The new law pertaining to consumer protection measures, known as Act “Hamon”, was adopted on February 13th, 2014 and published on March 17th, 2014 after being declared lawful by the French Constitutional Council. The new provisions go well beyond consumer protection and aim at extending measures to business to business relationships including sub-contracting. Penalties for failure to comply with these new requirements have been reinforced. We have summarized below our comments on the main changes concerning business contracts.
Greater Regulation of trade negotiations
Several provisions seek to impose greater regulation over B to B purchase terms and business negotiations. In this respect, the role of the seller’s general terms and conditions of sale becomes preponderant as the «only foundation for trade negotiations » (Article L.441-6 of the French Commercial Code). Although the real impact of this text is uncertain, the government’s stated objective is to achieve “balanced” business negotiations.
Article L.441-7 has been amended following the same lines. This article provides that "a written agreement entered into between the supplier and the distributor or the service provider states the obligations to which the parties are bound in accordance with Articles L.441-6 and L.442-6, for the purpose of price determination at the conclusion of the commercial negotiation. [The Agreement] indicates the price list as previously communicated by the supplier with its general conditions of sale or the modalities for the consultation of this price list in the version used for negotiations.”
According to Annick Le Loch, rapporteur during debates in the French National Assembly, these new provisions intend to clear any ambiguity regarding the current state of the text. “General conditions of purchase are often presented at best as the basis for trade negotiation and, at worst, as a document that must be signed by the supplier which will become the only agreement in place. […] We wish to clearly reaffirm the rule: negotiations must rely on and only on general terms and conditions of sale - this does not prevent distributors from discussing them. »
This commentary is in line with a recent Court decision on the prohibition of significant “imbalances” in contracts. The Paris Court of appeal (18 Dec. 2013, n ° 12/00150) held that the systematic imposition of the general conditions of purchase identically drafted in all purchase agreements in effect eliminates negotiation and creates significant imbalances in the parties’ rights and obligations on the basis of Article L.442-6 I. 2°.
General terms and conditions of sale must not be ignored by purchasers in the context of trade negotiations and their terms must be discussed between the parties in view to a final agreement. Parties will have to demonstrate they are in compliance with this legislation. Parties are advised to retain all documents evidencing effective negotiations have occurred between them regarding conditions of the parties’ cooperation, and in particular the agreed price of services or products.
New formalism on sub-contracting
For the first time, this new legislation introduces formalism for sub-contracting purchases in view to reducing perceived imbalances between the parties.
The new article L.441-9 of the Commercial Code is as follows:
“I. - A written agreement is established, in accordance with Articles L.441-6 and L.442-6, for any purchase of manufactured products customized for the buyer for integration into his own production, where the amount exceeds a threshold set by decree. [The agreement] indicates the conditions agreed between the parties, including:
1° The purpose of the agreement and the respective obligations of the parties;
2° The price or the terms of its determination;
3° Invoices and payment terms in accordance with applicable law;
4° Liabilities and warranties of each party such as, if applicable, detailed rules for the application of retention of title;
5° Rules governing intellectual property between the parties in accordance with applicable law, when justified by the nature of the agreement;
6° The term of the agreement and conditions of its termination;
7° The procedures for the settlement of disputes arising in relation to the execution of the agreement and, if the parties decide so, the conditions for mediation.
II. – In the event of failure to draft a written agreement as described within Section I, fines provided for in Section II of Article L.441-7 will be applicable.”
A written agreement must be prepared and executed for the purchase of sub-contracted production to the extent the purchase exceeds a financial threshold to be determined by decree. Considering the purpose of these new provisions, the amount of this threshold is likely not to be very high to ensure greater protection of subcontractors. This decree should also clarify the concept of purchase (for example, if “purchase” must be understood as any purchase from the same supplier over a certain period of time such as twelve months). Otherwise, a purchase could be realized in several stages, each below the threshold.
The combined application of Articles L.441-9, L.441-6 and L.442-6 of the French Commercial Code gives rise to questions. References in this Article to the provisions of Articles L.441-6 and L.442-6 suggest that the communication of the general terms and conditions of purchase together with a purchase order is likely not to fulfill the requirements of the written agreement stated in the new Article L.441-9. The agreement should indeed cover the agreed negotiated price as well as particular conditions duly signed by both the buyer and the seller to meet this new requirement.
New Article L.442-6, I, 12° of the French Commercial Code is also to be considered. A professional will be held liable if the professional:
12° orders, pays or invoices an order of products or services performed at a different pricefrom the agreed price resulting from the application of the price list stated in the general terms and conditions of sale, when these conditions have been accepted without negotiations by the buyer, or the price agreed further to trade negotiations covered by the agreement provided for in article L.441-7, as amended by addendum, or the renegotiation provided for in article L.441-8.
Any special price reduction, discount by way of a framework agreement or price adjustment must be formalized by a written amendment before a buyer issues an order to avoid situations where liability of the buyer could be sought. A supplier may invoke this provision against any unilateral price reduction (such as in the context of undetermined annual price decreases) imposed by a purchaser.
Reduced payment terms
The new law has revised payment terms for “periodic invoices”. For any summary invoice edited at the end of the month, the new payment term is 45 days from the date of issuance of the invoice (Article L.441-6 of the French Commercial Code). This new payment term is likely to apply to intermediate invoices in the framework of global services. Existing payment terms of 45 days end of month or 60 days from the invoice date remain into force for any other invoices.
Further to the Law on the Modernization of the Economy (“Loi LME”), the French government continues to support cash flow of companies through reduction of payment terms for periodic invoices.
The government has also strengthened penalties for non-compliance of payment terms to ensure greater efficiency.
Failure to comply with these provisions may lead to a fine of € 375,000 for companies and € 75,000 for an individual and may be imposed by the French Authority for Competition Policy, Consumer Affairs and Fraud Control (DGCCRF). These amounts may be doubled in case of repetition of the breach within a period of 2 years from the date on which the first decision became final.
The abovementioned fines reflect the desire to increase the effects of sanctions. Civil and criminal penalties have been replaced by administrative fines which may be imposed faster and are deemed to be more dissuasive.
These administrative fines will be enforceable in the event of failure to comply with rules applicable to payment terms, rules regarding contractual formalism and clauses or practices that have an effect of delaying the starting point for payment terms (Articles L.441-6, L.441-8 and L.441-9 of the French Commercial Code).
The DGCCRF will also be invested with powers of injunction regarding restrictive trade practices and heightened investigation authority.
The decree implementing the Act will complete certain terms and conditions and will therefore permit to identify the impact of these new provisions. A number of provisions came into force on March 19th, 2014 although certain provisions have a three month waiting period before applicability.