Contractual Imbalances : New Details on the Scope of Control and Sanctions

The French Supreme Court and the Paris Court of Appeal have recently provided important clarifications concerning the enforcement of two restrictive competition practices, firstly, on the scope of application of the advantage without consideration (“avantage sans contrepartie”), and secondly, on the sanction of significant imbalance (“déséquilibre significatif”).

Pursuant to Article L.442-1 I 1° of the French Commercial Code, a so-called advantage without consideration is defined as « obtaining or attempting to obtain from the other party an advantage which does not correspond to any consideration or which is manifestly disproportionate to the value of the consideration given », whereas a so-called significant imbalance implies « subjecting or attempting to subject the other party to obligations creating a significant imbalance in the rights and obligations of the parties » (Article L. 442-1 I 2° of the French Commercial Code).

Judicial review of the contractual price: between advantage without consideration and significant imbalance

In a ruling dated January 11, 2023 (n°21-11.163), the Commercial Chamber of the French Supreme Court censured a decision of the Court of Appeal which refused to review a discount systematically deducted and based on the tax credit granted to the other party, and another discount automatically applied to invoices, even paid late, on the grounds that only the existence of a significant imbalance could allow a judicial review of the price.

The Supreme Court took the opposite approach and stated that « the application of article L. 442-6, I, 1° (now 442-1, I, 1e), of the French Commercial Code requires only that the obtaining of any advantage or the attempt to obtain such an advantage not corresponding to any commercial service actually rendered or manifestly disproportionate with regard to the value of the service rendered, whatever the nature of this advantage, be established”. Indeed, the advantage that can be subject to a judicial review based on an advantage without consideration may be the contractual price of a sale or service (without consideration or disproportionate), even if it was freely negotiated by the parties. 

The burden of proof needed to successfully bring an action based on this unfair advantage is therefore reduced compared to an action based on significant imbalance, because in the first case it is not necessary to prove that the contract has not been freely negotiated.

Sanctions for significant imbalance and advantage without consideration

Traditionally, the victim of a restrictive competition practice may request from the judge:

• damages by engaging the tort liability of the author of the practice creating a significant imbalance (article L.442-1, I, 2° of the Commercial Code);
• the cessation of the practices, 
• the nullity of the illegal clauses or contract(s) and 
• the restitution of the advantages unduly received by its co-contractor (article L.442-4 of the French Commercial Code).

In a series of 7 rulings rendered on February 8, 2023, (No. 20/01748, 20/01712, 20/04558, 20/04557, 20/04561, 20/04545, 20/01706), the Paris Court of Appeal ruled on the effective application of these sanctions in cases of « significant imbalance ». These sanctions could also be applied to cases of contractual price control on the legal ground of an advantage without consideration.

These legal proceedings followed the annulment of the termination and intuitu personae clauses of the « Pizza Sprint » network’s (standard) franchise agreement and the cessation of the practice resulting from the application of the purchase clause ordered on the basis of significant imbalance by the Paris Court of Appeal, which had previously been seized by the Minister of the Economy (Paris Court of Appeals, February 5, 2022, No. 20/00737, see Altair Avocats news, March 2022). The franchisees, drawing the consequences of the voidness of these clauses, sought the annulment of the franchise agreement (this annulment having the advantage of obtaining the restitution of the royalties paid to the franchisor), and in the alternative, the termination of the agreement for breach by the franchisor. 

In these decisions, the Court of Appeal:

• refused to pronounce the voidness of the franchise agreement (certain actions being moreover time-barred), considering that the franchisees had « not demonstrated in what way these clauses [which had been annulled for significant imbalance] were essential to the franchise agreement or that their deletion was likely to disrupt the economy of the agreement »;
• considers that the purchase and minimum stock clauses, which combined performance was equivalent to an exclusive supply clause (annulled by the court on 5 February 2022), can be considered as constituting an « unfair performance of the contract » likely to engage the contractual (and not the tortious) liability of the franchisor based on the significant imbalance. Consequently, the Court pronounced the termination of the franchise agreement, to the exclusive detriment of the franchisor;
• compensates the franchisees for the significant imbalance, notably for the additional cost linked to the wrongful implementation of the supply clause, evaluated at 15% of the purchases made from the network supplier. 

The sanctions imposed by the Court of Appeal could probably, in some cases, be applied to the sanctions attached to judicial price review based on the advantage without consideration.

Key Takeaways

1. Judicial review of the price agreed in a commercial contract may be based on significant imbalance, but also on advantage without consideration, for which the burden of proof is reduced. 
2. A clause creating a significant imbalance may result in the annulment of the contract only if the clause is essential to the contract or if its removal disrupts the economic balance of the contract.
3. A clause creating a significant imbalance between the rights and obligations of the parties may also be analysed, in certain cases, as an unfair performance of the contract, which may give rise to contractual liability on the part of its author and not to liability in tort.
4. Judicial review of the price based on the advantage without consideration could, according to the same reasoning, lead to the annulment of the contract or to the contractual liability of the contracting parties having benefited from this advantage.

The assistance of Altaïr Avocats

• Drafting and negotiation of distribution and supply agreements,
• Pre-litigation negotiations at the end of agreements or commercial relationships, particularly with regard to restrictive competition practices;
• Compliance of commercial and pricing policies with respect to pricing transparency rules; 
• Assistance and advice in the context of litigation before judicial and administrative authorities with regard to restrictive practices of competition.