French law n° 2023-221 of 30 March 2023, which aims to strengthen the balance in commercial relationships between suppliers and distributors, referred to as « EGalim 3 » or « Descrozaille », builds on the work of the two eponymous preceding laws: protecting the remuneration of both farmers and other actors in the supply chain. 

This third phase takes place in an inflationary context, at a time of war in Ukraine and in the wake of a health crisis, highlighting questions of sovereignty in the sector. Against this background, the various measures adopted pursue the objectives of « securing supply chains, extending on a long-term basis the provisions that are currently not definitive, and perfecting the conditions of transparency and good faith that must apply to negotiations in order to achieve a better balance of economic power »^[1].

Key features of this new law: what you need to know!

The application of French law and the competence of French courts, both in commercial relations and negotiations, for all products sold in France.

A new Article L.444-1 A has been added to the French Commercial Code, stipulating that the specific provisions on agricultural products and foodstuffs, on transparency in commercial relations and on unfair commercial practices are « of public order » and apply to any agreements between a supplier and a buyer « concerning products or services marketed on French territory ». Furthermore, any dispute relating to the application of these provisions « falls within the exclusive jurisdiction of the French courts, subject to compliance with European Union law and international treaties (…) and without prejudice to the possibility of recourse to international arbitration ».

The legislator is seeking to better capture attempts to circumvent French law in order to escape from its protective provisions. In practice, there is no doubt that, in the event of a conflict of laws, this new provision will prompt the French judge hearing a dispute to follow the spirit of the text in applying French law and that it will facilitate the administration’s actions before the courts.

The concept of good faith in negotiations and the reinforcement of penalties in case of non-compliance with the deadline of March 1^st, or of failure to reach an agreement.

The legislator has put an end, at least in part, to the legal uncertainty surrounding the consequences of the absence of an agreement between a supplier and a distributor by March 1^st, which is the legal deadline for the end of the commercial negotiations.

Three key developments:

1. Good faith in negotiation: a new provision specifies that the negotiation of the framework agreement must be carried out « in good faith, in accordance with article 1104 of the French Civil Code », thus making a simple reference to the definition of good faith already provided in French ordinary law. However, this provision is supplemented by a new restrictive practice, consisting in the failure to conduct commercial negotiations in good faith « with the consequence of not concluding a contract within the deadline » of March 1^st. It remains to be seen how case law will characterize an abuse committed by a party causing the failure of the negotiations.

2. Trial measure in the absence of an agreement by March 1^st: Article 9, II of the Law also provides, on an experimental basis (i.e. for a period of 3 years), that in the absence of an agreement by March 1^st, the supplier may: (i) either terminate any commercial relations with the distributor, without the latter being able to invoke sudden termination within the meaning of Article L.442-1, II ; (ii) or to request the application of a notice period in accordance with the same Article (taking into account, in particular, the duration of the commercial relationship). The supplier may also refer the matter to the MRCA (mediator for agricultural commercial relations) to try to reach an agreement with his counterparty before April 1^st, retroactive to March 1^st and setting the terms of the notice period in light of « the economic conditions of the market on which the parties operate ».

3. Increased penalty for failure to meet the March 1^st deadline: the maximum administrative penalty for legal entities has been raised from €375,000 to €1 million^[2].

Extension of two experimental measures:

1. Higher resale-at-loss threshold (SRP+10). Initially introduced by Ordinance n° 2018-1128 of December 12, 2018 in order to « prompt a mechanism for margin transfer from distributors »^[3] and to better allocate value between the various players in the industry, and then taken up by Law n° 2020-1525 of December 7, 2020 to accelerate and simplify public action, the trial measure consisting of raising the threshold for food products, corresponding to the application of an additional 10% compulsory margin for distributors, has been extended by EGalim 3 for a further two years, i.e. until April 15, 2025^[4].

2. Twofold limitation on promotions. The trial measure on the double limitation of promotions, consisting in limiting promotions to consumers (limited to 34% of the selling price or to an increase in the equivalent quantity) and between suppliers and distributors (with an overall volume of promotion limited to 25%), was also introduced by the aforementioned Ordinance n° 2018-1128, to « counter deflation in the prices of agricultural products, some of which are sold at a loss as « loss leaders » in supermarkets »^[5]. EGalim 3 introduces two adjustments: on the one hand, this measure is extended until April 15, 2026 and, on the other, it also applies to products of general consumption (PGC), which now includes all other PGC products in addition to food products.

To ensure transparency and monitor the impact of these two measures, EGalim 3 sets out additional communication obligations for economic players in the food industry, enabling public authorities to evaluate their effects.

More stringent framework for logistics penalties.

EGalim 2 had begun to define a framework governing logistics penalties, which EGalim 3 has now completed, by capping the amount of logistics penalties imposed between suppliers and distributors at 2% of the value of products ordered. Other new features of EGalim 3 include: (i) the conclusion of an agreement for logistic matters, separate from the framework agreement, which does not follow the March 1^st deadline; (ii) the prohibition on imposing such penalties « for failure to meet contractual commitments that occurred more than one year earlier »; (iii) the obligation to declare the amount of penalties imposed each year to the French administration (DGCCRF), subject to an administrative fine.

Lastly, it expressly provides for the  possibility of the Government to suspend the application of logistics penalties for a maximum renewable period of six months, in the event of an exceptional situation, beyond to the parties, seriously affecting supply chains in one or more sectors, thus once again marking the intervention of public authorities in the spectrum of negotiation and commercial relations.

Strengthening measures in favor of the non-negotiability of agricultural raw materials (MPA) and extension to retailer branded products (MDD).

After EGalim 2 introduced the principle of non-negotiability of MPAs, via the three options to be presented by suppliers, for transparency purposes, in their general terms and conditions of sale, the French “Observatoire des négociations commerciales annuelle”’s results for 2022 (which is an information and consultation body specialized in this area) revealed that the involvement of an independent third party under the 3^rd option provided « little transparency (…) on the additional costs to be taken into account » in price determination. To address this issue, the third option as revised by EGalim 3 now provides for the independent third-party certifier to intervene twice: (i) once, to certify, within one month of the general sales conditions being sent out, the accuracy of the change in the supplier’s share of the tariff indicated therein, and (ii) a second time, to certify compliance with the principle of non-negotiability of the MPA, at the end of the negotiations^[6].

Article L.441-7 I of the French Commercial Code also specifies that « price negotiations shall not concern the proportion of the price offered by the manufacturer relating to [MPAs] », making the principle of non-negotiability applicable to retailer branded products.

A unified and clarified regime for wholesalers.

To reflect the specific nature of wholesalers’ activities and clarify the applicable regime^[7], EGalim 3 brings together the provisions concerning their activities, previously scattered across several articles of the French Commercial Code, in Articles L.441-1-2 and L.441-3-1, now specifically dedicated to wholesalers.

New criteria of analysis for sudden termination: taking into account a change in economic circumstances when determining the price to be paid during the notice period.

It should also be noted that, more generally, Article L.442-1, II of the French Commercial Code has been amended to provide that, when determining the price to be paid during the notice period, account must be taken of « the economic conditions of the market on which the parties operate ». This appears to provide judges with a new criterion for analyzing the abrupt nature of the termination.

It remains to be seen whether this umpteenth regime applicable to commercial negotiations and relations, increasingly complex, sophisticated and “under control” of the French administration, will not be amended again in the near future.

To be continued…