n (a)<\/strong> The two legal exceptions are Force majeure<\/strong> (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<\/strong> (\u201cfaute grave<\/em>\u201d) 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).<\/p>\n 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.<\/p>\n 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\u00b0 20-18.844<\/a>).<\/p>\n However, the Court of Cassation considers that \u00abeven 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\u00bb (Cass. Com., Oct. 14 2020, n\u00b018-22.119<\/a>).<\/p>\nIn a nutshell: <\/strong><\/h2>\n
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How to avoid the application of the French \u201cSudden Termination\u201d rule?<\/strong><\/h2>\n
What will be the law applicable to \u201cSudden Termination\u201d?<\/strong><\/h3>\n
How to avoid jurisdiction of French court over a \u201cSudden Termination\u201d claim?<\/strong><\/h2>\n
How to master the \u201cSudden Termination\u201d French rules?<\/strong><\/h2>\n
The prerequisite for \u201cSudden Termination\u201d: an established commercial relationship<\/strong><\/h3>\n
Anticipating a \u201cSudden Termination\u201d claim<\/strong><\/h2>\n
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Cases in which \u201cSudden Termination\u201d is ruled out<\/strong><\/h2>\n