Connection to previous case law
Article L442-6, I, 5° of the Commercial Code prohibits the sudden termination of established commercial relationships and requires that written notice of termination taking into account the length of the relationship be given. This provision has been the subject of a considerable body of case law and has given rise to problems when termination follows the sale of a business.
As the sale of a business does not automatically involve a transfer of the seller's rights and obligations to the buyer, this raises the issue of whether commercial relationships entered into by the seller must be continued by the buyer or whether they constitute new relationships created when the business is taken over.
In practice, if the commercial relationship is considered to be continued, the length of the notice period must consider the relationship created by the seller. However, if the sale ends the commercial relationship, there is no need to consider the length of the commercial relationship which previously existed between the seller and its counterparty. In such case the length of the notice period will be considerably reduced.
After adopting solutions perceived as ambiguous at times, on September 15 2015 the Supreme Court rendered a ruling which clarified the implementation of Article L442-6, I, 5° in the case of sale of a business.(1)
The September 15 2015 ruling provided a reminder that the transfer of established commercial relationships at the time of the sale of a business should not be taken for granted.
In the case at hand, the buyer operated a business under a business lease for five months before acquiring it. Two weeks after completion of the sale, the buyer informed one of its commercial counterparties of the end of their commercial relationship and gave it four months' notice. The counterparty argued the notice period was insufficient given the length of the commercial relationship it had had with the seller.
The Supreme Court held that the sale of a business does not automatically entail the buyer taking the seller's place in the commercial relationship between the counterparty and the seller.
The Supreme Court focused on the buyer's intention to continue or discontinue the commercial relationship. It concluded that the fact that a business lease and longstanding commercial relationships existed did not in itself enable the court to establish that the buyer intended to continue the commercial relationship previously entered into by the seller. Accordingly, there was no requirement to take into account the pre-sale commercial relationship in determining the length of the notice period to be given to the counterparty.
Connection to previous case law
Far from overturning existing case law, the September 15 2015 decision cements the courts' position.
For some years now, case law has assessed parties' intention to support the buyer's continuation of the commercial relationship established by the seller. For example, on January 29 2008 the Commercial Division of the Supreme Court(2) overruled a Versailles Court of Appeal decision for failing to assess whether the buyer, which had assumed some of the seller's commitments through an amendment to an existing contract, intended to continue the existing relationship.
On November 2 2011 a ruling raised doubts by accepting the continuation of the relationship on the grounds that an agreement between the buyer and the counterparty, entered into two months before the sale, "was merely taking over, with a few minor changes" the contract concluded between the seller and the counterparty, "such that this contract was in line with previous ones". Given the circumstances, this solution appeared to place less importance on the parties' intentions and accepted the principle of the continuation of established commercial relationships.
Subsequent rulings continued to assess the intentions of the parties,(3) or even that of the buyer alone,(4) on the basis of the evidence available to accept the continuation of the commercial relationship.
The September 15 2015 ruling removed any uncertainty as to the exceptional nature of the continuation of commercial relations in the event of the sale of a business by clearly reaffirming the principle that they do not transfer to the buyer, unless the buyer so intends.
The ruling constitutes a fair compromise between, on the one hand, the sale of the business, which does not entail a transfer of the seller's commitments and obligations to the buyer and, on the other, the protection of the counterparty against the sudden termination of its commercial relationship with the seller.
In the absence of an intention to assume the commercial relationship, the buyer can give notice to the seller's counterparty without taking into consideration the length of the relationship between the seller and the counterparty. Only the length of the relationship (if any) between the buyer and the counterparty is relevant, which often has the effect of reducing the required notice period considerably. In this situation, the counterparty should be able to make a claim against the seller on the grounds that it has not anticipated the effect of the sale of the business on the counterparty.
Therefore, the parties to the sale of the business should make specific provision for commercial relationships established by the seller. The buyer should seek to limit the risk of the counterparty establishing its intention to continue the relationship, while the seller should ensure that sufficient notice is given to its counterparties.
A buyer's continuation of the commercial relationships between the seller and its counterparties can arise only from a clear intention on the part of the buyer to take over these relationships. This intention will be analysed by the courts based on all available evidence, and could arise from:
- an express commitment given by the buyer to the counterparty; or
- a tacit commitment resulting from, for example, the conclusion of new contracts on terms and conditions that are substantially the same as those which applied between the seller(5) and the counterparty, or the continuation of business between the buyer and the counterparty over time.(6)
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email ([email protected] or g[email protected]). The Cabinet Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).
(1) Supreme Court, Commercial Division, September 15 2015, 14-17.964.
(2) Supreme Court, Commercial Division, January 29 2008, 07-12.039.
(3) Supreme Court, Commercial Division, September 25 2012, 11-24.301; Supreme Court, Commercial Division, October 22 2013, 12-28.704.
(4) Supreme Court, Commercial Division, May 20 2014, 12-20.313.
(5) Supreme Court, Commercial Division, November 2 2011, 10-25.323.
(6) Supreme Court, Commercial Division, October 22 2013, 12-28.704.