Review of the changes made to the regulations applicable to supplier-distributor relations by the "Egalim 3" or "Descrozaille" law
Law No. 2023-221 of March 30, 2023, designed to strengthen the balance in commercial relations between suppliers and distributors ("Egalim 3 Law") aims, in view of the high inflationary context, to rebalance commercial relations, particularly at the annual negotiation stage, which takes place from December 1st to March 1st of the following year.
Unless otherwise indicated, the provisions analyzed below are applicable from April 1st, 2023.
I. The mandatory application of French law and the jurisdiction of french courts to supplier/buyer agreements concerning products and services marketed in France
The French legislator noted that many distributors were attempting to evade the application of French legal provisions protecting suppliers, for example by locating their central purchasing units outside France. As a result, the agreements concluded had an international dimension, even though the products were marketed in France.
To prevent this legal evasion, the new Article L.444-1 A of the French Commercial Code stipulates that :
- French law applies to all agreements concluded between a supplier and a buyer concerning products or services marketed in France. Thus, regardless of where the parties are domiciled, the place of negotiation, or the stipulations negotiated, the agreement will be subject to French law as long as the products or services concerned are marketed in France; and that
- French courts have exclusive jurisdiction over disputes arising from the application of these agreements, subject to compliance with the rules of European law or international treaties. However, recourse to arbitration remains possible.
As these provisions are a matter of public policy, it is not possible to derogate from them.
II. Modification of the rules applicable and penalties incurred in the event of unsuccessful annual negotiations and failure to meet the March 1st deadline
Before the new law was passed, it was common for a distributor and a supplier to be unable to reach an agreement on the commercial terms applicable for the next period before March 1st. This situation would lead to a deadlock: suppliers regularly stopped delivering goods, or were forced to deliver the goods at the price previously applicable.
To remedy this situation, an experimental scheme to deal with the failure of annual negotiations has been set up for a period of three (3) years. The scheme can be summarized as follows:
It is important to note that if a supplier chose to terminate the relationship without notice, his co-contractor could not claim that the termination was abrupt.
At the same time, penalties for failure to meet the March 1st deadline for signing framework agreements have been increased for fast-moving consumer goods ("FMCG") (“produits de grande consummation” in French). The maximum fine is €200,000 for an individual and €1,000,000 for a legal entity (compared with €75,000 and €375,000 respectively for other products). As before, the amount of the fine incurred may be doubled in the event of a repeat offence within two (2) years of the date on which the first penalty decision became final.
III. A framework for commercial relations involving consumer goods and food products
As a reminder, the following products are considered to be FMCG (Article D441-1 of the French Commercial Code):
- Food products and beverages (alcoholic and non-alcoholic) ;
- Electric batteries;
- Washing and cleaning products (brooms, detergents, cleaners, etc.), excluding polishes, dyes, insecticides and fungicides;
- Paper items (filters, dishes, etc.), aluminium foil and plastic garbage can liners;
- Dressings (adhesive or non-adhesive);
- Non-electrical cosmetic appliances (razors, nail files, scissors, brushes, etc.)
- Personal hygiene products (soap, shaving foam, toothpaste, etc.);
- Beauty products (lipstick, make-up remover, hairspray, etc.), perfumes and deodorants; and
- Other hygiene/beauty products (paper tissues, tampons, cotton buds, etc.).
New provisions, partly codified in the French Commercial Code, have been adopted to give greater protection to FMCG suppliers in commercial negotiations with their distributors.
Firstly, the special regime of the "convention unique PGC" (unique FMCG agreement) now expressly provides that:
- The said agreement must indicate each of the reciprocal obligations to which the parties have committed themselves as a result of the negotiation, as well as their unit price (Article L.441-4 III of the French Commercial Code); and that
- Negotiations must be conducted in good faith (Article L.441-4 IV of the French Commercial Code).
Secondly, two new restrictive competition practices aimed specifically at FMCG have been sanctioned (Article L.442-1 I 4° and 5° of the French Commercial Code):
- Discriminatory practices that create a competitive disadvantage or advantage for the partner. Such practices were already sanctioned in the case of food products intended for humans and pets, and their scope has therefore only been extended to FMCG; and
- Negotiations in bad faith resulting in the failure to conclude the “convention unique” (single agreement) by the March 1st deadline. Thus, while failure to meet the deadline was already punishable by an administrative fine, it will also be punishable if it is attributable to bad faith on the part of one of the negotiating parties. As a result, negotiations conducted in bad faith by one party may be punished both by a civil fine (Article L.442-1 I 5° of the French Commercial Code) and by an administrative fine (Article L.441-6 of the French Commercial Code).
Thirdly, from March 1st, 2024, the framework for promotions will be extended to all FMCG products, and its application extended until April 15, 2026. Prior to the entry into force of the Egalim 3 law, the legislative provisions in force mainly governed promotions applicable to food products, with non-food FMCG consequently excluded. As a result, large-scale promotions were applied to these products.
Under these conditions, promotions on FMCG products granted to consumers by distributors will have to comply with two types of restrictions:
- A limitation in value: promotions, whether cumulative or not, applied to a given FMCG product may not exceed 34% of the retail price or an equivalent increase in quality (for example, an "X% free" offer); and
- A limit on volume: promotions may not involve FMCG representing more than 25% of (i) the forecast turnover set out in the single summary agreement, or, where applicable, (ii) the forecast volume set out in the contract for the design and production of food products, or (iii) volume commitments involving perishable agricultural products.
Fourthly, each FMCG distributor is required to submit a document to the French Ministries of the Economy and Agriculture, by September 1st , setting out the share of the turnover surplus recorded following the revaluation of food and agricultural product purchase prices by their suppliers.
Fifthly, the loss-leader threshold for foodstuffs (for human and animal consumption) introduced by the Egalim 1 law, raised to 1.1 times their actual purchase price by the ASAP law, will be applicable until April 15, 2025.
Sixthly, Article L.443-8 of the French Commercial Code concerning the “convention unique produits alimentaires” ("single agreement on food products") has been supplemented:
- Price changes resulting from the automatic price revision clause must be implemented no later than one (1) month after it is triggered; and
- Article L.442-1 II of the French Commercial Code, which penalizes the sudden nature of the termination of a relationship, is applicable to this "food products agreement", and the principle of non-negotiability of agricultural raw materials must be respected when determining the price applicable during the notice period.
IV. Creation of a "Logistics agreement" and tighter control over logistics penalties
In line with the innovations introduced by the Egalim 3 law and described above, additional protection has been provided to suppliers through the various provisions relating to logistics penalties described below, it being noted that they do not apply to wholesalers (Article L.441-17 IV and Article L.441-18 of the French Commercial Code):
- In addition to the “convention unique” (single agreement), an agreement must be signed setting out the parties' reciprocal logistical obligations (including penalties where applicable). However, it need not be concluded before March 1st (Article L.441-3 I bis of the French Commercial Code);
- The logistics penalties incurred are capped at 2% of the value of the products ordered belonging to the category of products subject to contractual non-performance (Articles L.441-17 and L.441-18 of the French Commercial Code);
- The period during which the distributor may demand payment from its supplier of penalties due to contractual non-performance is capped at one (1) year from the occurrence of the non-performance (Article L.441-17, I of the French Commercial Code);
- Any distributor claiming the application of logistical penalties by means of a "penalty notice" will have to provide proof of the breach found and of the loss suffered (Articles L.441-17 and L.441-18 of the French Commercial Code);
- The French Administrative Supreme Courtmay suspend the application of logistics penalties in the event of exceptional circumstances seriously affecting supply chains in one or more sectors; and
- Distributors and suppliers must now notify the DGCCRF (Directorate General for Consumer Affairs, Competition and Fraud Prevention) of the amount of penalties imposed before the end of each calendar year, on pain of an administrative fine of €75,000 for an individual and €500,000 for a legal entity (Article L.441-19 of the French Commercial Code).
V. Reorganization of the wholesaler regime
The regime applicable to commercial relations entered into by and with wholesalers has been clarified by restructuring the applicable provisions. As wholesalers are both buyers and suppliers, the substantive rules have not been changed but reorganized for the sake of clarification.
Firstly, the notion of wholesaler is now defined in Article L.441-1-2 I of the French Commercial Code as "any person who, for professional purposes, buys products and resells them, on a principal basis, to any other professional who obtains supplies for the needs of his business. Wholesalers include central purchasing or referencing agencies. Excluded from the notion of wholesaler are companies or groups of individuals or legal entities operating, directly or indirectly, one or more retail stores, or acting in the distribution sector as central purchasing or referencing agencies for retail companies".
Secondly, professionals thus qualified as wholesalers benefit from a number of derogations that make negotiation and formalization of their commercial relations more flexible. The following Articles do not apply to them:
- Article L.441-1-1 of the French Commercial Code governing general sales conditions for food products intended for humans and animals;
- Articles L.441-4 and L.443-8 of the French Commercial Code relating to the “convention unique” (single agreement) concluded for FMCG and food products for humans and animals; and
- Articles L.441-17 and L.441-18 of the French Commercial Code governing logistics penalties imposed on suppliers and distributors respectively.
Finally, the “convention unique” (single agreement) entered into by wholesalers with their suppliers and/or distributors is now governed by a dedicated Article (Article L.441-3-1 of the French Commercial Code), whose provisions are modelled on the basic general regime of Article L.441-3 of the French Commercial Code. Similarly, the new Article L.441-1-2 of the French Commercial Code governing general sales conditions drawn up by wholesalers reproduces Article L.441-1 of the same code.
VI. Clarification of the obligation to include a price renegotiation clause in certain contracts
Pursuant to Article L.441-8 I. of the French Commercial Code, contracts with a performance period of more than three (3) months for the sale of agricultural and food products whose production prices are significantly affected by fluctuations in the prices of agricultural and food raw materials and products, energy, transport and materials used in the composition of packaging must include a clause on price renegotiation procedures to take account of these upward and downward fluctuations.
Article 20 of the Egalim 3 law stipulates that a decree issued by the Minister for Agriculture could set the list of certain agricultural and food products for which, by way of derogation, such an obligation is not required.
The decree was adopted on July 31, 2023. The decree lists the products concerned, including cereals, certain flour-milling products and certain wines.
With the laudable aim of protecting the weaker parties in negotiations with supermarkets, this law of general application brings even more complexity and formalism to commercial negotiations between suppliers and distributors.
While the law is already supposed to be applicable, some retailers have called for a moratorium on the capping of promotions on hygiene products, which the French Minister for the Economy expressed his support for in an interview on September 7.
Inflation on food products also led the Minister to announce a new law for October that would bring forward the deadline for concluding framework agreements, but the date and scope of application have yet to be defined.