EGALIM 3: An obligation to negotiate in good faith […]

EGALIM 3: An obligation to negotiate in good faith, but no abusive termination of established contractual relations in the event of failure of negotiations between supplier and distributor

Commercial relations between a supplier and a distributor are subject to a relatively strict legislative framework.

In particular, a deadline of March 1 of each year has been set for negotiating and signing a new commercial agreement when the current one, which may not exceed 3 years, has expired.

This “legalism”, embodied in the successive EGALIM laws, was deemed necessary by the legislators, in particular to attempt to correct, at least in part, the imbalance that arises each year between supermarket chains and manufacturers at the time of the annual negotiations.

In particular, one of the major contributions of the latest EGALIM 3 law is that it has clarified – albeit still imperfectly and on an experimental basis only – the rules and penalties in the event of negotiations breaking down and no new agreement being reached by the deadline.

In practice, it had been observed that if negotiations failed, suppliers were obliged to continue supplying distributors at the previous year’s prices.

In a period of inflation, this situation was very favorable to supermarkets, which could continue to order thousands of products at the old price for several months, while suppliers were faced with rising raw material costs and higher production costs.

If, on the other hand, suppliers decided to put an end to their partnership outright, they would run the risk of being accused of abruptly severing established commercial relations.

The EGALIM 3 law introduced the following changes.

The obligation to negotiate in good faith reaffirmed

Neither suppliers nor distributors have any interest in the failure of trade negotiations, the former fearing the loss of an essential commercial outlet, the latter a reduction in the range available to consumers.

However, in order to limit the risk of non-conclusion of the annual agreement, the EGALIM III law reaffirmed the obligation (which is not new since it was already enshrined in common law) to negotiate “in good faith”, on pain of penalty.

In the final version of the law, it was more precisely decided:

• To add a clarification to article L 441-4, IV of the French Commercial Code, stipulating that “Negotiation of the written agreement shall be conducted in good faith, in accordance with article 1104 of the French Civil Code”;
• To introduce a new competition-restricting practice in article L 442-1, I, 5° of the French Commercial Code, punishing “failure to conduct commercial negotiations in good faith in accordance with article L 441-4, resulting in failure to conclude a contract within the deadline set in article L 441-3”.
• Reinforce penalties under article L 441-6 of the French Commercial Code for non-compliance with the March 1 deadline set out in IV of article L 441-3: instead of an administrative fine of up to €75,000 for an individual and €375,000 for a legal entity (paragraph 1), a specific fine of up to €200,000 for an individual and €1,000,000 for a legal entity has been introduced for non-compliance with the March 1 deadline.

Good faith in negotiations implies, in particular, respecting the deadlines set for sending the commercial proposal if this is defined, or failing this, respecting a reasonable deadline.

It also requires an unequivocal willingness on the part of both parties to reach a new agreement.

And what happens if, despite good-faith negotiations, no agreement is reached?

The EGALIM 3 law introduced a 3-year experimental scheme in the event of failure of the annual negotiation between supplier and distributor by the legal deadline, and in the absence of signature of the single agreement between supplier and distributor.

The parties can now terminate their business relationship:

• Or, immediately, without the risk of being sued for breach of established commercial relations;
• Or, by giving notice of termination.

They can also call on the mediator for agricultural trade relations or the company ombudsman to agree on the conditions of this notice period (duration and applicable price).

• In the event of agreement on this notice period, the agreed price will apply retroactively to March 1 and for the duration of the notice period.

“However, there remains the question of the price applicable during the period of notice if it has in fact been agreed by both parties.”

If no agreement is reached, the supplier may terminate the commercial relationship and opt for one of the two options described above (termination with/without notice).

In the absence of a legal provision on this issue, and in the absence of agreement between the parties, article L 442-1, II of the French Commercial Code stipulates that “the economic conditions of the market in which the parties operate” should be taken into consideration.

This relatively vague provision gives the judge a new criterion for assessment, and a clear lack of legal certainty for suppliers and distributors faced with this difficulty.

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So, despite this latest attempt at clarification, a number of grey areas remain, leading to the logical assumption that an EGALIM 4 law will soon see the light of day… no doubt at the end of the experimental phase of the EGALIM 3 law, if not before.