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Distribution Law

Abusive termination of contracts

As shown by numerous precedents, article L.442-6 5° of the French commercial code, which prohibits the abusive termination of commercial relationships, may lead to a condemnation of the author of the abusive termination to substantial damages.

This circumstance should lead companies to verify, before terminating any well established contract or commercial relationship, whether such termination may be abusive, because a sufficient notice period has not been granted to other party before the termination, except if such termination is justified by a violation of the contract.

1. When is a termination considered abusive?

Article L.442-6 5° of the French commercial code prohibits the fact of ?terminating brutally, even partially, an established commercial relationship, without a written notice and without a notice period taking into account the duration of such commercial relationship and complying with the minimum duration for notice periods as provided for in inter-professional agreements, by reference to usual commercial practice?.

It should be noted that this provision was initially mainly intended for the retail sector, but it has eventually been applied to all sectors and to all types of commercial relationships by the courts.

A ?termination??? within the meaning of that provision may result from any ?official? termination of a given contract, but it may also consist in a de facto termination. The text of the commercial code provides that even a partial termination may trigger the implementation of article L.442-6 5°. This includes, for example, situations where a distributor informally discontinues ordering some, but not all products of a given supplier. Court precedents have thus extended the term ?termination? to, for example, a mere reduction of the quantity of orders, in order to avoid that the progressive reduction of orders become a way to avoid the consequences of article L.442-6 5°.

The ?brutal? i.e. abusive nature of the termination results from the absence of a written notice and of a sufficient notice period. The assessment of this principle is made without taking any account of the notice period or termination notice system possibly provided for in the contract. The problematic question is to determine which duration the notice period should have. This duration is determined on a case by case basis by the courts, in particular depending on the duration of the past relationship and ? if they exist ? by referring to usual commercial practices or inter-professional agreements. There are thus precedents setting forth a duration from one month to more than 18 months!

As a matter of fact, precedents applying article L.442-6 5°, have created an obligation for any company to grant a reasonable notice period (which duration is difficult to appreciate) before terminating any contract. Naturally, when a termination is justified by a contractual violation by the other party, such notice period may not be necessary.

2. The risk of a condemnation to substantial damages

The victim of an abusive termination may claim substantial damages, with the purpose of repairing several types of prejudices:

- the loss of profit or turnover: certain courts calculate the reasonable duration of the notice period which should have been granted, and grant damages corresponding to the loss of either profit, or turnover for that period;

- specific costs linked to the abusive termination: the victim of the abusive termination may claim damages covering specific costs incurred because of the absence of a sufficient notice period (for example replacement costs, or the cost of perishable products already produced). It does not seem justified, however, to claim damages for a prejudice resulting from the termination itself, and not from the abusive nature of such termination. The termination itself is not prohibited, only the absence of a sufficient notice period is prohibited;

- in certain rare cases, the victim of the abusive termination may be able to demonstrate that such termination has harmed its reputation and caused the mistrust of other business partners. It may claim damages to compensate for this situation.