Interesting decision of the distribution division of the Paris Court of Appeal of 17 May 2023 in a case followed by Vogel & Vogel recalling the very strict conditions for a termination with notice to be challenged on the basis of the abuse of rights theory.
In principle, under French law, a distribution contract may be terminated freely by either party, without cause and without compensation, provided that sufficient notice is given, in line with both the contractual notice period agreed by the parties and the statutory notice period under the law on the termination of established commercial relationships.
Some distributors nevertheless try to obtain compensation at the end of the contract by arguing that the supplier forced them to make investments and that they are entitled to obtain reimbursement for the unamortized part at the end of the notice period.
The finding of such an abuse of rights is subject to very strict conditions: the supplier must have expressly required very large investments that cannot be reused for other activities at the end of the contract.
The decision handed down on 17 May 2023 by the distribution division of the Paris Court of Appeal illustrates the debates to which a dispute over an alleged wrongful termination may give rise.
The arguments of the terminated dealer were rejected in turn by the Paris Court of Appeal.
It first recalls the legality of the right of termination in successive performance contracts as well as the duration of the 24-month notice of termination contractually provided for, as is the case in most car distribution and repair contracts. The court does not recall it, but this notice period is much longer than the 18-month notice period making it possible to escape all liability in case of an action based on the termination of an established commercial relationship whatever the length of the relation.
The court found, firstly, that the two plaintiff companies were dealers of other brands; secondly, that almost all of the investments made in previous years were amortized at the end of the notice period as demonstrated in an accounting report and that it was irrelevant that their economic useful life was longer than their accounting depreciation. Thirdly, in addition to various shortcomings in the evidence or unfounded claims, that “abuse of rights cannot arise from the damage caused by the termination, but from the circumstances surrounding it”, which were not demonstrated in this case.
Finally, the court noted that it had not been demonstrated that the termination was the result of an intention to harm or that the supplier had engaged in tactics likely to mislead its dealers about its intention to terminate the contract.
The lesson to be learned from this decision is that it is prudent, even when terminating a contract with a long notice period, to avoid the risk of sudden termination without sufficient notice, to check whether the brand has recently demanded significant investments that cannot be easily recycled and to check the rate of amortisation of such investments if applicable. Another lesson is the usefulness of accompanying the defence with an accounting report demonstrating the significant depreciation of the alleged investments and refuting the opponent’s accounting explanations.