Ref: Paris Court of Appeal, Section 5, Ch. 4, 26 June 2024, RG no. 22/01389
A motorcycle importer had had a contractual relationship with its exclusive distributor since 1994. On 9 October 2017, the importer terminated the contract with its distributor, giving notice ending on 30 September 2018 and informing the distributor that a new distribution contract would be submitted to it shortly.
On 26 January 2018, the importer sent the distributor a pre-contractual information document setting out the new non-exclusive distribution contract proposed for signing. The parties signed the new contract and it became effective on 1 April 2018.
The new contract provided for a four-year term of validity after the effective date, subject to early termination. Both parties were given the possibility of terminating the contract before the expiry date, subject to giving six months’ notice.
On 27 February 2019, the importer notified the distributor of the termination of the distribution contract, giving it 19 months’ notice (instead of the contractual six months). Following this termination, the distributor sued the importer for compensation for the loss it claimed to have suffered as a result of the sudden termination of an established commercial relationship and the wrongful termination of the distribution contract. After all its claims were dismissed at first instance, the distributor lodged an appeal against the decision with the Paris Court of Appeal.
- Grievance based on the prohibition of sudden termination of an established commercial relationship
The distributor first challenged the importer’s termination of its exclusive distribution contractor on 9 October 2017. It argued that the loss of its exclusive distribution rights constituted a substantial change in the commercial relationship, even though it had made significant investments to develop the importer’s brand.
The appellant also argued that the one-year notice period granted by letter on 9 October 2017 had not been effective, since the distributor had not lost its exclusive distribution rights at the end of the one-year notice period, but on the effective date of the new distribution contract, i.e. on 1 April 2018. This loss of exclusive rights therefore caused the distributor a significant loss.
For its part, the importer argued that the exclusive distribution rights granted to the distributor were relative, since it was authorised to make online sales and these sales made outside the contractual territory accounted for a large part of its business.
The Court of Appeal dismissed the appellant’s claim on grounds that it had not adduced any evidence of the alleged loss, since it did not produce any data allowing a comparison of its sales volume before and after the loss of its exclusive rights. It also noted that the loss of exclusive distribution rights had had no real impact on the distributor’s business, given the considerable number of sales it made outside the contractual territory. The Court also found that the distributor had not adduced any evidence of the investments it claimed to have made.
The Court of Appeal therefore concluded that the distributor had failed to demonstrate any substantial change in the established commercial relationship during the notice period and dismissed its claim for damages.
- The unbalanced nature of the early termination clause
The appellant then claimed that the early termination clause was wrongful on the basis of Article L. 442-6, I, 2° of the French Commercial Code (now Article L. 442-1, I, 2°) and Article 1171 of the French Civil Code.
The distributor argued that the distribution contract signed in 2018 was a standard form contract the clauses of which were non-negotiable and that it had been forced to accept this clause due to its economic dependence on the importer. It also claimed that the importer had taken advantage of its position to impose an unbalanced clause on it.
Conversely, the importer argued that the termination clause was perfectly lawful, that the contract had been freely signed by the parties and that it had been negotiated with CNPA representing the distributors in the network.
The importer also argued that the conditions for the application of Article L. 442-6, I, 2° of the French Commercial Code were not met, since no imposition was demonstrated and the right to terminate was reciprocal, such that there was no imbalance in the rights and obligations of the parties.
Once again, the court ruled in favour of the importer. It began by pointing out that Article 1171 of the French Civil Code could not apply to contracts governed by the special provision of the Commercial Code, thereby adopting the solution developed by the Cour de cassation (French Supreme Court) and consistently applied since by the Paris Court of Appeal (Com., 26 Jan. 2022, no. 20-16.782; CA Paris, 29 Feb. 2024, RG no. 21/08313).
It then found that the distributor had not shown any attempt to dispute the draft early termination clause, even though it had been informed of the clause in the pre-contractual information document it received before signing the contract. The Paris Court of Appeal has indeed consistently required a party availing itself of a significant imbalance to demonstrate “the existence of effective negotiations”.
Finally, the Court found that the distributor had failed to demonstrate a lack of reciprocity of the clause, the existence of a disproportion between the rights and obligations of the parties and the existence of the distributor’s economic dependence on the importer.
- Wrongful termination of the distribution contract
The distributor also claimed that the early termination of the contract by the importer was wrongful on the ground that it had been deluded into thinking that the partnership would last and that it had been encouraged to make significant investments.
The French courts have long recognised that a supplier misuses the right to terminate a contract with its distributor when it terminates the contract after requiring its distributor to make significant investments specific to the brand and which have not been amortised on the termination date of the contract (see in particular Com., Oct. 5, 2004, no. 02-17.338; 11 May 2017, no. 15-15.558).
However, the Court of Appeal dismissed these arguments and, adopting the importer’s argument, found that the importer had simply made use of the right of early termination provided for in the contract, that it had given notice proportionate to the duration of the contractual relationship (19 months’ notice) and that the distributor had failed to demonstrate that it had been required to make investments when the contract was signed.
Joseph Vogel, IDI Country Expert for distribution in France.
