In a recent ruling dated September 19, 2018 (RG 16/05579, DES/ Clarins), the Paris Court of Appeal confronted the sudden termination of established business relationship(art.L442-6.I.5° of French commercial code)  to the rules of international litigation. This ruling is more specifically instructive regarding the determination of the law applicable to the sudden termination of established business relationship, as much for the issues raised by the Court than those the Court does not raise. 

In this ruling, companies belonging to the Clarins group (in France and Luxemburg) were sued for breach of their business relationship with a French company that distributed Clarins cosmetics in Algeria through local companies.

1. First of all, the Court had to determine the law governing the claim for indemnification based on an alleged sudden termination of established business relationship. In order to do so, the Court had to firstly qualify the nature of the right invoked by the victims of the breach to determine the relevant conflict-of-law rule. 

The Court uses contractual qualification to determine the law applicable to such claim. It notes that « relations are long established between the parties on a tacit contractual basis« . This is an implicit but clear reference to the Granarolo EU case law and thus an extension of this jurisprudence from the area of conflict of jurisdictions jurisprudence to the field of conflict of laws.

In the Granarolo ruling rendered on July 14, 2016 (No C 196/15), the European Court of Justice (ECJ) initiates a reasoning that would make it possible to determine the jurisdiction rules applicable within the EU, pertaining to indemnification in case of a sudden breach of a commercial relationship. De facto three hypotheses can be distinguished:  

  • the written contractual relationship that is not directly addressed by the ECJ, but which is to be deduced from the solution adopted by the Court : the claim based on a sudden termination of a (written) framework contract has a contractual nature according to conflict of jurisdiction rules under Brussels I recast Regulation;
  • the tacit contractual relationship, judged by the ECJ, which exists only if  the body of evidence listed by the ECJ are identified by the national judges: such a claim is also of a contractual nature under Brussels I recast;
  • the informal relationship which is not considered as a tacit contractual relationship and which is inferred, in contrary to the assumption judged by the ECJ, when the above-mentioned evidence are not gathered: such a request has a tort nature in light of Brussels I recast.

That being said, the Paris Court of Appeal clearly favored a contractual qualification of the action for damages based on a sudden breach of established commercial relations. If a parallel was to be made with the Granarolo EU case-law, it would be necessary to consider from now on, with regard to applicable law, that:  

  • a claim based on a sudden termination of a framework contract would have a contractual qualification within the meaning of the Rome I Regulation;
  • a claim based on a breach of a tacit contractual relationship, would have a contractual qualification within the meaning of the Rome I Regulation;
  • a claim based on a relationship which is not qualified as tacitly contractual (absent of a body of corroborating evidence) would have an non-contractual character within the meaning of the Rome l Regulation. 

This ruling probably marks the beginning of a modification of the jurisprudence pertaining to the determination of the law applicable to sudden termination of established commercial relationships which until now and, by extension of the qualification retained by domestic law, fell within the category of the tort liability.

But the rationale for determination of the applicable law appears to be incomplete on two items to constitute a conflict of law rule fully applicable by the parties to a contract:

On one hand, at the beginning of the reasoning, the Court of Appeal simply states that the long standing relationship has « a tacit contractual basis« , and does not analyse any other evidence put forward by the ECJ in the Granarolo case. In other words, « the tacit contractual basis » appears to be insufficiently characterized to set a rule that can be safely followed by the contracting parties to qualify their relationship and determine whether such relationship is of a contractual or tort nature.

On the other hand, and more importantly, at the end of its rationale, the Court did not draw any consequence from the contractual qualification as regards a specific rule of conflict of law. Whereas, the Rome I Regulation (which constitutes the French common set of rules of conflict of law, irrespective of the location of the contracting parties or their nationality) lays down no less than four conflicts of law rules on contractual matters which – at least in theory – could apply to this claim:  

  • Pursuant to Article 4.1 (a), the sale agreement is governed by the law of the country in which the seller has his habitual residence, whereas pursuant to Article 4.1 (f) the distribution contract is governed by the law of the country in which the distributor has his habitual residence;
  • Without any link to a specific contract, the standard conflict of law rule in contractual matters (Article 4.2) is the law of the country in which the party who provides the characteristic performance of the agreement has his habitual residence. Article 4.3 lays down a safeguard rule where the agreement is evidently connected more closely to another country.

It was therefore to the judge to determine, for the purposes of finding the applicable law, whether the breach belonged to the category of sale agreement or distribution agreement or neither category. The Court did not proceed to this second level qualification and, further, did not even state clearly whether French law should apply.

2. This ruling is also instructive about the qualification of article L 442-.I.5° of the French Commercial Code as overriding mandatory rule. The Paris Court of Appeal ruled that article L 442-.I.5° is an overriding mandatory rule (OMR).

This “disruptive” mechanism, which sets aside the usual conflict of law reasoning, is generally based on a two-step reasoning: identification of a rule as an OMR and then characterization of the triggering criteria for this OMR. But, in the case at stake, these two steps have not been sufficiently characterized.

Firstly, Article 9.1 of the Rome I Regulation defines an OMR as « provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation ».

However, by simply stating that « it is constant (SIC) that the provisions of Article L442-6 I. 5 ° of the Commercial Code is an overriding mandatory rule within the meaning of the aforementioned text, as it is provisions whose respect is considered crucial for the preservation of a certain equality of arms and of loyalty between economic partners and which are considered indispensable for the economic and social organization « , the Court did not precisely confront this Article to all the terms of the definition of Article 9.1. In any event, does « the preservation of a certain equality of arms and loyalty between economic partners » really meet the criterion of « the safeguarding of public interests » laid down in Article 9.1 above?

Secondly, as regards the triggering criteria, a French economic OMR seeks to protect either the interests of the market or the interests of a category of operators. When such interests are located in France, the OMR will apply.

However, the Court considered that Article L442-6.I.5 ° should automatically apply to the facts submitted to its jurisdiction, without seeking the link with French territory, while the relevant market was Algeria and two of the three victims of the termination were settled there. 

The conditions for the application of Article L 442-6.I.5 ° as an OMR therefore remain rather vague, even if it is clear that the Paris Court of Appeal considers this restrictive trade practice as such.

As a conclusion, even though Article L442-6.I.5° was probably applicable to this suddenbreach in the case at stake, the mechanisms of the conflict of law rules and of overriding mandatory rules must be strictly applied in order to allow the parties to an international commercial relationship to foresee the legal framework of their relation. It is therefore urgent for the French Court of Cassation to take a clear position on this matter in order to provide a secure legal framework to international trade operators.

By CHery

Update Distribution / Competition French law