By a ruling dated January 25, 2017, the French Supreme Court confirmed the possibility for a court to review contractually agreed prices in case of a significant imbalance in the rights and obligations of the parties.
This ruling is noteworthy as the position of the courts, and ultimately that of the French Supreme Court in this case, was to affirm a hitherto contested principle, namely that the courts have the possibility to review the price contractually agreed upon by the parties.
The notion of significant imbalance in the Civil Code (new §1171 introducing a ban on significant imbalances in subscription agreements as of October 1, 2016) and in the Consumer Code (§L. 212-1 prohibiting unfair contract terms, i.e. introducing a significant imbalance in B2C relations) does not allow assessing the adequacy of the price. These provisions even expressly exclude such a possibility.
This ruling affirms the power of the court to review the adequacy of the contractually agreed price (including all of its components) and determine if there is a significant imbalance under §L.442-6(I)(2) of the Commercial Code.
The French Supreme Court affirmed in effect that “§L. 442-6(I)(2) on restrictive competitive practices does not exclude the possibility, contrary to §L. 212-1 of the Consumer Code, that a significant imbalance may result from a mismatch between the price and the item sold” and that “§L. 442-6(I)(2) of the Commercial Code authorizes the courts to review prices, when they do not result from free negotiation and characterize a significant imbalance in the rights and obligations of the parties.”
The facts of the case were as follows: following an inspection by the DGCCRF (French competition watchdog) in 2010, the Minister of the Economy brought a claim against Le Galec (the central purchasing unit of the Leclerc hypermarket and supermarket chain) before the Commercial Court of Paris, under §L. 442-6(I)(2) of the Commercial Code, which prohibits subjecting or attempting to subject a business partner to obligations that create a significant imbalance between the rights and obligations of the parties.
The Minister of the Economy targeted two objectionable contract terms in this case.
First, the obligation to pay year-end rebates in consideration of a business volume to which no figure was put. Second, the obligation to pay this rebate in monthly advance instalments prior to payment of the goods by the distributor even though the distributor’s commitment only became effective at the end of the year.
The Minister of the Economy’s claim was dismissed during the first-level proceedings (Paris Commercial Court, September 24, 2013).
On appeal, the Minister of the Economy won its claim before the Paris Court of Appeal (July 1, 2015). The Court of Appeal ordered Le Galec to pay a civil fine of €2 million and to reimburse the amounts wrongfully received (€61.3 million).
The Court of Appeal considered that, while the Law on the Modernization of the Economy had established the principle of free negotiability of terms and conditions of sale and made specific terms and conditions of sale the basis of free negotiability, it did not eliminate the need for consideration or justification for the obligations assumed by the contracting parties. This being the case, the absence of consideration or justification for the obligations assumed, even though not falling within the category of commercial cooperation services, is punishable under §L. 442-6(I)(2) of the Commercial Code if it is founded in subjection or attempted subjection and results in a significant imbalance.
The Court of Appeal opined that the claimed significant imbalance did not result from the price level but from rebate mechanism implemented. In this context, it considered that the master agreements of 2009 and 2010 contained many contract terms that were unfavorable to suppliers that had been pre-drafted by the distributor and had not been modified subsequently, and that this absence of any real negotiation established the subjection.
On January 25, 2017, the French Supreme Court upheld the Court of Appeal’s reasoning, finding that “the principle of free negotiability is not unlimited and [that] the absence of consideration or justification for the obligations assumed by the contracting parties, even where these obligations do not fall within the category of commercial cooperation services, is punishable under §L. 442-6(I)(2) of the Commercial Code, when it is founded in subjection or attempted subjection and results in a significant imbalance”.
This ruling enshrines the right of the courts to review contractually agreed prices.In this context, even though commercial negotiations often end in a tense climate, all preferential pricing terms or advantages negotiated between suppliers and distributors will henceforth need to have consideration or a justification, that should be documented in the written agreement. Otherwise, the beneficiary of such advantages risks a civil fine and having to return the amounts wrongfully received.