What to Know When Terminating Contracts Governed by French Law or Involving French Parties

Morgan Lewis
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Morgan LewisArticle L. 442-1 II of the French Commercial Code, implemented in 1996 (and recently modified), prohibits the sudden termination of an established business relationship. This provision aims to give the terminated party sufficient time to reorganize its business.

Accordingly, when there is an established business relationship[1] between two parties, the terminating party must grant a reasonable termination notice to the terminated party. (The duration of the notice being assessed, in particular, is with regard to the duration of the business relationship. It should be noted that the level of economic dependence of the party against which termination is sought is also a factor, as is the presence of an exclusivity clause.) If the notice is unreasonable, the terminated party is entitled to claim damages equal to the gross margin achieved during the time of the reasonable notice.

Note that Article L. 442-1 II is a French public policy rule and would apply notwithstanding (1) the law chosen by the parties or (2) the fact that the parties have agreed on a specific termination notice in the contract, since there is a connection with France.

For instance, even if the contract is governed by New York law and the parties agree that the contract could be terminated with a three-month notice, a French judge will apply the above mentioned article and may rule that, notwithstanding the contractual notice, the notice should have been longer, and that the terminating party should indemnify the other party.

Obviously the same will apply in proceedings before a foreign judge if French law is applicable on the merits.

The following is a summary chart of reasonable termination notices on the basis of French case law:

Duration of Relationship

Reasonable Notice Period

Less than 5 years

Less than 6 months

5 to 10 years

6 to 9 months

10 to 20 years

9 to 18 months

More than 20 years

18 months (maximum)

Note that the author of a termination of a commercial relationship cannot be held liable for an insufficient period of notice if a notice period of at least 18 months has been granted.

 

[1] There is no legal definition of “established business relationship” but, according to case law, it relates to business relationships (whether it be one single contractual relationship or mere orders) that have a significant length and are quite stable, meaning that the parties expect the relationship to continue (as opposed, for instance, to fixed term relationships with requests for proposals).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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