The EGalim Law of 30 October 2018 authorized the government to comprehensively recast Title IV of Book IV of the French Commercial Code. On 28 December 2018 and 21 January 2019, the DGCCRF circulated and submitted for consultation two draft ordinances amending the rules for the formalization of commercial relations and the law on restrictive and abusive practices under Title IV of Book IV in accordance with Article 17 of the EGalim Law. It then issued an amended draft ordinance on 19 March 2019 prior to the publication of Ordinance No 2019-359 of 24 April 2019 “recasting Title IV of Book IV of the Commercial Code relating to transparency, practices restrictive of competition and other prohibited practices”.
In view of the changes made, many of the contributions received have clearly been taken into account and several technical points have been clarified. This is a courageous and wide-reaching reform and is to be commended. The task taken on by the Administration was not an easy one: giving operators more flexibility by establishing a more manageable framework putting an end to the current system of layers upon layers of rules. The recast has (I) relaxed the law on commercial negotiations, (II) simplified the rules on restrictive practices, (III) even if there is room for improvement.
I-Relaxing of the rules on commercial negotiations
In French law, the rules are currently subject to a relatively formalistic and cumbersome framework at each stage of the negotiation. Indeed, whether at the stage of the communication of the general terms and conditions of sale, the conclusion of single commercial agreements, the formal requirements required for invoices or payment deadlines, the partners are bound by a number of somewhat restrictive rules that were in need of reform. The reform implemented by the Ordinance, after a bona fide consultation of business professionals, has now brought about a relaxation of those rules, although there is still room for improvement with regard to many aspects.
- Necessity of reform
- General terms and conditions of sale (GTC)
The rules pertaining to general terms and conditions (GTC) have remained basically in place. It should be noted that the obligation to communicate them is preserved (new Article L. 441-1, II of the Commercial Code) although it is relaxed by the Ordinance since they now only have to be communicated by a person exercising a production, distribution or services activity who establishes such conditions.
The required content of the GTC now set out in Article L. 441-1, I of the Commercial Code, has also been reduced. In fact, the GTC only have to state the terms of payment and the elements used to determine prices, such as the scale of unit prices and any price reductions. The terms of sale may be included in the GTC, but this is no longer mandatory.
The GTC still constitute the “the sole basis of the commercial negotiation” (new Article L. 441-1, III paragraph 1), with the nuance that this applies as long as they exist since the reform establishes the freedom to choose whether to not to set out general terms and conditions with the exception of suppliers subject to the conclusion of a single commercial agreement which carries an obligation to spontaneously communicate their GTC to their distributors (new Article L. 441-3, V and new Article L. 441-4, VI). Parties can always establish GTC by category that can be communicated to the members of the specific category and can also agree on special terms of sale, which are not subject to an obligation to communicate.
The Ordinance has, however, replaced “judicial” legal sanctions with administrative sanctions. Any breach of the obligation to communicate the GTC is now liable to an administrative fine not exceeding EUR 15,000 € for a natural person and EUR 75,000 € for a legal person.
- Written commercial agreement
Ordinance No 2019-359 of 24 April 2019 proposes only two types of single commercial agreement, unlike first draft ordinance which proposed three.
There is now an ordinary civil law agreement under the Article L. 441-3 of the Commercial Code providing for a general simplified single agreement applicable to any relationship between supplier and distributor, merging with the wholesaler agreement (former Article L. 441-7-1), and which has been slightly relaxed compared to the previous regime as the provision on access to the price list communicated with the GTC no longer appears.
Further, a new single commercial agreement specific to mass market consumer products is now provided for in new Article L. 441-4. The agreement is more stringent and only applies to suppliers of consumer goods, wholesalers being expressly excluded from its scope, even if they buy and resell consumer goods. The goods covered are defined as “non-durable, fast-moving, high-consumption goods“, suggesting that the agreement concerns a limited number of products.
Whereas, until now, the agreed price was determined “double net” (i.e. price minus discounts / rebates and other obligations), it is now defined “triple net” and includes commercial cooperation services. The new rules on commercial cooperation also implies that an additional provision is required compared to the previous system, namely total budget for commercial cooperation services. This makes it possible for the Administration to measure potential deviations in commercial cooperation budgets over time.
We also note a slight relaxing of the negotiation timetable compared to the previous law. While more flexibility regarding the 1 March deadline was envisaged during the drafting of the ordinance for the signing of single commercial agreements to conclude the single agreements, the deadline was ultimately reintroduced for both agreements. However, it may be noted that in the context of the general single commercial agreement, prior notification of the GTC by the supplier to the distributors covered by the single commercial agreement which previously had to be at the latest three months before the 1 March deadline, i.e. before 1 December, must now only be provided within a reasonable time before 1 March (new Article L. 441-3, V).
The option for multiannual agreements available since 1 January 2017 has also been maintained. New Article L. 441-3, IV of the Commercial Code provides for the possibility to conclude agreements for a period of one, two or three years, with the obligation to lay down the terms under which the agreed price is revised when concluded for a period of two or three years, which may provide for the inclusion of one or more public indices reflecting the evolution of the price of the factors of production.
- Invoicing rules
The invoicing rules, which are now grouped together into a specific sub-section, have been the subject of two reforms: a harmonization of the legal rules of the Commercial Code with the tax rules regarding the date of issue of invoices (new Article L. 441-9, I of the Commercial Code) and a replacing of criminal sanctions with administrative sanctions (new Article L. 441-9, II of the Commercial Code).
- Payment deadlines
The provisions relating to payment deadlines are now included in Articles L. 441-10 to L. 441-16 of the Commercial Code. They have been completely reorganized with a view to clarifying the general substantive provisions, the derogating sectoral provisions, the export and overseas derogations, the rules binding statutory auditors and the possibility to request an administrative rescript. The new structure clearly makes the rules on payment deadlines more accessible and better organized.
There are relatively few substantial changes, but they do concern details which may be important in practice:
– clarification on the legal rate applicable each half-year period and the relationship between the actual collection costs and the flat-rate recovery indemnity;
– clarification on the fact that the export derogation applies to both agreed deadlines and regulated deadlines applicable to certain categories of products;
– correction of a material error stemming from the Hamon Law to clarify the scope of the rescript faculty concerning the agreed deadlines and transport delays and laying down the legal rules.
Also, less stringency with regard to seasonal products – derogations from maximum payment deadlines are now integrated into Article L. 441-11 of the Commercial Code, with the reference to the decree having been removed.
- What could be improved?
- Inconsistency in maintaining the obligation to disclose the method of calculating price of services or to provide a detailed quote
The Ordinance has retained the requirement that “where the price of a service cannot be determined a priori or accurately stated, the service provider is required to communicate to the recipient, upon request, the verifiable method for calculating the price, or a sufficiently detailed quote” (new Article L. 441-1, III, paragraph 3). The provision already existed under the previous law but seemed to have fallen into disuse; it runs counter to the case-law which recognized that the disclosure requirement did not apply where the services demanded require customized offers which are not susceptible to the pre-establishment of general terms (CA Paris, 21 June 2006, LawLex061482). Requiring all service providers to communicate to any recipient in a “B 2 B” relationship requesting how its prices are calculated, or a sufficiently detailed quote, is an enormous burden. As regards the method of calculating prices, this information is competitive and highly confidential and a requirement to disclose them is excessively onerous. Maintenance of the provision is particularly illogical and inconsistent insofar as the new rules governing GTC has limited the obligation of communication on request only to those having in fact drawn up such GTC.
It is somewhat paradoxical to allow the freedom not to disclose the GTC if there are no GTC established – notably where the prices of the services cannot be determined in advance or indicated accurately – and nevertheless oblige the service provide in that case to disclose the method of calculating prices to make it possible to check those prices, or a sufficiently detailed estimate, on demand. The last paragraph of new Article L. 441-1, III needs to be repealed, as was recommended by numerous respondents to the consultation.
- Account to be taken of indicators in the GTC and written agreements for agricultural or food products containing agricultural products
. The reference to indicators for food products is now included in Chapter III entitled “Provisions specific to agricultural products and foodstuffs”, and specifically in new Article L. 443-4.
According to new Article L. 443-4, I of the Commercial Code, the GTC and the agreements now referred to in Articles L. 441-3, L. 441-4, L. 441-7 and L. 443-2 must now “refer to and describe the conditions under which […]indicators listed in the ninth indent of Article III, Article L. 631-24 and Articles L. 631 -24-1 and L. 631-24-3 of the Rural and Maritime Fishing Code or, where relevant [of] all other available indicators, including those established by the Observatory of Prices and Margins Formation Food Products” are taken into account for the determination of the price. Violations of the provisions of Article L. 443-4, I of the Commercial Code are now punishable by an administrative fine not exceeding EUR 75,000 for natural persons and EUR 375,000 for legal persons (Article L 443-4, II).
The new provisions require all operators at every level to refer to the indicators mentioned above and to explain how they are used for the determination of the price in:
– the GTC (new Article L. 441-1);
– the general single commercial agreement – also applicable to wholesalers (new Article L. 441-3);
– the commercial agreement specific to mass market consumer goods (new Article L. 441-4);
– the agreement between suppliers and distributors concerning the design and production of food products sold under private label (new Article L. 441-7); and
– the agreement specific to perishable agricultural products or short production cycle goods (new Article L. 443-2).
These new provisions undeniably constitute a major obstacle and are very difficult if not impossible to put into practice for operators in the chain who purchase agricultural products from a variety of producers or intermediate operators in order to have wide and varied product lines available for the benefit of their customers.
- Definition of triple net price
If, from an economic point of view, the new definition of the triple net price is rational, especially as the resale below cost is also calculated “triple net”, legally speaking it is complicated since it merges two distinct prices, the price of the products sold by the supplier to the distributor on the one hand, and the price of the services rendered by the distributor to the supplier on the other. Furthermore, single commercial agreements must now, for the purposes of contributing to the determination of the agreed price, establish within commercial cooperation services the total remuneration pertaining to commercial cooperation services (new Article L. 441-3, III, 2 °), which constitutes an added burden.
- The application over time of the provisions of new Articles L. 441-3 to L. 441-7 of the Commercial Code
Section I of Article 5 of the Ordinance contains a transitional provision according to which the rules regarding the amendment derived from new Article L. 441-3, II of the Commercial Code are applicable to any ongoing contract as of the date of entry into force of the Ordinance, i.e. 26 April 2019.
Thus, in the event that no derogation has been provided for in the contract as may be the case in supplier/wholesaler agreements, any modification occurring after entry into force of the Ordinance requires compliance with new Article L. 441-3, II. In other words, any contractual amendment must be in writing and state what new elements justify it.
In addition, Article 5, II of the Ordinance – another transitional provision -provides that new Articles L. 441-3 to L. 441-7 are applicable as of 1 March 2020 to contracts in progress of a duration of over one year at the date of coming into force of the Ordinance.
Thus, all multi-year agreements ongoing on 26 April 2019 must be brought into compliance with the provisions of the new Articles L. 441-3 to L. 441-7 of the Commercial Code by 1 March 2020.
- Invoices – new mandatory stipulations
Invoices must not only include the provisions required under new Article L. 441-9, I, paragraph 4 and the ten references under Articles R. 123-237 and R. 123-538 of the Commercial Code and those required by Article 242 (9) A of Annex II to the General Tax Code, the Ordinance adds two new mandatory elements of billing information. They are the billing address of the buyer and the seller if it is different from their address and the purchase order number if the buyer has allocated one.
Article 5, III of the Ordinance further provides that the provisions of the current Article L. 441-3 of the Commercial Code relating to invoices remain applicable in the wording existing prior to the entry into force of the Ordinance, to invoices issued before 1 October 2019.
Thus, all invoices issued as of 1 October 2019 must comply with the provisions of new Article L. 441-9 of the Commercial Code, and it will then be necessary to ensure that the two new stipulations appear on invoices, particularly given that there is uncertainty as to the possible cumulation of offenses, since the rule in regard thereto has not been explicitly capped for breaches of the invoicing rules.
- Increased risk in matters of invoices and payment deadlines
Sanctions for violations of the invoicing rules have until now been limited. By replacing the criminal sanction with an administrative sanction, the risk is now that the invoicing rules will be subject to more systematic controls and sanctions by the Administration, especially as it is a reciprocal obligation and includes invoices received by an undertaking (principle of shared responsibility , current Article L. 441-3 paragraph 2 of the Commercial Code); the invoicing obligations “are imposed indiscriminately on the seller and the buyer, who are bound by complementary and reciprocal obligations” (Court of Cassation, criminal chamber, 20 June 1994, No. 93-83.037 and 15 March 2008, No. 07-87.139).
Verifications of payment terms are also becoming more frequent and the Administration strictly enforces the rules, even if undertakings have been able to show that over 95% of payments are made within the deadlines.
II- Simplification of the law of restrictive practices
Former Article L. 442-6 of the Commercial Code listed thirteen restrictive practices giving rise to liability and five prohibited clauses. Ordinance No. 2019-359 of 24 April 2019 has radically simplified the system. This simplification was certainly needed but the fight is not over yet and further simplification is required to address the remaining issues.
- Necessity for simplification
- Substitution of a number of disparate abuses by two umbrella offenses
The thirteen practices set out in former Article L. 442-6, I of the Commercial Code has been simplified. Indeed, new Article L. 442-1 has retained only two umbrella offenses:
– obtaining a benefit without consideration or which is manifestly disproportionate under new Article L. 442-1, I, 1°; and
– subjecting a partner to a significant imbalance under new Article L. 442-1, I, 2°.
The two practices are intended to encompass most of the offenses previously set out in former Article L. 442-6, I.
- Maintenance of two specific offenses and two prohibited clauses
Two more specific practices have been retained by Ordinance No 2019-359. They are abrupt termination of established commercial relationship in Article L. 442-1, I, the prohibition of outside network resale provided for in a new provision, Article L. 442-2.
With regard to the sudden termination of established commercial relations, the Ordinance brings in an entirely new provision. It is now specified that “in disputes between the parties concerning notice” the liability of the instigator of the termination cannot be incurred for insufficient duration where a period of 18 months has been granted (new Article L. 442-1, II).
The reintroduction of the ban on off-network reselling is to be welcomed. It was crucial that it be maintained in particular as claims on this basis are very common in litigation against resellers outside networks and in the context of ex parte orders or applications for interim relief under Article 145 of the Code of Civil Procedure.
In addition, two out of five prohibited clauses have been retained in new Article L. 442-3 a) and b) of the Commercial Code. They concern the retroactive benefit of rebates, discounts or commercial cooperation agreements and most favored customer clauses, allowing the other contracting parties to benefit automatically from more favorable conditions granted to competing undertakings.
- Actions and sanctions under new Article L. 442-4 of the Commercial Code
New Article L. 442-4 governs procedures for bringing legal action and the sanctions for restrictive practices.
Persons able to bring an action before the civil or commercial court include any person justifying an interest, the Public Prosecutor, the Minister of the Economy and the President of the Competition Authority.
The recasting of the provision allows any person with an interest to formulate the same demands as those of the Minister of the Economy and the Public Prosecutor, except for civil fines. Now, any person with an interest can request the cessation of the practices and damages for harm suffered, and only the victim can ask for unlawful terms or contracts terms to be held null and void and the restitution of undue payments for services/ other advantages (new Article L 442-4, I, paragraph 2).
The ceiling of the fine has also been modified and is now capped at the higher of the following: 5 million euros, three times the amount of payments/advantages unduly received or obtained, 5% of turnover excluding taxes realized in France (new Article L. 442-4, I, paragraph 4).
- Further simplification needed
- The scope of new Article L. 442-1, I of the Commercial Code
Article L. 442-1, I, paragraph 1 now covers “any person carrying out production, distribution or service activities”. The scope of the provision therefore seems to be broader than the notion of “producer, merchant, manufacturer” or artisan.
An easing of the conditions for recourse to the two umbrella offenses can also be noted: references to the “commercial partner” no longer appear for the obtaining of an advantage without consideration or which is manifestly disproportionate and the subjection to a significant imbalance, which now merely state “other party“. While the case law interpreted “commercial partner” restrictively and specifically excluded from subjection to a significant imbalance first-time contractual relations or certain contracts not reflecting a true commercial partnership, it is now possible to rely on those provisions without being commercial partners.
It is not entirely clear who can in fact rely on the provision. Specifically, does it apply to self-employed professionals (professionnels libéraux)?
- Specificity of the 18-month notice period
New Article L. 442-1, II of the Commercial Code provides that ““in disputes between the parties concerning notice” the liability of the instigator of the termination cannot be incurred for insufficient duration where a period of 18 months has been granted.
However, the 18-month notice period of should not be considered as a ceiling since an undertaking which has granted 12 months’ termination notice instead of 24 months can be ordered to pay compensation equivalent to 12 months’ notice.
Thus, the only means available to the terminating party to ensure no liability is incurred for the sudden termination of an established commercial relationship where there is a risk of being ordered to grant more than 18 months is to provide for 18 months’ notice, even if an order for a shorter notice period might have been issued in litigation proceedings.
- Lack of specific transitional provisions for abusive practices
The Ordinance is generally applicable the day after its publication, on 26 April 2019, with some express transitional provisions concerning amendments, the single multi-year agreement and invoicing. There are no more specific transitional provisions for restrictive practices. However, it is incontestable that transitional provisions are needed to clarify the application of the law over time. Although the principle is that the new law does not have retroactive effect, a doubt remains as to the possibility of continuing to apply current Article L. 442-6 for practices predating it, which have been repealed or attached to the remaining offenses under new Article L. 442-1 of the Commercial Code. A single ruling by the Paris Court of Appeal dated 29 February 2012 (No 08/16771) has held that a repealed practice could no longer be prosecuted, whether the facts in question occurred prior to or after its repeal. This, however, seems contrary to the established case of the Court of Cassation and, in any event, merits clarification.
The issue also arises of the applicable sanctions for earlier facts sanctioned on the basis of new Article L. 442-1, where the practice in question has been repealed but attached to the new provisions (1 ° or 2 ° of Article L. 442-1, I or a) and b) of the new Article L. 442-3), insofar as the sanctions under new Article L. 442-4 of the Commercial Code are more severe.
Furthermore, there is some uncertainty as to the application over time of the 18-month notice period for sudden terminations of established commercial relations.
Given the stakes involved, it is essential that these issues be clarified quickly, for example in the parliamentary ratification bill to follow. For sudden terminations of established commercial relationships, it would be particularly helpful to provide that terminations announced before the entry into force of the Ordinance remain subject to the rules of former Article L. 442-6, I, 5° and the sanction under former Article L. 442-6, III and those announced after its entry into force fall under the new provisions limiting the duration of the notice period while increasing the risk of sanction for non-compliance.
See the ordinance