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Significant imbalance affecting the rights and obligations of the parties to a contract: Each contract has its own regulations... and uncertainties

Significant imbalance affecting the rights and obligations of the parties to a contract: Each contract has its own regulations... and uncertainties

Published on : 29/04/2022 29 April Apr 04 2022
Publications et Séminaires

The significant imbalance of article 1171 of the French Civil Code gives way to article L. 442-1, 2° of the French Commercial Code 
 
  • According to article L. 442-1-2° of the French Commercial Code, any person engaged in production, distribution or service activities is liable for "subjecting or attempting to subject the other party to obligations that create a significant imbalance in the rights and obligations of the parties".
  • Article 1171 of the French Civil Code (a new article introduced by a reform of the French civil code in 2016), provides that "in a adhesion contract, any non-negotiable clause, determined in advance by one of the parties, which creates a significant imbalance between the rights and obligations of the parties to the contract shall be deemed to be unwritten."

The law being silent on this point, it was possible to consider that any professional had an option allowing him to ground his claims on one article or on the other.

In a decision dated January 26, 2022 (n°20-16.782), the French Court of Cassation finally ruled on the relationship between articles 1171 of the Civil Code and L. 442-1, 2° (formerly L. 442-6, I, 2°) of the Commercial Code, both of which aim to sanction the existence of a significant imbalance in the contract. The Court of Cassation has definitively settled the question of the articulation of these two provisions, deciding in relation to a financial lease contract that article 1171 of the Civil Code applies to contracts not covered by article L. 442-1, 2° of the Commercial Code. 

The residual application to professionals of the significant imbalance of article 1171 of the Civil Code


Applying the principle that special law derogates from general law, the Court of Cassation confirms the appeal decision concerning the applicability of article 1171 of the Civil Code to financial leases.

The Court states that the distinction between significant imbalance under civil and commercial law is not based on the status of the parties as traders, but on the nature of the contract, provided it is subject to regulations that place it outside the law of restrictive competition practices, which is covered by article L. 442-1, 2° of the Commercial Code (in this case, the financial lease contract was subject to the provisions of article L. 311-2 of the Monetary and Financial Code). 

Article 1171 of the Civil Code will therefore apply to rare cases, including the said financial lease contract between a credit institution and a finance company. This solution should therefore apply more generally to "banking and financial organizations and activities", but also to commercial leases, relations between an economic interest grouping (EIG) and one of its members, and relations between a cooperative company of retailers and its members.

The quasi-systematic application between professionals of article L. 442-1, 2° of the Commercial Code


In a large majority of cases, the significant imbalance invoked by one professional against another is based on Article L. 442-1, 2° of the Commercial Code, applicable to "any person engaged in production, distribution or service activities" since the ordinance of April 24, 2019.

Two conditions must be met cumulatively: (i) submission or attempted submission and (ii) a significant imbalance in the parties' rights and obligations.
 
  • The perpetrator of the practice must subject or attempt to subject its co-contractor to the terms of the contract. Case law considers that submission cannot be deduced from the mere bargaining power of one of the parties. The party claiming to be the victim must therefore demonstrate not only the absence of effective negotiation of the disputed clauses, but also the will of the other party to impose the contract without any negotiation. 
This is the case, for example, when "the disputed clauses [are] inserted in all the contracts signed by the suppliers, who had no real power to negotiate them". In a recent decision, the Paris Court of Appeal noted that all of the franchise agreements analyzed were identical, and concluded that the franchisor had subjugated the franchisees (Paris Court of Appeal, January 5, 2022, No. 20/00737; Pizza Sprint - Domino's Pizza).
  • This must result in a significant imbalance between the rights and obligations of the parties. In commercial matters, it is accepted that this imbalance may relate to the elements contributing to the determination of the price, contrary to the provisions of civil law which expressly exclude it. 
In principle, judges assess the balance of the contract as a whole: a clause unfavorable to one of the parties may be rebalanced by another, stipulated in its favor, thus preventing the contract from falling under the scope of significant imbalance.

In the above-mentioned decision of January 5, 2022 (see here the DGCCRF press release), the Court of Appeal declared null and void several clauses of the Pizza Sprint franchise agreement, including the clause on termination of the agreement in the event of a change of control of the franchisee, on the grounds that this clause did not provide for reciprocity in the event of a change of control of the franchisor (a sanction that appears to be questionable in several respects). The Court also declared null and void the supply and minimum stock clauses, the combination of which created a de facto commitment to purchase exclusively from a supplier belonging to the franchisor's group; the Court noted that these two clauses were not balanced by other clauses in the contract and that their implementation was not justified in terms of preserving the homogeneity of the network or transmitting the know-how. Even if the scope of the sanction should be limited in this case because the franchisees did not seem to be aware of this ownership and the prices charged by the referenced supplier were well above the market price, it is clear that these cancellations create insecurity for the co-contractors and in particular for companies leading franchise networks.

As regards penalties, article L. 442-1, 2° of the Commercial Code provides that the perpetrator of the practice is liable in tort. The injured party, in addition to damages, may request the cessation of the practice, the nullity of the illegal clauses or contract(s) and the restitution of the benefits unduly received by the other party. The Minister of Economy can ask for a civil fine (e.g. €500,000 in the Pizza Sprint case), the cessation of the practices and the restitution of the undue advantages.
                               

Key takeaways : 

  • Offer the other parties the opportunity to make comments and suggestions on the terms and conditions of the draft contract... and keep the supporting documentation showing the negotiation (or refusal to negotiate) ;
  • Formally identify the counterpart, in economic, legal or practical terms, of each sensitive clause of the contract.

What Altaïr Avocats can do for you : 

  • Audit of distribution, franchise and license agreements;
  • Assistance in the preparation of standard contracts for networks and contract negotiations; 
  • Assistance in the context of investigations by the French Competition Authority, the DGCCRF and the DREETS ; 
  • Representation in litigation proceedings before the competition authorities and the courts in matters of restrictive competition practices.
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