Future changes of the law relative to commercial negotiations after the Egalim Law of 30 October 2018.
The law “for a balance in commercial relations in the agricultural and food sector and healthy and sustainable food“, better known by professionals under the name EGa or EGalim in reference to the États généraux de l’alimentation (the French national food conference), was enacted on 30 October 2018 (Law No 2018-938, OJ 1 November). As the wording implies, it mainly concerns the agricultural and food sector. In this area, it considerably strengthens contractual obligations between professionals and provides for measures to protect farmers’ incomes.
The new law allows the government, by the issuing of an ordinance within 4 months of the publication of the law, i.e. up to 1 March 2019, to take any measure to provide for a 2-year increase in the resale below cost threshold by 10% for foodstuffs and pet foods, sold as such to consumers. For those same products, the government will also be able to regulate promotional operations in terms of value and volume and define the administrative sanctions ensuring the effectiveness of the provisions. The law goes as far as to prohibit the use of the term “free” (gratuit) in the promotion by operators of food products. This part of the provision has solicited the most media attention and given rise to various declarations by large-scale retailers that it is largely ill-adapted and will cause inflation, whereas the agro-food business is mainly critical of its complexity.
The ordinary law of commercial negotiation between suppliers and distributors will also be affected by the Egalim law. It is therefore important to prepare for future changes and to participate where necessary in their implementation. In effect, Article 17 of the law authorizes the government to make sweeping reforms to Title IV of Book IV of the Commercial Code, that is to say all the ordinary commercial law rules on price transparency (invoicing, general terms and conditions of sale, single commercial agreements [the convention unique]) and abusive and restrictive practices.
- RISK OF INCREASE OF FORMAL REQUIREMENTS FOR GENERAL TERMS AND CONDITIONS AND SINGLE COMMERCIAL AGREEMENTS.
The law, as it stands, relative to general terms of sales and the single commercial agreement between suppliers and distributors is already onerous. It is unlikely that the upcoming ordinance will simplify the formal requirements given the very rigid framework of the enabling law. Suppliers and distributors are required to “take account of reciprocal obligations to which the parties have committed in order to determine the price” in the single commercial agreement, i.e., according to the parliamentary proceedings, “so that the consideration granted by the distributor for the financial advantages granted by the distributor is effective“.
Proof of consideration for every price reduction, which is already included in Article L. 442-6, I, 2° of the French Commercial Code, is now generalized. The law also requires the incorporation of a “business plan” and “projected turnover“, two constraints that are difficult to fulfill in the course of business and which will undoubtedly give rise to litigation if the objectives in the agreement are not met.
In addition to the increased formalism, the government is authorized to modify the provisions concerning when the general terms of and conditions must be disclosed and consequently those concerning the dates of the signing of the agreements subject to Articles L. 441-7 and L. 441-7 -1 of the Commercial Code, which may, in practice, lead to difficulties managing the various dates for the sending of the general terms and the conclusion of the agreements.
Likewise, the rule pertaining to amendments will be simplified and clarified for the standardly applicable single commercial agreement and the wholesaler agreement, although it is unclear what this will entail. It would perhaps have been preferable, as suggested by the French Association of Competition Studies (AFEC) to make the simplified scheme of the wholesaler agreement generally applicable under ordinary law and to limit the more formalized Article L. 441-7 agreement to the relations between large retail distributors and their suppliers.
- UPCOMING TECHNICAL REFORM OF LAW ON INVOICING
The Law allows the government to clarify the invoicing rules by harmonizing them with the provisions of the General Tax Code and to modify rules governing sanctions. It is likely that the current criminal penalties applicable to invoicing will be replaced by administrative sanctions and that differences between tax law and commercial law regarding the issuing of invoices will be corrected (see French Commission for the Examination of Business Practices (CEPC) Opinion No 17-5 of 2 March 2017).
- POSSIBILITY OF A MORE AMBITIOUS REFORM OF THE LAWS OF ABUSIVE AND RESTRICTIVE PRACTICES.
3.1. The per se resale price maintenance prohibition under Article L. 442-5.
Article 17 of the Egalim Law gives the government wide powers to restructure Title IV of Book IV of the Commercial Code, clarify its provisions and remove those which are no longer relevant. It is to be hoped that the upcoming ordinance will finally repeal the per se minimum price prohibition of Article L. 442-5. Indeed, this article in question has become almost obsolete. It declares any resale price maintenance automatically illegal whereas under the rules governing anticompetitive practices a far more sophisticated test is used, even if it, too, remains imperfect.
3.2. What of abusive practices under Article L. 442-6.
The government seems to also have quite a wide margin for maneuver with regard to the law of abusive practices in Article L. 442-6 of the French Commercial Code. Article L. 442-6 will very probably be completely overhauled and simplified. There have been proposals to make a general rule on significant imbalance the cornerstone of the law of abusive practices with the other provisions of Article L. 442-6 merely constituting examples of application alongside a stand-alone regulation dealing with sudden termination of established commercial relations. This proposal is attractive but will probably not cover all possibilities currently covered by Article L. 442-6. Certain provisions are not related to the subjection to an imbalance criterion, such as the prohibition of direct or indirect participation in the violation of an outside network resale ban, that deserves to remain in the interest of the legitimate protection of distribution networks. Others concern abusive behavior, often occurring at the very start of a trade relations, that by definition cannot be made subject to the requirement of a prior commercial partnership.
3.3. Regulation of termination of established commercial relations.
After 20 years of application, the rules on terminating an established commercial relationship look very incoherent today, being at the same time a cause of economic inefficiency and legal uncertainty. Notice period to terminate contracts are often very long in respect of all commercial relations, which makes it difficult for undertakings to adapt to the demand and to competition from the foreign companies. The current interpretation of Article L. 442-6, I, 5° can result in substantial compensation payments to companies that have reoriented their businesses successfully and have suffered no loss or, on the contrary, a situation where an operator is not compensated at all when relations are terminated by a client after 30 years on the pretext that the partnership was organized from the offset by a process of calls for tenders. A better option would be to limit the notice period to one year and the termination indemnity to actual losses suffered, taking into account the reorganization of the terminated party’s business and limiting the amount to loss of profits minus costs not borne due to the termination of the relationship. The application of Article L. 4416, I, 5° should also be limited to the French market so that distribution contracts with foreign distributors can continue to be subject to their national law.