Your business lawyer in Bordeaux

Chloé Fernström

Beware of the big bad French provision sanctioning the sudden termination of a business relationship!

Article L.442-6, I, 5° of the French Code de commerce sanctions the abrupt termination, whether total or partial, of an established business relationship and subjects the author thereof to compensate damages resulting from the suddenness and brutality of the aforesaid termination in the absence of notice period or when said notice is deemed too short.

Practically speaking, the length of the reasonable period of notice is determined by courts in light of one chief legal criterion: the length of the relationship. Also, the state of economic dependence might be taken into account, as well as any investments made specifically for the relationship or the existence of exclusivity undertakings between the parties.

Most important, courts control whether the period of notice is long enough even when a notice period was specifically set forth in the contract. This means that the terminating party may be held liable even if the notice period provided under the agreement has been fully observed whenever such a notice period appears to be insufficient with respect to the factual elements of the case and the overall duration of the commercial relationship.

There is no precise criterion to define the length of a so-called reasonable notice period. However, roughly speaking, granting a period of around one month per contractual year (with a maximum of 24 months) is generally considered a safe approach.

If the notice period is deemed insufficient by a judge or arbitrator, the party who terminated the relationship shall be liable to pay damages to the other party, mainly consisting in (i) the gross margin that the other party would have achieved during the reasonable notice period and, under specific conditions, in (ii) other damages such as payment of severance pays when a party has to lay-off part of their staff due to the suddenness of termination.

Of course, no liability is incurred when termination is due to a serious misconduct of a contractor.

Initially, this provision solely intended to protect industrial suppliers in the mass market sector. However, today, case law has substantially extended the scope of this action, which now protects all kind of commercial operators and is thus exponentially and massively invoked in disputes.

This specific provision of French law, which injects some unforeseeability for parties wishing to terminate a contractual relationship, should be kept in mind even in an international context where commercial operators should be aware of the risk of liability in tort for the sudden termination of a commercial relationship.