Terminating an established commercial relationship is a decision to be taken with caution, at the risk of having to pay substantial sums of money to your ex-contractor.
Let’s take a look at a decision made by the Paris Court of Appeal concerning the termination of a commercial relationship in the event of fault on the part of the co-contractor (Paris Court of Appeal, July 3rd 2024, no. 22/14428).
The termination of an established commercial relationship is strictly regulated by French law, particular by article L. 442-1 of the French Commercial Code, which provides that:
“Any person engaged in the production, distribution or provision of services who abruptly terminates an established commercial relationship, even partially, without giving prior written notice that takes into account the duration of the commercial relationship, with reference to trade practices or inter-professional agreements, shall be liable for damages caused.”
This special legal framework applies when the commercial relationship is ‘established’. In other words, if (i) there is a commercial relationship between the parties – evidenced by a contract, a series of contracts, a series of orders, etc. – (ii) when that relationship is regular, stable and habitual and (iii) the parties can reasonably expect a certain continuity of the relationship.
If these conditions are met, the party wishing to terminate the relationship is obliged to give its partner written notice so that the latter can reorganise, find new partners, etc.
If no written notice of termination is given, or if the period of written notice given is insufficient, the termination is considered “brutal”, and therefore unlawful.
The calculation of the period of notice to be given must be carefully analyzed, even if the contract has already set the duration. Judges are not bound by contractual notice periods, and analyze the situation in concreto.
The period of notice to be given will be even longer if:
- the business relationship is long-standing at the time of notification of termination,
- the partner is economically dependent on the breaker and/or has had to make investments in connection with the relationship,
- the volume of business between the parties is significant, etc.
Commercial practices, the presence of any exclusivity, the specific features of the market and of the products and services concerned, and any economic and/or legal obstacles to the reconversion of the partner are also taken into account when calculating this period.
As an exception to this principle, the party responsible for the termination is not obliged to give notice to its co-contractor if it is responsible for a breach that is sufficiently serious to justify the immediate termination of the relationship.
How do you determine whether such a fault exists, enabling the relationship to be terminated without notice?
Judges consider that the fault or breach in question must be incompatible with the continuation, even temporary, of the relationship.
This analysis must be carried out:
- objectively: according to the extent of the breach and the nature of the obligation breached; and
- subjectively: according to the actual impact of this fault on the commercial relationship, the possibilities of its continuation and the behavior of the parties.
In the above-mentioned Paris Court of Appeal decision, the party responsible for breaking off the commercial relationship accused its co-contractor of two faults: (i) denigration of its products/services and (ii) breach of a prohibition provided for in the contract binding the parties.
- With regard to denigration: the terminating party (specialized in the production, selection and sale of ducklings for breeding) accused its customer and partner (specialized in the hatching of ducklings for the French and international foie gras industry) of distributing a leaflet to all actors in the industry with a view to denouncing certain practices of its suppliers (in particular the attempt to impose long-term contracts and excessively high prices).
However, the Court of Appeal considered that the distribution of this leaflet could not justify the termination of commercial relations without notice.
Indeed, the leaflet did not specifically name the supplier in question, and the criticisms mainly concerned the structural organization of the industry rather than the relationship between the parties directly involved.
As a result, there was no denigration of the products/services of the party responsible for the termination of the relationship.
- With regard to the alleged breach of contract: the distribution contract formalizing the relationship between the parties, which began ten years ago, expressly prohibited the party suffering the loss of the relationship from “moulting” the ducklings purchased from the distributor at the end of the operating cycle.
Specifically, the contract stipulated that the victim of the termination was not authorized to use the ducklings purchased from the party responsible for the termination beyond the agreed “operating cycle” (approximately 1 year), at the end of which the breeding ducklings were to be slaughtered.
However, the distributor was carrying out massive ‘moults’, failing to respect the obligation to slaughter the ducklings at the end of the aforementioned “operating cycle”. As a result, its orders for ducklings from the breaching party were reduced.
The Court of Appeal considered that this breach justified the termination of the commercial relationship without notice.
The practice of “moulting” was likely to have serious consequences for the supplier, i.e.: risk of damaging its reputation and good name as well as lost profits.
The Court also noted that the breaches in question had already been identified by the supplier in the past. These breaches had, moreover, justified the signing of the contract formalizing the relationship. Thus, the repeated breach of the prohibition in question had irreparably undermined the trust between the parties, making it impossible to continue the relationship during a period of notice.
It is therefore essential to seek the advice of a specialist in the field to analyze the various options for terminating a commercial relationship:
- With notice: how much notice should be given?
- Without notice: is there sufficiently serious misconduct ?