Back to submission or attempted submission, in a significant imbalance between professionals

On 28 February this year, the Court of Cassation handed down an important ruling on significant imbalances.¹. Among other points, the High Court ruled on the criteria to be used to characterise the existence of a significant imbalance and more particularly the condition of submission or attempted submission of the other party to contractual obligations creating an imbalance.

It is this notion of submission that interests us this month.

To return to the sources, according to the cardinal principle of contractual freedom: people are free to conclude or not to conclude a contract, to choose the person of their co-contractor and to determine as they see fit the form and content of their agreement – within the limits set by the law.².

This principle is all the more important because contracts are binding on those who enter into them. The Code tells us that they take the place of the law for those who formed them.³.

However, this principle of contractual freedom, and its corollary of the binding nature of contracts, come up against the reality that relationships between co-contractors are not always equal, so that some people may be in an unfavourable position when negotiating. Economic or legal reasons, or asymmetry of information, can put one party in a position of strength, able to impose more on the other than it intended.

In contractual matters, the asymmetrical relationship par excellence is that between two contracting parties of different qualities: a consumer and a professional.

This explains why, as early as 1978 (⁴), the French legislator felt the need to penalise the inclusion of unfair terms which create a significant imbalance in contracts (⁵) concluded between a professional and a consumer or non-professional.

Then the legislator gradually accepted that asymmetry could also exist between contractors who were both professionals, but in different positions (either because of their size or their place in the marketing chain). The concept of “significant imbalance” then made its appearance in the French Commercial Code.

Article L.442-1-I-2° of the said Code does not penalise the mere existence of obligations creating a significant imbalance, but the behaviour that led to this imbalance.

“I.-Agrees the responsibility of its author and obliges him to repair the damage caused by the fact, in the context of commercial negotiation, the conclusion or performance of a contract, by any person engaged in production, distribution or service activities:

2° Subjecting or attempting to subject the other party to obligations that create a significant imbalance in the rights and obligations of the parties”.

For the application of this sanction, the whole question comes down to determining when a co-contractor “submits or attempts to submit”?

Current events have shown a certain success of this incrimination, giving the Courts the opportunity to clarify its contours, particularly in distribution law (where the power of certain buying groups makes it a favourite place).

1/ THE FIRST INTERESTING DECISIONS ARE TWO JUDGMENTS OF 15 MARCH AND 28 JUNE 20236 BY THE SPECIALISED DIVISION OF THE PARIS COURT OF APPEAL.

Quite rigorously, the Court starts from a definition of “submission or attempted submission”. It concerns “the absence of effective negotiation, or the possibility thereof, of the terms or obligations at issue” in the creation of a significant imbalance.

The submission, or attempted submission, must be demonstrated by the party claiming that the contract is significantly unbalanced.

It is examined on a case-by-case basis.

Obviously, submission can take the form of threats or retaliatory measures.

But it can also be the result of contextual elements which, taken together, make it possible to characterise the submission or its attempt.

These indicators include market structure.

When it comes to distribution, it’s easy to imagine the major retailers (who represent a concentrated market with few alternatives) imposing their conditions on suppliers wishing to be sold by them.

The Court of Appeal then offers its interpretation. To determine the extent to which the structure of the market may have contributed to the absence of effective negotiation, it refers to another quite distinct concept: the state of economic dependence.

In her view, account should be taken of the existence of a possible state of economic dependence, which translates into the impossibility for a company to have an economically and technically equivalent solution.

This state of dependence is linked to :

• The reputation of the supplier’s brand,
• The size of its market share in the market in question and in the reseller’s turnover,
• The impossibility of obtaining equivalent products.

In these two decisions, the Paris Court of Appeal noted that many of the suppliers were multinationals, leaders in their markets, which generated only a small proportion of their sales with the targeted distributor. However,” she adds, “they cannot afford to suffer repeated or long-lasting deferrals in supermarkets because they do not have alternative outlets enabling them to reach such a large customer base in the French market.

The Court then proceeded to analyse the distributor’s relationship with each of its suppliers on a case-by-case basis.

It ruled that some of them, including Colgate, Henkel, Mondelez, Johnson, Aoste, L’Oréal and BIC, had been victims of submission or attempted submission on the part of their distributor, which wished to impose on them obligations not provided for in the annual agreements. The impossibility of negotiating was reflected in the distributor’s retaliatory measures, such as threatening and carrying out unjustified delisting of products, the distributor’s obstinacy in its demands, and the absence of any proposal for measurable and commensurable compensation for its demands.

2/ THIS LINE OF REASONING IS REFLECTED IN A RECENT RULING BY THE COUR DE CASSATION.

In a ruling handed down on 6 December 2023(⁷), the French Supreme Court held that the structure of the contract may be taken into account in assessing the existence of a significant imbalance in that it may constitute an element of submission or attempted submission, without being sufficient in itself.

Additional information must also be provided on the conditions under which the contract was negotiated (for example, whether the contract concluded is a standard form contract or a contract of adhesion, material elements such as pre-contractual exchanges, etc.).

In practice, the Court ruled that the company claiming the existence of a significant imbalance did not prove that it had submitted or attempted to submit. The company did not provide the judge with any background information on the conditions under which the contract was negotiated that would indicate that it was impossible to negotiate.

3/ LASTLY, STILL IN THIS PRAGMATIC APPROACH TO MARKET STRUCTURE, WE FIND THE DECISION OF 28 FEBRUARY 20248 THAT WE MENTIONED IN THE INTRODUCTION, IN WHICH THE HIGH COURT APPROVED THE COURT OF APPEAL’S METHOD OF ANALYSING THE RELATIONSHIP BETWEEN THE FRANCHISOR AND THE FRANCHISE AS A WHOLE. SHE NOTES:

• The network had a strong reputation in the west of France, attracting individual entrepreneur candidates,
• The franchisor enjoyed a dominant position over the franchisees, on whom a standard franchise agreement was imposed in the name of network homogeneity,
• The 30 product contracts signed with different franchisees are identical and were not actually negotiated.

These elements made it possible to characterise the absence of effective negotiation and therefore the submission or attempted submission for the purposes of examining a significant imbalance.

What can we learn from these decisions?

Any imbalance in the contract cannot be penalised, as this would open the door to abusive denunciations of contracts and a challenge to contractual freedom, with systematic review by the courts.

This is why Article L.442-1-I-2° of the French Commercial Code limits the offence to significant imbalance, and only when it results from conduct aimed at subjugating or attempting to subjugate the other party.

The aim is to guarantee the freedom of negotiation of all parties to the contract and the fairness of these negotiations.

The assessment of a bid or attempted bid can only be made on a case-by-case basis, taking into account all the material, economic and legal elements when negotiating the contract.

Market structure is an important indicator of the balance of power that may exist between potential trading partners, but it is not in itself sufficient to characterise the absence of effective negotiation. It must be corroborated by other elements.

That being said, the burden of judicial proof of submission or attempted submission leads some litigants to favour other grounds with less restrictive conditions, such as advantage without consideration.

¹Cass. com. 28 February 2024, no. 22-10.314

²Article 1102 of the Civil Code

³Article 1103 of the Civil Code

⁴Law no. 78-23 of 10 January 1978 on the protection and information of consumers of products and services.

⁵Article L.212-1 of the Consumer Code

⁶Paris, Pôle 5 ch. 4, 15 March 2023, no. 21/13227; Paris, Pôle 5 ch. 4, 28 June 2023, no. 21/16174

7Cass. com. 6 December 2023, no. 21-23.288

8Cass. com. 28 February 2024, no. 22-10.314