Termination of an established commercial relationship (notice period – non-performance – economic circumstances – force majeure – economic dependency)
Due to the particular consequences of lockdown that France is currently undergoing, many companies are experiencing a period of part or full closure on their trading activity, whether or not they resort to using short-time working (see the firm’s note on short-time working (partial unemployment): https : //www.village-justice.com/articles/coronavirus-virus-covid-distance working-unemployment leave-models-legal,34129.html).
Some companies have been forced to stop co-operating with their partners, both those of long-standing and otherwise, with whom they may in fact have a relationship of economic dependency.
However, the breakdown of commercial relations is covered by specific legal provisions. One should first refer to the termination methods set forth in the contract – if there are any – that was entered into by the parties, including the clause on force majeure.
Furthermore, the force majeure clause is explained in another article drafted by our firm (https://bondard.fr/force-majeure-clause-content of your -contracts-commercial-taking into account-coronavirus-covid -19 /).
Accordingly, in this article, we will be dealing with the particular situation regarding the termination of an established commercial relationship with an entity deemed to be economically dependent.
I. What is economic dependency?
Economic dependency is a condition in which a company finds itself once it has been deemed not to have any provisions which are technically and economically equivalent to actual contractual relations that it has established with another company ( Cass. Com., March 3, 2004, n ° 02-14.529; Cass. Com., December 2, 2008, n ° 08-10.731; Cass. Com., February 12, 2013, n ° 12-13.603).
Thus, generally due to the fact that a specific business partner may play a significant role in the turnover of a company, therefore the latter party will be considered to be economically dependent on this partner.
Furthermore, because of this condition, the commercial partner cannot terminate the commercial relationship established without serving due notice, especially when this is likely to seriously jeopardize the injured company financially.
II. Is it possible to abruptly terminate an established commercial relationship with a service provider?
In order to terminate an established commercial relationship, prior notice should be served which is considered to be reasonable based on the length of said relationship. Indeed, article L. 442-1 II of the Commercial Code provides that:
“Any party who abruptly terminates, even partly an established commercial relationship, and fails to provide written notice which takes into account the specific length of the commercial relationship, pursuant to current commercial practices or inter-professional agreements, shall be held liable for any damages and loss incurred to any party carrying out production, distribution or service activities.
However, in the event of a dispute between the parties regarding the notice period, the terminating party will not be held liable for failing to serve sufficient notice provided that he has given at least eighteen months notice. ”
Therefore, one should first refer to the contractual provisions regarding termination including termination for both negligence and non-negligence. In the absence of such provisions, the length of reasonable notice should be duly determined.
The wording of Article L. 442-1 II, formerly codified in Article L. 442-6.I.5, only mentions “the length of the commercial relationship”, as a factor that may enable the notice period to be determined.
The possibility to abruptly terminate commercial relations does not depend on whether or not the injured party is economically dependent (T. com. Amiens, Oct. 22, 1999: RJDA 2/00, n ° 217, p. 187).
However, this is a compounding factor and may in turn lead to the length of the necessary notice period being interpreted more strictly, and consequently will have an impact on the loss and damages suffered by the injured party (Cass. Com., 6 Nov. 2012, n ° 11-24.570: JurisData n ° 2012-025179). Thus “greater the economic dependency is, then greater will be the loss and damage arising from the abrupt nature of the termination” (CA Douai, March 15, 2001, n ° 1999/01301: JurisData 2001-150707).
This context must be clearly analyzed for each company that suffers from an abrupt termination, and the notice period should be specifically calculated according to the circumstances of the particular case (Cass. Com., Oct. 7, 2014, n ° 13-19.692: JurisData n ° 2014 -024183).
According to the terms of the Paris Court of Appeal, in a Judgment of May 9, 2018 (n ° 16/02810): “When assessing the length of the notice period to be served, it will depend on all the circumstances that are likely to influence it on the date on which notice was served, in particular (…) the condition of economic dependency of the injured company”.
In another Judgment, dated April 11, 2018 (no.15/02833), the Paris Court of Appeal stated that:
“When assessing whether sufficient notice period was given, it will be necessary to consider the condition of economic dependency by referring to the share of turnover that the terminating party contributes to the overall turnover of the injured party suffering from the abrupt termination”.
Thus, the classification of the condition of economic dependency is a parameter to be observed when determining the notice period, as a mitigating factor.
However, it is possible to have a breach of contractual relations without serving notice, in the case of non-performance by the other party of its obligations and furthermore in the event of force majeure.
These two cases are expressly covered by the final paragraph of article L. 442-1 II of the French Commercial Code, which provides that:
“The provisions of this II do not preclude the possibility to terminate without giving notice, in the event of non-performance by the other party of its obligations or in the event of force majeure. ”
As regard non-performance, the case law upholds that the seriousness of the behavior of a party to a contract can justify it being ended by unilateral termination, regardless of whether the contract is fixed term or permanent (Cass. Civ., 1st, 20 Feb. 2001, n ° 99-15.170; Cass. civ. 1st, Oct. 28, 2003, n ° 01-03.662).
The Court of Cassation, following the former article 1134 of the Civil Code, specifically restated that “the seriousness of the behavior of a party to a contract may justify the other party to terminate it (…), irrespective of the formal terms of contractual termination” (Cass. com. 10 Feb 2009, n ° 08-12.415, RTD civ. 2009. 318, obs. B. Fages; RDC 2010. 44, obs. Th. Genicon).
It also considered that non-performance would constitute serious behavior and could justify the unilateral termination of the contract (Cass. Civ. 1ère, 5 nov. 2008, n ° 07-20.113 RTD civ. 2009. 119, obs. B. Fages).
The Court of Cassation also recognizes a party’s right to unilaterally terminate the contract if there is a serious breach of contractual good faith. It condemns breaches of contractual good faith, from the start of such contractual relationships and throughout their contractual term (Cass. Com. 23 Sept. 2008, no 07-10.025, RTD civ. 2009. 320, obs. B. Fages ; CCC 2008. Comm. 272; Cass. Com. March 31, 2009, no 07-20.991, JCP 2009. I. 273, no 33, obs. P. Grosser).
As regards force majeure, this is assessed in accordance with the criteria set forth in article 1218 of the Civil Code: namely events or circumstances of an unforeseeable, unavoidable and external nature as defined by said Civil Code.
For more information, and in particular regarding the classification of the coronavirus pandemic (“Covid-19”) as a case of force majeure, we refer you to our article “Force majeure clause, epidemics and freedom of contract”:
https://bondard.fr/clause-de-force-majeure-sein-de-vos-contrats-commerciaux-tenant-compte-coronavirus-covid-19/ and https://www.village-justice.com/articles /clause-force-majeure-epidemies-liberte-contractuelle,34085.html.
Consequently, provided that the breach is serious or force majeure is established, thus the party terminating the established commercial relationship will be exempt from serving notice and the parties will then, in certain cases, be restored to their original condition.
III. In the absence of the non-performance or the classification of a case of force majeure, will the company that terminates the established commercial relationship without giving notice be held liable?
It is possible to abruptly terminate a commercial relationship established with a service provider without having to rely on the conditions of non-performance or a case of force majeure, by justifying it upon the economic circumstances surrounding the performance of the contract, even if the injured party is in a condition of economic dependency.
In a judgment of February 6, 2019 (n ° 17-23.361) the Commercial Chamber of the Court of Cassation upheld that when an established commercial relationship is abruptly terminated and no notice is served, this could be justified by economic circumstances, and would mean that neither of the contracting parties could be held liable for such termination of said relationship. The Court then interpreting ex Article L. 442-6.I.5 of the Commercial Code, now codified in Article L. 442-1 II above.
In this case, company X supplied software and related services to company Y with whom it had a business relationship since 2003, the latter “constituted its main client”, thus it could be classified as being economically dependent.
Due to the economic crisis of 2008, company Y suffered a fall in its trading activity which meant it had to reduce the volume of its orders with company X. This decision had severe repercussions on the finances of the latter, which resulted in it terminating the established commercial relationship and moreover failing to serve notice upon the injured party. The Court of Cassation then held that:
“(…) After noting that the relations between the parties were part of an open order to be followed by specific orders and retained, without any alteration, that company Y justifiably had suffered a significant reduction in its property development activity during the period from July 1, 2008 to June 30, 2009, following the economic and financial crisis of 2008, the judgment concluded that the breach claimed by company X was not attributable to company Y; that only in these circumstances alone (…) and was able to reject the action filed by company X ”
Thus, due to the economic circumstances, the defendant party could not be held liable for such termination, nor did it give rise to a case of force majeure, consequently no notice had to be served upon company X.
The Commercial Chamber of the Court of Cassation had already adopted a similar decision in a judgment of February 12, 2013 (Cass. Com., February 12, 2013, n ° 12-11.709), and gave a ruling based on the same grounds:
“(…) That after having noted that the drop in orders from Caterpillar companies from CMI, were significant from 2008 and continued in 2009, and this was due to the decrease in their own orders from Caterpillar companies, and which justified a 70% decrease in their activity between 2007 and 2008, following the economic and financial crisis of 2008 which had severely impacted the construction and public works sectors and had led to the collapse of orders for construction machinery, and furthermore, the Bankruptcy-Judge upheld in his order of May 11, 2009, that despite the disastrous nature of Caterpillar’s activity over several months, it cannot be proven that there was any termination of the relationship established between CMI and each of the Caterpillar companies, the latter having certainly significantly reduced their order volume with their subcontractor, but the decrease in their own orders had been duly taken into account and therefore had not been carried out willfully; ”
In a judgment of January 14, 2016, the Paris Court of Appeal upheld, still on the basis of ex Article L. 442-6. I.5, that the abrupt termination of an established commercial relationship, is justified by “the drop in the volume of business turnover from orders placed (…) does not constitute a breach or fault, since it arises from the ongoing global economic situation” ( CA Paris, pole 5, ch. 5, January 14, 2016, n ° 14/16799).
In another judgment, the Commercial Chamber of the Court of Cassation upheld on the same ground that a client cannot be forced to maintain a level of activity with its subcontractor when the market itself decreases, so that the “drop in orders (…) inherent in a market in crisis, does not render him liable” (Cass. com., November 8, 2017, n ° 16-15.285).
In the event that no case of force majeure can be established, therefore it should be possible in certain cases to argue that a change in economic circumstances may justify the termination of a commercial relationship established with a partner in a situation of economic dependency. Furthermore, the influence of Covid-19 on the slowing down of economic activity could be relied upon as a ground for arguing that the terminating party cannot be held liable for it.
Please do not hesitate to contact us should you have any further questions on this matter.
Master Céline Bondard.
Lawyer at the Court and the New York Bar
Cabinet Bondard – Toque B0181
62 rue de Maubeuge – 75009 Paris
T: +33 (0) 1 85 08 33 28 / F: +33 (0) 9 59 55 15 15 / M: firstname.lastname@example.org