The termination of Agency and Distribution Agreements in France by gegeshandong


									The termination of Agency and Distribution Agreements
                      in France

                   PAULHAN & ASSOCIES
                         29 avenue d’Eylau
                             75116 Paris

                          tél: (33) 01 53 70 05 55
                       fax:(33) 01 53 70 05 55
                      www. p a u l h a n - a v o c a t . c o m

        Contact : Olivier PAULHAN or Claire COURCELLES

By resorting to the practise of mandate (Commercial Agency) or entering into an organised
resell agreement (controlled distribution) the parties commit themselves into a business
relationship which the supplier may not terminate unless it complies with a minimum notice
period and/or pays off a compensation to the contracting party.

   1. Commercial Agency

       1.1      Statutory rules

The status of Commercial Agency in France is governed by the article L 134-1 to L 134-17 of
the Code of Commerce (resulting from law n° 91-593 of June 25th, 1991 implementing the
E.C. Directive n° 86/653 of December 18th, 1986).

       1.2      Notice period

The length of the notice period is determined in consideration of the time passed since the
Commercial Agency Agreement has come into force, ie :

       -     one month during the first year of execution,
       -     two months during the second year of execution,
       -     three months after the second year of execution.

       1.3      Compensation

                1.3.1 The compensation system chosen

French law states as a principle that the amount of compensation received by the Agent shall
depend on the loss the Agent has suffered in accordance with article L 134-12 of the Code of
              1.3.2 The conditions for obtaining compensation

The Agent shall receive payment of a compensation upon termination of the Agency
Agreement, regardless of the indefinite or definite duration of the contract. Compensation
may be obtained in particular in case of termination of definite duration contract, or any
termination due to the age, infirmity or illness of the Agent. Such a payment by the Principal
is not due if termination is imputable to the Agent, caused by a serious fault of the Agent or
due to a transfer of the Agency contract.

The Agent must claim to the Principal for his right to compensation no later than one year
after termination of the Agreement.

The amount of compensation is not subject to the Agent’s contribution to the development of
the Principal’s clientele and may not in any manner be reduced even if the Agent has
undertaken similar duties under other commercial agency agreements. The same rule also
applies even though the Agent has lost clients or has not reached the targets that had been
agreed upon between parties.

                1.3.3 The maximum compensation amount

There is no compensation ceiling as the French system provides for a compensation amount
calculated in proportion of the prejudice suffered.

              1.3.4 Cases in which the maximum compensation amount of one year may be

Irrelevant, given the above paragraph.

       1.4    Calculation of the indemnity

              1.4.1 The calculation method chosen by French Courts

French Courts invariably take the view that the compensation amount shall be equivalent to
two years gross commission of the Agent, unless one of the parties can show that the Agent’s
prejudice is lower or higher than such an amount.

              1.4.2 Most commonly awarded compensation amounts

- Supreme Court (November 26th, 2003) : Indemnity provided by law may be cumulated with
an additional one in case of abusive termination by the principal.

- Supreme Court (June 17th, 2003): Contractual provisions agreed upon between the parties
cannot predetermine a percentage of the commissions as a compensation corresponding to an
indemnification for the termination of the agreement.

- Supreme Court (March 19th, 2002):      274,408, equivalent to 2 years of commission.

- Court of Appeal of Caen (June 20th 2002): The two years commission compensation may
also be cumulated with a contractual notice period indemnity.

- Court of appeal of Versailles (September 15th, 2000): 22,867 as compensation, for two
years of activity and a turnover amounting to 173,639 during the last calendar year. In such
a case the compensation amount has been determined by reference to the origin, the
importance and the age of the clientele lost and is not equivalent to two years gross

- Court of Appeal of Nancy (September 22nd, 1999): 17,840 as compensation corresponding
to two years gross commission for nine months of activity.

- Supreme Court (March 28th, 1995): 90,000 as compensation corresponding to two years
gross commission for nine years of activity.

       1.5       Termination for breach

                 1.5.1 Breach by the Principal without notice

The Principal may terminate the commercial agency contract of indefinite duration with
immediate effects in case of serious fault of the Agent or by virtue of an act of god.

                 1.5.2 The serious fault of the Agent excludes compensation

The Principal has to show evidence that the Agent is responsible for a serious fault, such as
unfair competition, so as to be allowed to terminate the contract with immediate effects.

It is to be noted that French Courts are not so strict when it comes to determine the
indemnification of Agents acting under neighbouring contracts similar to the Agency
Agreement. Indeed, neighbouring contracts are treated more favourably for the Principal as
regards the exposure to payment of an indemnification. This is the case for the commission
agreement where the commission Agent is acting in its own name but on behalf of the
Principal (whereas in the Agency agreement the Agent acts in the name and on behalf of the
Principal). Court cases usually deny any right to commission agents to benefit from an
indemnification, unless the conditions of termination are abusive.

    2. The Controlled Distribution

Five different types of contractual relationships fall within the scope of Controlled
Distribution: exclusive distribution agreement, exclusive purchase agreement, assistance to
resellers, franchise, and selective distribution agreement.

                 2.1     Statutory rules


                 2.2     Notice period

Originally, French law did not provide for a specific duration of the notice period in the
context of controlled distribution.

Consequently, Courts used to calculate such duration by referring to the three main criteria,
listed below and now included in the French Code of commerce:

       -      duration of past relationships,
       -      financial weight of past relationships,
       -      the professional practises.

The application of those criteria have led to a large variety of decisions: it has been decided,
in separate cases, that a six months notice period was not sufficient and that a fifteen days
notice period was enough.

               2.3     Compensation

French Courts have always denied to distributors who are considered as independent owners
of their business the right to be indemnified for the loss of clientele they incur upon
termination of a controlled distribution agreement.

In the light of French court cases, it is clear that such an indemnification may only be sought
and awarded where the termination appears to be unfair.

Furthermore, French courts have also decided that a distribution agreement does not constitute
a mandate between the contracting parties and thus never admitted that distributors could
benefit from the regime applicable to mandates.

It results from the above that either the termination of an indefinite term contract or the non
renewal of a definite term contract is free, provided that it is not unfair and detrimental to the
distributor who may, in such a case, claim for indemnification in order to obtain
compensation for the prejudice suffered.

For the purpose of valuating this prejudice, the Courts would take into account not only the
direct losses suffered by the distributor but also the investments he has made at the request of
the supplier (equipment, personnel, marketing, etc…).

In addition to the above-mentioned indemnity, the termination of a distribution agreement
may also involve other financial aspects such as the possible obligation to take over the
employment contracts of the distributor in execution of article L 122-12 of the French Labour
Code and of the E.C. Directive n° 77/187 of February 14th, 1977 which has granted to the
employees of the Distributor the right to claim against either the Distributor itself or the
Supplier for the upholding of their employment contract or at least for an indemnity
compensating for the termination of their employment contract. Such a claim shall be
admitted provided that the termination of the distribution agreement has led to the transfer of
an existing autonomous economical entity.


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