Criteria for abrupt termination of an established commercial relationship

(Court of Cassation – Commercial Division – October 18, 2023 – no. 22-20.438)

The French Supreme Court has confirmed that the brutal nature of the termination of an established commercial relationship is analyzed in a sovereign manner by the lower courts according to various criteria, which enable them to determine the notice period that would have been necessary and the prejudice resulting from this brutality.

Since April 1^st, 2023, the brutal severance of established commercial relations, which has been the subject of numerous reforms and case law assessments, is now governed by article L. 442-1, II. of the French Commercial Code, which provides in particular that:

« II. – Engages the responsibility of its author and obliges him to repair the damage caused the fact, by any person in the production, distribution or service sectors to abruptly terminate the contract.even partially, an established commercial relationship, in the absence of written notice that takes into account, in particular, the duration of the commercial relationshipwith reference to trade practices or interprofessional agreements.

In the event of a dispute between the parties over the length of the notice period, the person who terminated the contract may not be held liable on the grounds that the notice period was insufficient, provided that he or she gave eighteen months’ notice.

In order to avoid liability for sudden termination of an established commercial relationship, the party initiating the termination must give written notice to the other party, taking into account the duration of the commercial relationship and any industry practices.

A glass ceiling has been introduced by the legislator: the person who terminates the contract cannot be held liable if 18 months’ notice has been given.

However, the complexity of this subject lies first and foremost in the notion of an “established commercial relationship”.

The appeals decision challenged in the judgment handed down by the Commercial Chamber of the Cour de cassation on October 18, 2023 gives a clear definition of this under the old text applicable to the matter:

“To be established within the meaning of these provisions, the commercial relationship must be ongoing, stable and habitual. The criterion of stability refers to foreseeable stability, so that the victim of the breach had to be able to reasonably anticipate a certain continuity in the future flow of business with its commercial partner.

The purpose of the aforementioned text is not to punish the termination itself, but rather its brutality, characterized by the absence or inadequacy of written notice.

The notice period must be understood as the time required for the abandoned company to reorganize itself according to the duration, nature and specific features of the established commercial relationship, the product or service concerned.”

Thus, the penalty relates to the brutality (which is not defined by law) of termination without notice or with insufficient notice, which does not allow the co-contractor to prepare for the termination of the commercial relationship.

As a result, it is left to the discretion of the trial judge to determine whether a situation is brutal or not.

Several criteria are used by judges to determine the length of notice required in each case, and to determine whether the termination of an established commercial relationship has been brutal:

• Duration or length of relationship ;
• Sales volume and sales growth ;
• Any specific investments made and not amortized ;
• Exclusive relationships and the specificity of the products and services in question ;
• And finally, the state of economic dependence.

This is particularly true of the decision handed down by the Commercial Chamber of the French Supreme Court on October 18, 2023.

In this case, a consulting firm and a factoring company successively entered into two consulting contracts, each for one year. At the end of the second contract, the factoring company did not wish to award a third contract to its former co-contractor, but decided to appoint competing companies, which included people hired by the first company.

The Cour de cassation confirms the decision taken by the Court of Appeal, which had held that :

• The express exclusion of tacit renewal by the two successive fixed-term contracts does not preclude the existence of an established commercial relationship, provided that the co-contractor could legitimately have expected the renewal from which he benefited at the end of the first renewal of the one-year contract;
• The established business relationship is demonstrated, and it is undisputed that it ceased with the simple expiry of the second contract, without prior notice or warning of any kind, while the company’s director was wondering what action to take on the assignment.

Therefore, to determine the length of the notice period that the victim of the brutal termination should have received to enable him to reorganize, the judges of the fund took into account: the duration of relationship between the parties of 2 years, cost and sales trends over this period and their importance in the balance sheet of the company victim of the brutal rupture.

In this case, the offending company was ordered to pay damages to its former co-contractor on the basis of a sovereign assessment by the judges, with the Cour de cassation stating that the Court of Appeal “did not have to explain further why the three-month duration enabled the service provider to find new outlets”.

So, even in the presence of a contractually-defined term in the commercial relationship, the parties to an established commercial relationship must assess the necessary period of time to be granted to a co-contractor to enable him to organize himself if the end of their relationship is envisaged by one of the parties, in accordance with the criteria specific to their relationship and the practices of their professionbefore the courts, should a dispute arise.