Although primarily focused on consumer protection, recent French legislation, known as the “Hamon” Act of February 13th, 2014, goes well beyond consumers and aims at extending greater regulation over business to business relationships including, for the first time, over sub-contracting agreements. Substantial fines of 375,000 Euros for failure by companies to comply with these new requirements have been introduced.
Certain regulations including the fines are applicable in France regardless of the governing law of business parties’ agreements. Any relationship involving an OEM, supplier, or purchaser located in France or an agreement subject to French law is affected. Important aspects concerning business contracts are outlined briefly below:
Greater Regulation of trade negotiations
Several provisions seek to impose greater regulation over business to business purchase terms and business negotiations. In this respect, the role of the seller’s general terms and conditions of sale becomes preponderant as the « only foundation for trade negotiations » (Article L.441-6 of the French Commercial Code). Although the real impact of this text is uncertain, the government’s stated objective is to achieve “balanced” business negotiations.
Article L.441-7 has been amended similarly, which provides for "a written agreement entered into between the supplier and the distributor or the service provider states the obligations to which the parties are bound in accordance with Articles L.441-6 and L.442-6, for the purpose of price determination at the conclusion of the commercial negotiation."
According to Annick Le Loch, French parliament member and rapporteur during debates within the French National Assembly, these new provisions intend to clarify ambiguities regarding the current state of the text. “General conditions of purchase are often presented at best as the basis for trade negotiation and, at worst, as a document that must be signed by the supplier which will become the only agreement in place. […] We wish to clearly reaffirm the rule: negotiations must rely on and only on general terms and conditions of sale - this does not prevent distributors from discussing them."
This commentary is in line with a recent Court decision on the prohibition of significant “imbalances” in contracts. The Paris Court of appeal (18 Dec. 2013, n ° 12/00150) held that the systematic imposition of the general conditions of purchase identically drafted in all purchase agreements in effect eliminates negotiation and creates significant imbalances in the parties’ rights and obligations on the basis of Article L.442-6 I. 2°.
In light of the reform and recent case law, general terms and conditions of sale must not be ignored by purchasers in the context of trade negotiations and their terms must be discussed between the parties in view to a final agreement. Parties will have to demonstrate they are in compliance with this legislation. Parties are advised to retain all documents evidencing effective negotiations have occurred between them regarding conditions of the parties’ cooperation, and in particular the agreed price of services or products.
This reform is relevant both in relation to negotiation of OEM agreements and supply chain management.
New formalism on sub-contracting
For the first time in France, this legislation introduces a formal requirement of a written agreement for sub-contracting purchases (in view to reducing perceived imbalances between the purchaser and sub-contractor).
The new article L.441-9 of the Commercial Code is as follows:
“I. - A written agreement is established, in accordance with Articles L.441-6 and L.442-6, for any purchase of manufactured products customized for the buyer for integration into his own production, where the amount exceeds a threshold set by decree.
II. – In the event of failure to draft a written agreement as described within Section I, fines provided for in Section II of Article L.441-7 will be applicable.”
A written agreement must be prepared and executed for the purchase of sub-contracted production to the extent the purchase exceeds a financial threshold to be determined by decree. The agreement must contain certain basic terms such as purpose, price, payment terms, warranty liability, intellectual property rights, termination and dispute resolution, failing which either party may be subject to fines.
References in this Article to the provisions of Articles L.441-6 and L.442-6 suggest that the simple notification of the general terms and conditions of purchase together with a purchase order is likely not to fulfill the requirements of the written agreement stated in the new Article L.441-9. The agreement should indeed cover the agreed negotiated price as well as particular conditions duly signed by both the buyer and the seller to meet this new requirement.
Amended Article L.442-6, I, 12° of the French Commercial Code states that a professional will be held liable if the professional:
12° orders, pays or invoices an order of products or services performed at a different price from the agreed price resulting from the application of the price list stated in the general terms and conditions of sale, when these conditions have been accepted without negotiations by the buyer, or the price agreed further to trade negotiations covered by the agreement provided for in article L.441-7, as amended by addendum, or the renegotiation provided for in article L.441-8.
Any special price reduction, discount by way of a framework agreement or price adjustment must be formalized by a written amendment before a buyer issues an order to avoid situations where liability of the buyer could be sought.
This provision is of particular pertinence to OEM supplier relationships where OEMs frequently seek to impose price reductions unilaterally. A supplier may invoke this provision against any unilateral price reduction (such as in the context of undetermined annual price decreases) imposed by a purchaser.
Reduced payment terms
The new law has revised payment terms for “periodic invoices”. For any summary invoice edited at the end of the month, the new payment term is 45 days from the date of issuance of the invoice (Article L.441-6 of the French Commercial Code) (instead of 60 days). This new payment term is likely to apply to intermediate invoices in the framework of global services. Existing payment terms of 45 days end of month or 60 days from the invoice date remain the limit for other invoices.
Failure to comply with these provisions may give rise to fines of € 375,000 for companies and may be imposed by the French Authority for Competition Policy, Consumer Affairs and Fraud Control (DGCCRF). The amount may be doubled in case of repetition of the breach within a period of 2 years from the date on which the first decision became final.
These administrative fines will be enforceable in the event of failure to comply with rules applicable to payment terms, rules regarding contractual formalism and clauses or practices that have an effect of delaying the starting point for payment terms (Articles L.441-6, L.441-8 and L.441-9 of the French Commercial Code).
The DGCCRF will also be invested with powers of injunction regarding restrictive trade practices and heightened investigation authority.