Risks of abruptly terminating established commercial relations
Under French law, commercial partners are not always free to immediately sever a commercial relationship. French law prohibits the “abrupt termination of established commercial relations,” known in French as a “rupture brutale de relations commerciales établies”.
The party that abruptly severs a commercial relationship may thus be liable to compensate its former partner for the resulting damages.
French companies invoke this right quite often when their partner decides to terminate a commercial relationship. This right applies to various types of commercial relationships. For example, distribution agreements, supplier contracts (purchase and sale) or service contracts.
Under what circumstances do grounds for damages exist when a commercial relationship is severed?
First, it should be noted that in principle it is possible to break off a commercial relationship. Companies may enter into commercial relations with each other and also break them off again, for example if it is commercially or strategically necessary or wise to do so. What the law penalizes is the abrupt severance of the commercial relationship, not the termination itself.
A commercial relationship may be severed as long as a sufficient notice period is given to the other party.
The risk of being held liable for damages on this ground exists only if the notice period is too short.
How long this notice period should be depends on the duration of the business relationship, on what is customary in the sector and on whether there are any specific interprofessional agreements that apply in the sector. As a rule of thumb, the longer the commercial relationship has lasted, the longer the notice period should be. If there is a dispute, it is ultimately up to the judge to decide whether the notice period was long enough.
Consequently, the first requirement for a right to damages is that the business relationship was terminated abruptly (i.e., with an insufficient notice period).
The second requirement is that there must be established commercial relations between parties. The parties need to have been doing business with each other for some time. In general, this means that a single transaction is usually insufficient to prove the existence of established commercial relations between the parties.
How are the damages calculated?
Once it has been established that a commercial relationship was abruptly severed, the next question is how much damages the other party can claim.
The damages usually amount to the loss of profit of the other party due to the severance of the relationship, during the period when the notice period should have been in force but was not. Therefore, the greater the volume of transactions that existed between the parties, the higher this amount can be.
Written contract, oral agreement or understanding between the parties
The prohibition of abruptly severing a commercial relationship applies to all types of commercial relationships. It is not required that a written contract is in force between the parties.
Even if business has simply been conducted, sometimes for many years, without ever formally signing a contract, there may be established commercial relations between the parties.
In some cases, a written contract does exist between the parties. In such cases, the contract will often include a provision regarding the notice period that must be observed to terminate the contract. In that case, this period must at the very least be taken into account, otherwise there is a breach of contract.
However, applying only the contractual notice period is not always sufficient. Indeed, in some cases, French courts have ruled that the contractual notice period was too short and that the other party could therefore still claim damages. Although the contractual conditions for termination had been met, the notice period was still deemed too short. Therefore, the other party could still claim compensation for the damages caused by the severance of the commercial relations.
Exceptions to the rule
The prohibition against suddenly severing a commercial relationship is not absolute. For example, a party is allowed to terminate a commercial relationship immediately if this is justified by lack of performance or serious faults of the other party. In that case, no notice period needs to be observed (unless the contract provides otherwise).
However, the existence of such shortcomings or faults must be proven. There must therefore always be evidence of this.
Furthermore, in the event that force majeure makes performance of the contract impossible for a significant period of time, the commercial relationship may in general be terminated.
Conclusion
The severance of a commercial relationship is subject to certain rules in French law. These rules must be abided by, otherwise the other party may be entitled to damages. It is therefore always advisable to check the applicable notice period before formally breaking off a commercial relationship.