• The dos and don'ts of terminating distribution contracts in France Goodwill compensation, notice period and indemnity
  • October 22, 2004 | Author: Christoph Martin Radtke
  • Law Firm: Lamy & Associés - Lyon Office
  • 1. Distributorship contracts are widely used by foreign companies to distribute their products within the European Union. It is common practice to have at least one distributor for each national market. Various types of distributors exist : sole distributors, exclusive or non exclusive distributors.

    2. It is interesting to note that no special EU regulations exist for this type of contract. Only the competition aspects of distributorship contracts are covered by specific rules (EC regulation 2790 of 1999).

    In the EU member states, no specific national legal regulations exist for distributorship contracts, with the exception of Belgium (Belgium law of April 13, 1971).

    3. This lack of special regulations may appear a surprise since the agency contract, other very frequent contractual mechanism to develop the sale of products on a foreign market, is covered in a very detailed way by national legislation in conformity with the EEC directive 86/653 of December 18, 1986.

    4. In practice, the distinction between the commercial agent and the distributor is not always very clear for the parties.

    The distributor who is not protected by statutory provisions frequently claims the application of the protective legislation on commercial agents applicable within the EU and especially the right to legal goodwill compensation or indemnity at the end of the contract.

    5. This paper presents the situation of a distributor at the end of the contract under French law in the two most frequent situations in contractual practice:

    • The company does not renew a contract concluded for a determined time period ;

    • If a contract is concluded for an undetermined period, the company puts an end to this contract

      • By granting a notice period;
      • By not respecting a notice period;
      • With cause;
      • Without cause.

    6. As indicated above, France, like the other EU countries, with the exception of Belgium, has no special regulations concerning distributorship contracts.

    Due to distributorship contracts being more and more frequent in practice, distributors in France have claimed for many years a right to an indemnity at the end of the contract.

    Established legal authors have argued in favour of such an indemnity.

    The jurisprudence of the French Appeal Courts and the French Supreme Court have systematically refused to recognise a legal right to goodwill compensation or indemnity for the distributor at the end of the contract.

    The reason is that, according to the French courts, there is no transmission of goodwill from the distributor to the company at the end of the contract.

    7. Nevertheless, a right to an indemnity has been recognized by French jurisprudence in the following situations:

    • 7.1 Termination of a distributorship agreement without an adequate notice period;
    • 7.2. Abusive termination.

    7.1. Termination of a distribution contract concluded for a determined time period before its term and termination of an undetermined contract without an adequate notice period.

    In this case the critical issue is to know what is an adequate notice period. In the past, if the notice period was determined in the contract (usually 3 - 6 months), French courts applied the contractual notice period.

    If the contract was silent, the French courts applied the following criteria:

    The notice period depends on the duration of the contract. Moreover, the following criteria are important: the financial importance of the contract for the distributor and the usages of the professional branch.

    It is obvious, that in the absence of a contractual notice period, it is difficult in practice to determine an adequate notice period beforehand and it is more prudent to grant at least 6 months. Nevertheless there are court decisions which have ruled that notice periods can be easily between one and two years if the contract has lasted for a long time (10-20 years).

    This court practice has recently been confirmed by the introduction into the French Commercial Code of Art. L 442-6, I 5, following the law n° 2001-420 of May 15, 2001 and the law n° 96-588 of July 1st, 1996, as a general principal for contractual relationships.

    The present situation, confirmed by recent case law of the French Supreme Court (Cour de Cassation) can be resumed to the following points:

    • A reasonable notice period must be respected in all cases notwithstanding the parties' contractual stipulations,
    • This rule applies to all contracts or commercial relationships even if there is no written contract.
    • This rule applies in case of termination of a contract for an undetermined time period as well as in the case of non-renewal of a contract concluded for a determined time period.
    • As far as the duration of the notice period is concerned, the judge is not bound by a notice period agreed upon by the parties in the contract, the judge must examine if the duration is conforming to the criteria of Art. 442-6 of the French Commercial Code
    • to determine the reasonable duration, the judge will apply various criteria: the duration of the parties' relationship ( this being the only criteria expressly mentioned in Art. 442-6) .Other criteria frequently analysed are the evolution of the commercial relationship between the parties, the cost born by the distributor, the percentage of the turnover reached by the distributor with the contractual products, etc.

    7.2. Abusive termination

    French jurisprudence has regularly stated that the company generally has the right to terminate a contract with notice or not to renew a contract after its expiration without giving any justification.

    Nevertheless many court decisions have also stated that the judges have the right to control the execution of this right by the company.
    The company will be liable only if the execution of its right was abusive.

    This is for example the case if the termination is made with the intention to harm the distributor or if it is made without taking into account his legitimate interests.

    8. The calculation of the amount of indemnity

    The indemnity will be determined by the judge.

    a) In a case where the adequate notice period has not been respected, the compensation granted will correspond to the loss of profit for the time the contract should have lasted by respecting an adequate notice period.

    b) With a case of abusive termination, the distributor must prove a link between the abusive behaviour and the prejudice suffered.

    9. In conclusion, companies which want to terminate a (written or unwritten) distributorship agreement governed by French law should pay particular attention to the respect of an adequate notice period and to the circumstances of the termination. The right way to terminate a distribution agreement has become a difficult enterprise in France.