The sudden termination of established commercial relations can be used by a third party to claim damages

The Court of cassation ruled in a decision rendered on the 6th of September 2011 that a third party could use the sudden termination of a commercial relation to claim indemnities if this termination also caused a prejudice to this third party.

Cour de cassation, 6 septembre 2011, Chambre commerciale, pourvoi n°10-11975

An import-export company called DENIS FRERES had a subsidiary in Thailand called COMMERCIAL COMPANY OF SIAM.

In 1974, CCS was contacted by a producer of industrial yeast called LESAFFRE. LESAFFRE wished to sell products in Thailand.

LESAFFRE reached an agreement with the French company DENIS FRERE who was charged to bring the products to Thailand and deal with the administrative and accounting aspects of the orders made by CCS from Thailand.

LESAFFRE signed a contract with DENIS FRERES and then DENIS FRERES subcontracted with CCS.

LESAFFRE discovered that the orders coming from Thailand started to diminish in 1998.

LESAFFRE terminated the commercial relations with DENIS FRERES on May 25, 1999.

DENIS FRERES found this termination sudden and asks to have a delay of two years before the termination.

LESAFFRE decided finally to grant a three month prior notice before terminating the commercial relations.

DENIS FRERES claimed damages for the sudden termination in a quite usual way applying article L 442-6 5° of the French commercial code:

The following acts committed by any producer, trader, manufacturer or person listed in the trade register render the perpetrator liable and entail the obligation to redress the prejudice caused:

(…)

– Suddenly breaking off an established business relationship, even partially, without prior written notice commensurate with the duration of the business relationship and consistent with the minimum notice period determined by the multi-sector agreements in line with standard commercial practices. When the business relationship involves the supply of products bearing the distributor’s brand, the minimum notice period is double that which would apply if the products were not supplied under the distributor’s brand. In the absence of such agreements, the decrees issued by the Minister for the Economy may determine a minimum notice period for each product category, taking due account of commercial practices, and may lay down conditions for the severing of business relations, paying due regard to their duration. The foregoing provisions do not affect the right to cancel without notice in the event of the other party failing to discharge its obligations or in the event of force majeure;

The company from Thailand who had no direct commercial relations with LESAFFRE decided also to claim damages together with DENIS FRERES.

The Court of appeal of DOUAI decided to grant damages to both DENIS FRERES and CCS.

The manufacturer decided to appeal to the Supreme Court (Cour de cassation). LESAFFRE argued that it was impossible for a Court to grant damages to a third party for the sudden termination of a commercial relation.

The Supreme Court ruled that a third party can obtain damages if he has suffered a prejudice caused by the sudden termination of a commercial relation.

The Supreme Court had already ruled that a contractual misconduct could be used by a third party to claim damages for a tort action.

The sudden termination or break-up of a commercial relation could be eventually seen as a contractual misconduct even if the notion of sudden break-up is wider.

This decision could have an important impact on a practical level since it will probably multiply the number of claims based on a sudden termination of a commercial relation.

A company who terminates a commercial relation will now be facing claims from the former commercial partner but also from all other companies involved in the distribution process. All subcontractors could find interest in claiming damages if a commercial relation is terminated on a higher level of the commercial chain.

The decision to terminate a commercial relation will therefore be even more dangerous than before.

A company should therefore be very cautious before terminating the contract without a long prior notice. All terminations should be very carefully studied before hand.

The conditions and consequences of the termination should be analysed before taking and notifying any decision.

By Olivier Vibert, Avocat, Paris.

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