01 August 2019

The Law “for a balance in commercial relations in the agricultural and food sector and healthy and sustainable food’, better known under the name EGAlim, in reference to the French national food conference, was enacted on 30 October 2018 (Law No 2018-938). The EGAlim Law aims at strengthening the position of agricultural producers in trade negotiations, in particular by reversing the price construction process: it is now up to agricultural producers to offer contracts to their buyers based on their production costs. This reversal of the price construction process intends to ensure a better distribution of value throughout the distribution chain.

The EGAlim Law further aims at reforming trade negotiation rules as a whole, in order to simplify and harmonise them with other legal provisions (French General Tax Code and French Rural and Maritime Fishing Code).

This ambitious reform concerns all industry-trade relationships, far beyond the mere agro-food sector. The Ordinance No. 2019-359 amending Title IV of Book IV of the Commercial Code relating to Transparency, anti-competitive practices and prohibited practices has deeply modified commercial negotiation.

 This reform covers both upstream and downstream process of negotiation. For the upstream process, new provisions were implemented which aim at formalizing and bringing transparency, through contractualization and price fixing between farmers, producers, first buyers and distributors. At the downstream level, new provisions were implemented to regulate prices and practices, through the increase of the resale at loss threshold and through limitations applicable to food products and pet food promotions.

  1. More transparency to trade negotiations

In addition to the renumbering of almost all articles of Title IV of Book IV of the French Commercial Code, which will definitely require getting used to, this Ordinance No.2019-359 taken pursuant to Article 17 of the EGAlim Law changes the rules on written agreements: derogatory rules applicable to agreements with wholesalers now constitute the standard regime (new Article L.441-3 of the Commercial code), and the derogatory regime applies only to widely-consumed goods intended for retail sales (new Article L.441-4 of the commercial code). Actually, this new derogatory regime takes over the former regime. Please note that the scope of this derogation will depend on the definition of widely-consumed goods, which should be listed in a decree (not yet issued).

This Ordinance also took into account the mutual obligations borne by the parties in order to determine the agreed price, the estimated turnover and the business plan. It is required from the parties at the end of the negotiation period to have agreed upon the “agreed price” which takes into account all the negotiated elements. The parties also have to define the business plan which should include all the commercial cooperation and other services to be reported on the written agreement.

The French Commercial Code will now also govern “amendments” to agreements. New Article L.441-3, paragraph II, provides that “any amendment to the agreement (…) must be made in writing and make reference to the new element justifying the amendment”. This provision shall apply to all on-going contracts when the order comes into force.

Finally, this Ordinance has amended the penalties applicable in case of non-communication of the General Terms and Conditions prior to the trade negotiation and in case of failure to comply with invoicing terms. Both failures are sentenced by administrative fines. Concerning the non-communication of the GTCs, it is a real novelty. The administrative fine is set at €15,000 for natural person and €75,000 for legal entity. Concerning invoicing, any omission or failure with the mandatory particulars will now be sentenced by an administrative fine up to €375,000 for legal entity. This infringement has thus been decriminalised.

  1. The simplification of the laws of abusive and restrictive practices

This Ordinance has completely amended the provisions related to restrictive practices and refocused on three main restrictive practices: unfair advantage, significant imbalance and brutal breach of commercial relations which are now provided under a single Article L.442-1 of the Commercial Code.

The concertation prior to the issuance of EGAlim Law has demonstrated that the thirteen restricted practices listed in the former Title IV of Book IV were obsolete. To simplify the list of restrictive practices, the legislator has therefore removed some former restrictive practices including the following ones:

  • to refuse or return goods or unilaterally deduct from the amount of the invoice issued by the supplier, penalties or discounts corresponding to non-compliance with a delivery date or non-compliance of the goods, when the debt is not certain, liquid and due, without being able to check the validity of the corresponding claim;
  • to obtain, or seek to obtain an advantage, as a prerequisite to the placing orders, without providing a written commitment concerning a proportionate volume of purchases and, of appropriate, a service requested by the supplier which is subject of a written agreement;
  • To obtain, or to seek to obtain clearly abusive terms concerning prices, payment terms, terms of sales or services that do not come under the purchase or sale obligations, under the threat of an abrupt total or partial termination of business relations;
  • To prescribe or attempt to prescribe a business partner to penalties for late delivery in case of force majeure;
  • The principle of price intangibility.

Such removal was justified by the fact that these legal grounds were rarely used before commercial courts and these unlawful conducts could be sanctioned either under significant imbalance or unfair advantage whose scope has been extended.

However, please note that this simplification does not aim at rendering lawful these former restrictive practices. The purpose of this simplification is to refocus anti-competitive restrictive practices on broader notions that will allow to incorporate the numerous terms and practices listed in the former Article L.442-6 of the Commercial Code.

One of the main clarification provided by this Ordinance implementing EGAlim Law is related to the practice of brutal breach of commercial relations (now listed under Article L.442-1 II° of the Commercial Code). This abusive practice, which gives rise to many disputes, is now framed within a maximum notice period.

As a reminder, the fact, for a person involved in production, distribution or service activities to break abruptly, even partially, an established commercial relation, without prior written notice taking into account in particular the duration of the commercial relationship, with reference to commercial practices and inter-professional agreements, will be sentenced. The author of the breach shall incur liability and shall repair the damage caused by its breach.

The compensation for such breach will take into account the sufficient notice period that should have been allocated to the business partner in order for it to reorganise its business prior to the breach. This concept of sufficient notice period was subject to Courts’ discretion taking into account the duration of the commercial relation and the position of economic dependence.

A presumption of sufficient notice period is now set at 18 months, regardless of the nature of the products concerns. This amendment to the text has the merit to provide some visibility to business partners eager to terminate long-term commercial relation. The upper limit set at 18 months appears to meet the needs for litigation regulation and economic realism.

It shall also be noted that sanctions incurred for having committed on of these three restrictive practices as well as the modalities to implement legal actions have also been clarified (see new Article L.442-4 of the Commercial Code). Only the victim of the practice can request for the illegal clause or contract to be voided and can demand the restitution of the benefits / undue advantages. The Minister of the Economy or the Public Prosecutor may also refer to the Court and requests the imposition of a civil fine, the amount of which may not exceed the greater of the following three amounts: (i) 5 million euros, (ii) three times the amount of the sums unduly earned or obtained, (iii) 5% of the pre-tax turnover made in France by the buyer during the last closed financial year preceding the one during which the practices were implemented. Finally, there will be systematic publication of the decision.

By Thomas Lamy and Astrid Galand

 Grall & Associés