Is your contractual notice period enforceable in France?
05 October 2020
International companies doing business in France are often baffled to find that their contractual notice periods are unenforceable. This is due to a specific regime that requires lengthy notice to be given before terminating a commercial relationship. A recent decision from the Paris Appeal Court, however, clarifies how to mitigate the risk of being stuck with an unwanted business partner.
Prohibition of abrupt termination: a French specific regime
Under French law, a party to an ‘established’ commercial relationship cannot terminate it without providing sufficient written notice to the other party; in other words, there can be no ‘abrupt termination’, irrespective of the contractual provisions. The rationale is to give the non-terminating party sufficient time to redirect its activities towards new customers.
Why do International companies need to pay attention to this French abrupt termination regime?
International companies need to pay attention to this French regime as:
- The scope is very wide: the Courts assess whether a relationship is established from an almost purely factual point of view, based on its length, stability and intensity. The regime applies irrespective of the parties’ contractual framework, be it a long-term agreement or a succession of short-term orders. There are limited exceptions (including property lease agreements and contracts with commercial agents). Financial institutions should be aware of this regime as it will apply to the institutions’ own relationships (although this regime does not apply to the termination or non-renewal of credit lines or loans) as well as representing potential liability for this institution’s clients.
- It is mandatory: this regime cannot be excluded and supersedes any contractual arrangement, in particular prior notice clauses (if any). For instance, if your contract provides for a 2 month prior notice but your business partner is entitled to 6 months under the abrupt termination regime, the applicable notice would be 6 months and your contractual provision will be unenforceable.
- It is not harmless: French Courts typically require one month of notice for each year the relationship has been in place, sometimes longer depending on the non-terminating party's economic dependency on the relationship. Additionally, the Courts can take into account relationships entertained with the parties’ predecessors, which can dramatically increase what they consider to be the sufficient notice period. French Courts sometimes impose up to 24 or 36 months. French law now stipulates an 18-month cap; however, how this applies is unclear and we cannot rule out that Courts may still impose longer notice periods in some cases. In any event, the French regime is more severe than other European legislations, for instance, German law usually imposes up to 6 months or, maximum 12 months.
What are the risks for international companies arising from the abrupt termination regime?
- Lack of familiarity: international companies are not always familiar with these French-specific rules, even when they have been doing business in France for a long time. The reasons for this lack of awareness include: it is counterintuitive to depart from the agreed contractual provisions; the length of the prior notice under the abrupt termination regime is not determinable at the outset but changes over time; and the abrupt termination regime is very French-specific. Indeed, their French business partners are often also unaware of this regime.
- Court proceedings: at A&O, we often see companies discovering the regime’s existence after a contractual termination, which is then alleged to be an abrupt termination, at a point where they are dragged into lengthy proceedings before French Courts or arbitral tribunals. The claimant asks for damages or for an injunction forcing the terminating party to resume the relationship. This happens regularly; French Courts settle about 300 abrupt termination claims per year. The relatively modest costs of litigation in France and the fact that the losing party often bears only a fraction of the winning party’s costs incentivise non-terminating parties to try their luck and start proceedings.
- Financial risk: the resulting financial risk can represent millions of euros. Recoverable damages include the non-terminating party's loss of profits during the notice period it should have enjoyed (calculated on its net margin), as well as the specific investments it made in expectation that the relationship would continue.
- Continuing an unwanted commercial relationship: companies spontaneously complying with the abrupt termination regime or forced to comply with it by the Courts are not better placed. During the notice period, parties are to conduct business ‘as usual’, meaning sales volumes during the notice period should be substantially the same as before the notice was given. Partial termination involving a sharp decrease in volume rather than an actual termination is also prohibited. As a result, the terminating party might have to maintain a commercial relationship for a potentially long period, on terms which no longer reflect market conditions.
How to mitigate such risks?
Until recently, the application of the abrupt termination regime seemed almost inevitable, even for international commercial relationships. This was because several French appeal court decisions held that it was part of the French ‘overriding mandatory provisions’ (as defined by the Rome I Regulation); this means that French Courts would have to enforce it regardless of the law applicable to the commercial relationship provided the French market was affected. However, the French Supreme Court has never confirmed this position and case law is divided on this issue.
In June 2020, the Paris Appeal Court issued a decision that could end this debate. The Court decided that the abrupt termination regime is not part of the French overriding mandatory provisions because the regime protects private rather than public interests (as required by the overriding mandatory provisions).
Accordingly, parties doing business with a French company can exclude this regime by selecting foreign law to govern their commercial relationship (although this may be difficult to implement in the case of an on-going relationship). In short, instead of only excluding the abrupt termination regime, cut the Gordian knot and exclude French law altogether.
Interestingly, this decision was rendered by the International Chamber of the Paris Appeal Court. This chamber, along with the International Chamber of the Paris Commercial Court, was created to attract international disputes in Paris after the Brexit referendum. It offers the possibility of conducting proceedings in English while following procedural rules that common law lawyers are familiar with, such as discovery or cross-examination of witnesses.
The International Chamber's position is yet to be confirmed by the French Supreme Court. In the meantime, it will certainly influence other chambers of the Paris Appeal Court and, more generally, Commercial Courts in France because the International Chamber is specialised in international private law matters and the Paris Appeal Court has exclusive jurisdiction over all appeals involving an abrupt termination claim.
The fact that the Court limited the scope of application of the abrupt termination regime and decided instead to rely on the parties' choice of law, can clearly be seen as a pro-business stance. In this regard, whatever happens next, there is no doubt that this will remain the first landmark decision of the Appeal Court’s International Chamber.