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Four things to know before doing and terminating business in France

2 million Euros, 1.8 million Euros, 1.5 million Euros, 10% of global turnover: these are the types of fines companies doing business in France can now face.  France was seen as a jurisdiction where fines were low or non-existent up until very recently when large foreign companies, mostly through their French subsidiaries, started to be mentioned in the headlines as having been sanctioned by the French market surveillance authorities or French Courts.  Below are the four main issues that have led to such recent financial and reputational risks.

Authorities and Courts will examine your contracts 

Deborah Azerraf - Signature Litigation
Deborah Azerraf – Signature Litigation

Under French law, contracts must be balanced.  In other words, there should not be undertakings by only one company and none from the other. There should be no situation where there is a significant imbalance in favour of a party.

On 12 June 2019, the Paris Court of Appeal, for the first time,imposed a fine of 2 million Euros on a company for having provided, in its contract, terms which led to a contractual imbalance against the suppliers of that company.

The French market surveillance authorities, who are at the origin of this litigation, commented on this decision as follows: “Besides the specific case to which it relates, this decision (…) is particularly important because, having been asked to rule on this question for the first time, it considered that the [authorities] could use, in legal proceedings, statements from companies who are victims of unfair commercial practices without revealing their identity. Indeed, the victims of such unfair commercial practices generally fear being the target of economic retaliation if they give testimonies in the scope of proceedings (…). By making it possible for claimant companies to remain anonymous, this case law further strengthens the revelation and punishment of unfair commercial practices“.

One can already imagine the consequence of such a decision when reading the French authorities’ reaction.  Indeed, not only do French Courts allow French authorities to read and check contracts entered into with French companies, they also allow them to refer imbalanced contracts to the Courts.  In addition, any complaining company will remain anonymous after drawing the authorities’ attention to a contract they believe is not compliant.

Authorities and Courts will check how you enforce your contracts 

Companies are also closely monitored in their relationships with other companies and, in particular, their suppliers.  The French authorities are well known for their strict approach, aiming to protect small and medium French businesses against larger international groups.  Conditions around payment terms are an easy way to carry out such controls and sanction them.

In 2018, 263 companies were sanctioned in France, representing a total in fines of 17.2 million Euros. These figures are much higher than in 2017 (155 fines, totaling 8.6 million Euros).  In April 2019, two companies received record fines of 510,000 Euros and 670,000 Euros.  The latest fine,which totaled a record 1.8 million Euros, was handed down to a French electricity provider.

More importantly, the French authorities have created a specific webpage which publishes the names of the penalised companies and their subsequent penalties.  This is not standard practice in France and can be at the origin of difficulties for companies trying, for instance, to develop their business here.  On every occasion, the company receiving the fine is in the headlines.

It is, therefore, not sufficient to have the right payment term conditions mentioned in the contract; the French authorities will check that it is enforced at all times. 

Sylvie Gallage-Alwis - Signature Litigation
Sylvie Gallage-Alwis – Signature Litigation

Courts will check how you terminate your business relations 

When doing business in France, it is essential to know about litigation arising from alleged sudden termination of business relations.  When professionals enter into contractual relations, they can reasonably consider that the contract will be the binding law between the parties, including the termination clause.  However, in France, it is not possible to terminate established business relations whenever you wish or whenever you think you are contractually able to do so. The notice period determined in the contract will not necessarily be enforceable.  Indeed, the party wishing to terminate the contract will have to respect a certain period of time depending on the duration of the business relationship, and the economic dependency between the parties.  If the applied notice period does not comply with the above, the victim will be able to claim damages on the ground of the sudden termination of business relations.

As such, French Courts will not hesitate to enforce a much longer notice period than what is detailed in the contract (e.g. 90 days), the idea being that the weaker party needs protection in order to get organised.  The said weaker party can claim for damages, which would correspond to the loss of contribution margin, for example the difference between turnover from which the victim was deprived after deducting the expenses that were not incurred as a result of the decline in activity resulting from the termination.

By Order no. 2019-359 dated 24 April 2019, the legislator has decided to provide some clarity by stating that an 18-month notice period would allow businesses to avoid liability.  This period is presented as a maximum, beyond which it will no longer be possible to hold the party at the origin of the termination liable.  This exemption from liability if the parties comply with an 18-month notice period is intended to apply regardless of the duration of business relations.  This is particularly interesting in the scope of very long business relations as, until now, companies faced a risk of having to comply with a notice period of more than 18 months.  It is, however, a very long period for short business relations and we will have to monitor how the French courts will apply it.

 Companies can be held criminally liable

In France, both companies and their representatives can be held criminally liable.  One of the most common offences companies are prosecuted for are deceit and misleading commercial practice.  These offences can be linked to products and services.  Companies must be very careful about their communications, whether direct or indirect, on the products/services themselves and online, etc.  The increase of the applicable fine highlights the high risk for companies. Indeed, the fine has increased from 300,000 Euros to 1.5 million Euros with the option to raise the fine to up to 10% of the turnover of the company.

The increase in the criminalisation of French law against companies can also be observed in the development of new offences against companies. By way of example, planned obsolescence, according to which producers can be held liable if they are developing products in a way that would render them obsolete faster than they need to be, in order to push consumers to purchase a new product (Article L.213-4-1 of the French Consumer Code). The obsolescence that can give rise to sanction can be aesthetic, functional, technical, direct, due to the change in the accessories, etc. The scope is very large, as are the potential sanctions. Companies risk a fine of up to 1.5 million Euros, which can be increased to up to 5% of the average turnover of the company for the three years preceding the offence.

As one can see, criminal liability is, in all the above offences, possible even when there is no safety issue and just a communication/marketing issue.

Sylvie Gallage-Alwis is a partner and Deborah Azerrafis an associate at Signature Litigation’s Paris office. www.signaturelitigation.com