On April 24, 2019, the French government adopted Ordinance n°2019-359 with the aim of clarifying and strengthening the effectiveness of rules relating to unfair trade practices and to the formalization of business relationships. This reform, although aimed at clarification, should lead to further enforcement by the regulator, victims and third parties.
The Ordinance applies directly to contracts adopted after its entry into force on April 26, 2019. Long-term contracts in effect on the date of its entry into force must be modified by March 1, 2020.
1. A shorter list of prohibited practices
The French Commercial Code sets out a number of rules protecting weaker parties against abusive conducts by their contracting partners (so-called “unfair trade practices”). The Ordinance dated 24 April 2019 refines the list of prohibited behaviors around only three broad practices: (i) significant imbalance between the obligations of the parties, (ii) benefit without consideration (i.e., fictitious services or services which value is unrelated to the services invoiced) and (iii) abrupt termination of business relationships.
In addition to these three illegal practices – which can only be established following an analysis of the circumstances of the case – the list of clauses automatically prohibited is also reduced from five to two: (i) clauses providing for retroactive rebates and (ii) MFN clauses allowing a contracting party to automatically benefit from more favorable conditions granted to competitors by its contracting partner.
Wider scope of unfair trade practices
The “significant imbalance” and “benefit without consideration” prohibitions are no longer limited to long-term commercial relationships and now cover short-term contractual relationships such as one-time supply contracts not intended to last for a substantial period of time.
In the same vein, the “benefit without consideration” prohibition is no longer limited to consideration for “commercial cooperation services” (i.e., services facilitating the marketing of products, such as the allocation of a privileged location in stores or marketing efforts). Similarly to what was decided in a few court cases, judges can thus establish the lack of consideration in a wide range of circumstances (e.g., whether royalties paid under a license agreement are not manifestly disproportionate).
A timid change with respect to abrupt termination
Companies are entitled to sufficient notice prior to the termination of their business relationships and can claim compensation where sufficient notice has not been given. Until now, the rules on abrupt termination did not give any indication as to what notice periods would be appropriate, which led to numerous disputes. French courts tended to consider that one month per year of a relationship constituted an appropriate notice.
While the first draft of the Ordinance suggested limiting the notice period to one year, the final version caps it at 18 months. This means companies granting notices of at least 18 months will not be liable for abrupt termination. The change introduced by the Ordinance is fairly timid given that French courts rarely determined the need for a notice period of more than 18 months except in very specific cases (for example, where there was a decades-long business relationship or in circumstances of economic dependency).
More rights granted to victims and third parties
On top of the compensation for the harm suffered, victims of unfair trade practices will now be able to request that the clause giving rise to the practice be declared null, as well as the recovery of undue payments. Prior to the reform, these two last prerogatives were reserved to the Minister for the Economy. In addition, the Ordinance clarifies that any “person with an interest” (e.g., third parties affected by the practice) can not only bring proceedings before the courts and receive compensation for the harm suffered but also request an injunction to end the unfair trade practice.
The Minister for the Economy and the public prosecutor can still request a court to order a fine. The fine is now capped at the highest of: (i) €5 million, (ii) 5% of the annual French turnover, or (iii) three times the amounts unduly collected or obtained. Prior to the reform, the 5% threshold was only used where the €5 million fine was not proportionate to the benefits derived from the practice.
2. Increased transparency in commercial negotiations
Simplification of the rules on commercial negotiations
Under the French Commercial Code, a supplier and its distributor must enter into a “Single Agreement” setting out the obligations of the parties by March 1 of the year in which it takes effect. In addition, the supplier’s terms and conditions (T&Cs) had to be shared with the distributor 3 months prior to the March 1 deadline.
Under the new, simplified regime:
- Suppliers can communicate T&Cs within a “reasonable period” prior to the March 1 deadline, leaving the parties with some flexibility.
- On top of potential rebates, the agreed price must also include the remuneration of all “commercial cooperation services”.
- Any addendum to the Single Agreement must be adopted in writing and justify its existence.
For the supply of consumer products (i.e., products purchased frequently and at a relatively low price, a list of which will be established by decree), however, the obligation to communicate T&Cs 3 months prior to the March 1 deadline remains. In addition to the obligations mentioned above, Single Agreements must indicate the projected turnover and the “business plan” (i.e., specify the sale conditions, cooperation services and other obligations).
With respect to a failure to communicate T&Cs, the Ordinance replaces the civil sanction under the French Commercial Code with an administrative sanction of €75,000.
Similarly, with respect to mandatory information that should appear on invoices, the previous criminal penalty has been replaced with an administrative sanction of €375,000.
Consequently, French authorities – rather than courts or prosecutors – will be able to impose sanctions on non-complying companies more quickly and with more discretion.