This book provides a wide-ranging review of the European rules relating to distribution: exclusive purchase and exclusive supply, exclusive and selective distribution, motor vehicle distribution, franchises, commercial agents.

French Distribution Law

In France a trend has developed over the last few years for the theory known as “contractual solidarity” (solidarisme contractuel). According to partisans of the trend , “contractual solidarity consists of a requirement of public spiritedness which translates for each contractor, as the taking into account of the legitimate interest of his co-contractor and is based on ideas of altruism, decency,  …

Critique of the "contractual solidarity" theory.

Independent distributors have constantly demanded that they be afforded the same protected status as dependent distributors, and in particular the right, on termination of their contracts, to a substantial end-of-contract indemnity like commercial agents. A recurrent idea that has been fuelled by proponents of the contractual solidarity theory and has recently raised renewed interest during discussions on the reform of Regulation No 1400/2002. Distributors and independent repairers wanted the end of the protective status resulting from the transition of the motor vehicle distribution to the general vertical restraints regime in 2013 to be accompanied by an extension at European level of the protection of commercial agents, already recognized by the laws of some countries. In fact, it would not be appropriate to strengthen the protection of independent distributors either at the European level or at the national level in France. The demand is not based on any convincing legal grounds and would, on the contrary, considerably limit the efficiency of distribution systems, by raising distribution costs to the detriment of consumers and the economy and ultimately, distributors themselves.

The issues.

In France a trend has developed over the last few years for the theory known as “contractual solidarity” (solidarisme contractuel). According to partisans of the trend , “contractual solidarity consists of a requirement of public spiritedness which translates for each contractor, as the taking into account of the legitimate interest of his co-contractor and is based on ideas of altruism, decency, consistency and cooperation. This duty, imposed on the contracting parties to exercise the rights and powers conferred on them by the law or contractually within the respect of the legitimate interest of others, is essentially intended to be deployed in contractual relationships based on dependence and marked by an imbalance between the parties in their formation and performance, as is shown by the power the dominant contractor has to unilaterally decide on the content of the agreement which is often long-term, characterized by a joint clientele and sealed by an exclusivity clause”.

The proponents of contractual solidarity consider that distribution contracts, which they find highly unequal, fall under relationships of dependency; the obligation to apply the law or the contract respecting the legitimate interest of others leads them to recommend that the legal rules and contractual stipulations be interpreted so as to systematically protect the distributor. Under the guise of solidarity, the theory has become widely confused with the protection of the party considered to be the weaker in the contractual relationship.

Legal commentators have rightly criticized the solidarity theory, emphasizing the risks of judicial interventionism it would generate: the court becomes a party to the contract or is considered as knowing what is right for the parties better than they themselves do. One commentator has argued that in applying this theory, and particularly its more social aspect, “the logic of the rules give way to considerations of expedience, the rationale of judgments relies on vague considerations, the application of the “law” is highly unpredictable, feeding the increasing litigiousness in society” .

In actual fact, the application of contractual solidarity leads to contractual egotism and carries with it the seeds of the negation of the rule of law itself. The rights of the party assumed to be the stronger are systematically sacrificed in favor of the party considered weaker. Such inequality of treatment is all the more unjust in that the alleged situation of dependence and blatant inequality between the parties in the conclusion and performance of distribution contracts claimed in order to justify it, is not borne out by the reality of the matter. Above all, the appeal of contractual solidarity translates as the reflection of a reflex to retreat and of protectionism, which is common of societies in decline, and which results in the systematic sacrificing of new, younger and more dynamic entrants in favor of established operators.

There is ultimately very little, if any solidarity in contractual solidarity: solidarity does not function only in one direction. According to the theory, the supplier has certain obligations to meet in respect of the distributor: to provide information to prevent the distributor from being caught out by the price differences operating from one European country to another, to compensate him at the end of the contract, to help the distributor in his reconversion, to provide assistance with no right to oppose the transfer by the distributor of the contract or the undertaking to a third party without giving objective reasons, and to take on the distributor's staff when the contracts ends. The distributor however retains all his profits and his clientele, does not have to meet performance targets, can terminate the agreement for no compensation and assign it to a third party. Would it be right to have such an imbalance in terms of obligations and impose obligations which are not stipulated in the contract on only one of the contracting parties in the name of an ideological prejudice, on the grounds that one party to the contract is in a stronger position than the other?

Contractual solidarity is based on the assumption of a profound contractual imbalance in individual relationships between the supplier, presumed to be in a strong position, and each of its distributors - weaker parties placed in a situation of economic dependence with regard to the supplier. However, contrary to the premise of contractual solidarity, a distribution contract is above all a collective agreement and the relations between supplier and distributor cannot be reduced to individual bipartite relationships. In the majority of cases, distribution contracts are no longer negotiated between an all-powerful supplier and an isolated distributor. Most negotiations take place between the supplier and the grouping of distributors of the brand, whose rate of representativeness is generally extremely high: each negotiation has a collective character, as much at the signing stage as on performance of the contract. In the context of this collective negotiation process, which determines the content of the contractual relationship to a large degree, the power of the supplier and the network balances out.

Finally, the nature of the relationship between suppliers and distributors has been transformed: previously the relationship was one of weak party - strong party, whereas now both parties are on an equal footing. Today, the top 100 French automobile concession groups control more than 50% of registrations carried out by the dealers. The number-one concession group has more clout than a number of suppliers. As each group has control of a regional area, it becomes an indispensable partner for the supplier, since without it sales and profitability will fall. The balance has shifted and where once there was economic dependence, now mutually interdependent relationships prevail.

See the summary of the doctrine presented by MAZEAUD on Cass. com., 15 January 2002, France Motors (Sté) v Nodée (ès qual.); Société d'Exploitation du Garage Schouwer, LawLex200200005004JBJ, the Cass. com. made a tiny step into acknowledging the contractual solidarity theory.

STOFFEL-MUNCK, on Cass. com.,, 15 January 2002, D., 2002, 1974, 1979.

Two opposing theories prevail today in distribution law: contractual solidarity and network efficiency. The conflict between these two doctrines can be found both in terms of their fundamental principles and in the legal remedies they advocate.

Distribution by network is characterized by the economic interdependence between contractor and contractee and by a new contractual balance linked to the collective nature of contracts and to the concentration of distributors. While the contractual solidarity theory holds the distributor to be the weak party in the deal, supporters of network efficiency consider that distributors in place can benefit from barriers to entry of new operators and that those new entrants represent the weaker party needing protection. As a consequence, the court's role is different. Under contractual solidarity, the court may create further obligations beyond the provisions of the contract or the legal rule applicable in order to ensure the protection of distributors. On the contrary, according to the network efficiency theory, where there is a need for interpretation when assessing a management decision taken by the head of company, the court rules in the light of the interest of the distribution system, taking into account both the head of the network and its members, and limits itself to the review of evident abuses.

These different theoretical approaches lead to diametrically opposed practical solutions. The conflict in remedies can be seen at each stage of the contract's life. At the pre-contractual information stage, contractual solidarity will favor an automatic penalty for non-compliance with the requirements of the law through nullity of the contract or damages. For its part, case law based on the efficiency of the network only levels this type of sanction if the failure to inform has actually vitiated the consent of the co-contracting party, a procedural irregularity being without consequence for the efficiency of the distribution system. Decisions inspired by the contractual solidarity theory tend to protect the distributor in matters of duration of notice, continuation of relations, obligation of justification and compensation on termination of contract. This trend may also be considered to be the origin of the interpretation of the block exemption regulation as giving rise to rights to the benefit of the distributor. The network efficiency theory postulates on the contrary that fluidity of entries to and exits from the network is necessary, so that the operators not performing well can more easily cede their place to new entrants. It avoids an over-long notice period for termination, since the loss of confidence between the parties and an awareness that the relationship is coming to an end will generally bring about a lack of incentive on the part of the distributor and a drop in sales, which are detrimental to the interests of both parties. Similarly, under this approach, there is no justification for requiring reasons to be provided for a termination or requiring end-of-contract compensation. The need for reorganization of the network is a decision that the head of the network alone can take, and the court's review is limited to fraud and abuse of rights, without the court's assessment replacing that of the company head.

Different concepts and conflicting solutions.

The courts have almost always rejected the contractual solidarity approach. The Court of Cassation has thus demanded the failure to comply with the pre-contractual obligation to disclose information resulting from non-compliance with the Doubin law has an impact on the capacity to consent of the co-contracting party that can lead to the nullity of the agreement. Furthermore, it is settled case law that a concession contract of unlimited duration can be terminated freely, without justification or indemnity as long as a reasonable notice period has been respected and no abuses have been committed when the contract is terminated . Likewise, it has been held that where the supplier complies with the contractual notice period, thus allowing the distributor to organize the restructuring of the business, the former is neither under an obligation to assist the distributor nor to pay an indemnity for unjust enrichment further to the termination of an agreement containing a post-contractual non-compete clause . As regards the course of contractual relationships the courts have generally favored the network efficiency approach:

- by ending the obligation to set prices in distributor framework agreements and by authorizing the supplier to fix the sale price for its network, subject to abuse which is interpreted restrictively ;

- by ruling out the supplier's responsibility for price differences between EU Member States, as they consider that they are due to various factors over which suppliers have no control .

By generally finding that “if the rule according to which agreements must be performed in good faith allows the court to punish unfair use of a contractual prerogative, it does not allow it to impair the very substance of the rights and obligations agreed between the parties” , the courts clearly favor adherence to the contract and legal certainty over the theory of “contractual solidarity”.

EU law, which was initially influenced by the proponents of the protection of the weaker party in the context of the development of successive motor vehicle block exemption regulations, has now adopted a neutral position with the return of automobile distribution to the general scheme of Regulation No 330/2010.

The Commission noted in the evaluation of the impact of Regulation 1400/2002 that the protection of distributors has led to distorted effects although they only concerned the effects of an incomplete protection system for distributors, providing mainly for reasons for ordinary termination to be given, the freedom to transfer within each network and the possibility of multi-brand sales at points of sales, without going as far as imposing a general obligation for compensation at the end of the contract. These different measures, which had no economic justification, did in fact generally lead to a reduction in competition on the market. The purpose of the obligation to state the reason for a termination was to prevent distributors or repairers from being sanctioned by the supplier for pro-competitive initiatives, for example in terms of prices. In fact, the Commission has come upon no case of terminations being used for anticompetitive purposes. In contrast, the obligation to state reasons has led in practice to the disappearance of ordinary terminations which has frozen the structure of distribution networks, protecting the distributors in place and making it more difficult for new operators to enter. The object of allowing dealers to transfer their contracts within the network was to facilitate cross-border acquisitions and encourage trade between Member States. Such acquisitions have scarcely ever been carried out. On the other hand, the rule has been exploited within each Member State and has encouraged the concentration of distributors at local and regional levels thereby reducing competition between distributors. Finally, the Commission found that the imposition of multi-branding was devoid of meaning because manufacturers, at the time when they could impose brand exclusivity on their distributors, did not do so when it was not economically viable and allowed for multi-branding in the less dense areas. By contrast, suppliers' fear that their distributors would become multi-brand distributors and therefore less specialized and less efficient in the representation of their brand and at the same time their investment would benefit other brands, has encouraged them to raise their standards for representation and has led to an inflation of distribution costs. Ultimately, none of the measures protective of distributors instituted by Regulation No 1400/2002 has achieved its objectives and they been instrumental in creating inefficiency and a reduction in competition.

It is now established law that the party responsible for the termination of a contract complying with the notice period encumbent upon him does not have to provide reasons for the termination or non-renewal of the contract so the provision of inaccurate untrue reasons does not incurre his liability since there is no obligation to state reasons, Cass. com., 25 April 2001.

Cass. Ass. plén., 1 December 1995, LawLex200200004345JBJ.

Cass. com., 20 February 2007, LawLex200700000227JBJ.

Cass. 3e civ., 26 March 2013; Cass. com., 10 July 2007; Cass. 3e civ., 9  Decemeb er 2009.

The position of the supervisory authorities.

The expiry of the motor vehicle regulation generated intense lobbying from distributors wishing to continue benefitting from its protective provisions. The Commission has however decided to place the sector under the umbrella of the general vertical restraints regime. Automobile distributors are now demanding a special protective status which, they claim, is necessary and justified taking into account investments they have made, their dependence with regard to manufacturers and the protection of jobs. The distributors' lobby has therefore tried to have the French legislator adopt a series of measures mirroring the provisions of the expired motor vehicle regulation, or going even further such as the demand for an end of contract indemnity or requiring manufacturers to justify any investments demanded of them.

In support of their demands, distributors' representatives have argued that the adoption of a protective status is compatible with the harmonization of legal systems and the promotion of a single market. In fact, only a minority of Member States accord a special protection to auto dealers, giving them the status of commercial agents . Most of those countries make the indemnity subject to a number of conditions and impose a ceiling amounting to half of that awarded to commercial agents under French law. Given that the practices are not widespread in Europe, the harmonization argument would appear to have little foundation.

Alongside a variety of other measures, automobile distributors have also demanded the possibility to resort to an independent arbitrator or expert. But this option is already included in the codes of good practice adopted by the ACEA  and JAMA  associations. There therefore appears to be no reason to establish it as a legal requirement; it is for manufacturers and groupings of distributors to assess the appropriateness of such procedures, which are in fact often used when pertinent in particular for the fixing of objectives. The obligation for manufacturers to justify investments by distributors appears to be a form of distrust of suppliers and is also unjustified. The manufacturer is within his rights as the network head, brand owner and guardian of the brand reputation to decide what measures are needed to defend its identity for the greater benefit of dealers who are thereby protected from competition from unauthorized resellers.

The distributors are in effect demanding a comprehensive legal framework to govern the termination of dealer agreements: minimum notice periods, an obligation to provide reasons for termination, termination indemnities. However, they already benefit from protection if their contracts are terminated. Article L. 442-1, II of the Commercial Code in effect imposes a reasonable notice period for the termination of distribution agreement, which can only be deviated from if the terminating party can prove that his co-contractor has committed a “fault”. Furthermore, the ACEA and JAMA's codes of good conduct provide for an undertaking by manufacturers and importers to grant their dealers a minimum notice period of two years. If the distributors demands were accepted,this would amount to renouncing the more flexible solutions available under positive law, which purports to maintain the right balance between protecting the parties and the prohibition of perpetual contracts. Where termination indemnities are provided for, as is the case in agency agreements,the notice period is of a short duration; a long notice period is only justified where there is no provision for a termination indemnity. Reasons never have to be provided when terminating a distribution agreement. If new protections were to be put in place, it would become excessively difficult, if not impossible, to terminate a distribution agreement. This would be contrary to the principle enshrined by the “Conseil constitutionnel” according to which “if the agreement represents the law by which the parties are bound, the freedom arising from Article 4 of the Declaration of 1789 justifies that an open-ended private law contract can be terminated unilaterally” .

From an economic point of view, such a framework would generate a number of perverse effects. Minimum notice periods are contrary to market fluidity and create barriers to entry. If suppliers were forced to give reasons for terminating agreements where there are already minimum notice requirements in place, this could make trade relations far more rigid, whereas in practice dealers tend to make fewer sales during the notice period leading to significant costs for suppliers. In addition, it is in fact often very difficult to bring evidence of the reasons of a termination and such an obligation would automatically generate a rise in prices for purchasers of dealerships by discouraging terminations thus maintaining the status quo to the detriment of new market entrants and consumers. 

Dealers also rely on the argument that they must make investments and that carmakers can take advantage of access to information on their customers. However, all undertakings have to make investments to run their businesses without having an acquired right of a continuous relationship with their trading partners, customers and suppliers. A disproportionate legal advantage is not justifiable in the case of motor vehicle distributors. Dealers make investments in exchange for the distribution rights and protection against non-network competitors that they enjoy. Those investments can generally be of benefit to them on switching brands whereas customer data is usually provided by the manufacturers who buy it from the French vehicle registration management agency, 3A.

Distributors, who can choose to sell their businesses if they wish, are now claiming the right to also transfer their dealership agreements. This right does not exist in France for obvious reasons. All companies have the right to freely choose with whom they do business in accordance with their interests. Conversely, they cannot be forced into a commercial relationship with a particular party. It has always been accepted that the supplier could authorize a distributor within a commercial relationship based on the personal trust of the supplier in the distributor. To allow the distributor to sell on his business by imposing an unauthorized buyer on the supplier would be contrary both to the applicable legal rules and the proper functioning of the network which requires complete faith in the distributor by the supplier.

In its evaluation report, the Commission itself observed the pernicious effects that had resulted from the transfer of dealerships under Regulation No 1400/2002, strengthening dealer concentration and reducing intra-brand competition. Merger control also had no effect since it does not apply to takeovers of dealerships of below EUR 15 million in turnover. In any case, even if the transaction were subject to merger control, the weakening of intra-brand competition due to the acquisition of small dealerships would not be enough to prevent the merger from being cleared. 

In terms of the public interest and the efficiency of networks, the establishment of a special status for automobile dealers therefore appears in our view neither necessary nor desirable. 

This is the case for approximately 6 Member States.

ACEA: European Automobile Manufacturers Association.

JAMA: Japan Automobile Manufacturers Association.

Cons. constit. Decision No 99-419 of 9 November 1999, Recueil, 116.

French Distribution Law

13. Critique of the "contractual solidarity" theory.

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13. Critique of the "contractual solidarity" theory.

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