Newsletter 1st Quarter 2018 – Business Law – April 2018
Summary
Case Law
Contracts – Commercial Law
- Survival of limitation of liability clauses in the event of contract termination
- Compliance of the franchise agreement clauses with competition law
- Consequences of inaccurate turnover figures in the deed of sale of a business
Commercial leases
- What is included in the eviction compensation?
- Exceptions to rent caps in the event of renewal
- The invalidity of the lease-management agreement results in the forfeiture of the right to renew the commercial lease agreement
Corporate Law
- A shareholders' agreement can be terminated at any time if no term is specified
- A contract can be terminated by the salaried director on behalf of the company, even in the absence of a delegation of authority, if the company tacitly ratifies the termination decision
- EIRL and the rules for allocating assets: Caution
- Intra-Community transfer of a company's registered office and freedom of establishment
- The failure to ratify actions taken on behalf of a company in formation cannot be raised by the trial judges on their own initiative
- The principle of the immutability of the agenda
- Survival of the delegation of powers after the cessation of the functions of the manager who granted it
- No appeal is possible against the application of Article 1843-4 of the Civil Code regarding the transfer of shares
- Failure to effectively replenish equity capital and mismanagement
- The consequences of an act carried out contrary to the social interest
- Enforceability of the limitation of the leader's power
Contracts – Commercial Law
Survival of limitation of liability clauses in the event of contract termination
Com. February 7, 2018 (No. 16-20.352) FS-P+B+I:
The termination of a contract results in its retroactive annulment.
It was on this basis that the lower court judges held that the party responsible for the damage could no longer rely on the clause limiting its contractual liability. This decision was upheld by the Court of Appeal.
The Court of Cassation, however, considers that clauses limiting contractual liability remain applicable even in the event of contract termination.
Compliance of the franchise agreement clauses with competition law
Cass. Com 20 December 2017 (No. 16-20.500):
Are exclusive supply clauses in a franchise agreement contrary to competition law?
The French Court of Cassation has ruled that clauses that establish the control essential to preserving the identity and reputation of the network do not constitute restrictions on competition.
More specifically, if an exclusive supply clause is necessary to ensure that each franchisee has access to consistent quality and taste of products manufactured by a particular supplier using their proprietary process, then it is essential to the image and identity of the network.
Cass. com 8 June 2017, no. 15-27.146, no. 843 FD
It should also be noted that for a non-re-affiliation clause for a franchisee after the termination of the contract to be valid, it must be limited in scope and geographically.
In this case, since the non-re-affiliation clause was not geographically limited, the Court of Cassation upheld the Court of Appeal's decision that it was invalid.
Consequences of inaccurate turnover figures in the deed of sale of a business
Cass. com., March 21, 2018, n° 16-24.245, n° 240 FD
In the event of inaccuracies in the information contained in the deed of sale of the business, the purchaser has one year to bring an action for warranty, from the date of possession of the business.
Commercial leases
What is included in the eviction compensation?
Cass. 3rd civ. December 7, 2017 (nos. 15-12.452, 15-12.578 and 15-12.912) FD:
The landlord served the tenant with a notice of termination, refusing renewal and offering compensation for eviction, effective nine months after the notice.
During this period, the tenant sold their business and informed the buyer that the lease was expiring.
The question then arose as to whether, in determining the amount of compensation for eviction, it was necessary to take into account, in addition to the market value of the business plus incidental expenses (such as moving costs, relocation expenses, and transfer taxes for acquiring a new business), compensation for the disruption to business operations.
It is generally accepted that compensation for disruption to business operations, intended to redress the loss suffered by the business owner during the repurchase of the business, is included in the compensation for eviction.
The Court of Appeal held that, since the buyer of the business was aware of the notice of termination given by the landlord, they could not claim compensation for disruption to business operations.
The Court of Cassation overturned this decision, considering that eviction compensation must necessarily include compensation for commercial disruption.
Exceptions to rent caps in the event of renewal
Cass. 3rd Civil, Feb. 15 2018, n° 17-11866, n° 17-11.867, n° 170 FS-P + B + I
The principle: rent caps in the event of renewal of the commercial lease.
However, there are certain exceptions provided for in the Commercial Code, particularly in the event of modification:
- characteristics of the premises in question;
- the destination of the premises;
- local factors of commerciality;
- but also the respective obligations of the parties.
The contractual modification of the rent constitutes a significant modification of the obligations of the parties, justifying in itself the removal of the rent cap.
In this case, the parties agreed, by addendum, to modify the rent of the current lease and to waive a procedure for revising the rent to the rental value during the lease in the context of an action for revision based on Article L. 145-39, which had been initiated.
The amendment, constituting a conventional modification of the lease, characterizes the tenant's implicit waiver of the capping rule.
The invalidity of the lease-management contract results in the forfeiture of the right to renew the commercial lease contract.
Cass. 3rd civ., March 22, 2018, n° 17-15.830, n° 284 F- P + B
The lessee of a commercial lease leased their business under a management agreement without having operated it for two years prior to the signing of the agreement, even though this is a requirement stipulated in Article L.144-3 of the French Commercial Code.
The lessor terminated the lease, refusing renewal and without compensation for eviction, on the grounds that the management agreement was null and void.
The Court of Cassation ruled that the sanction for a management agreement concluded in violation of the conditions of Article L. 144-3 is absolute nullity, which results in the forfeiture of the right to renew the commercial lease as provided for in Article L. 144-10 of the French Commercial Code.
Corporate Law
A shareholders' agreement can be terminated at any time if no term is specified
Cass. Com., December 20, 2017, No. 16-22.099
The solution adopted by the Paris Court of Appeal, and subsequently taken up by the Commercial, Financial and Economic Chamber of the Court of Cassation on December 20, serves as a very instructive reminder that, when a shareholders' agreement does not mention any time limit and does not include any fixed or determinable term, the said agreement can be unilaterally terminated at any time.
A contract can be terminated by the salaried director on behalf of the company, even in the absence of a delegation of authority, if the company tacitly ratifies the termination decision
Cass. com. 17-1-2018 n 16-22.285
In a ruling issued on January 17, 2018, the Commercial, Financial and Economic Chamber of the Court of Cassation rejected the argument put forward by the company's business partner. The partner, having been faced with the termination of a brokerage agreement, had sued the company to have the termination annulled on the grounds that the salaried director lacked the necessary authority.
The Court held that since the company had tacitly ratified the termination decision made on its behalf by the salaried director, there was no need to determine whether the director had been authorized to terminate the contract.
EIRL and the rules for allocating assets: Caution
Cass. Com., February 7, 2018, No. 16-24.481
The significance of this ruling issued by the Commercial, Financial and Economic Chamber of the Court of Cassation on February 7, 2018, lies particularly in its reminder that, in accordance with the provisions of Article L.526-6 of the French Commercial Code, a sole proprietor with limited liability may allocate assets to their professional activity that are separate from their personal assets. The establishment of these assets results, in particular, from filing with a legally required register and submitting a declaration that must include a descriptive statement of the assets, rights, obligations, or securities related to the professional activity, specifying their nature, quality, quantity, and value (Articles L.526-7 and L.526-8 of the French Commercial Code).
In the absence of such a declaration, or in the event of an incomplete declaration, and especially if the sole proprietor with limited liability is subsequently placed in judicial liquidation, the commingling of assets could occur, making the sole proprietor liable for debts incurred during the course of their business activities using their personal assets.
Therefore, extreme caution is advised.
Intra-Community transfer of a company's registered office
CJEU, October 25, 2017, case C-106/16 Polbud – Wykonawstwo sp. z oo
The Court of Justice of the European Union considers that Member State regulations cannot impose any obligation to liquidate companies wishing to transfer their registered office to another Member State.
Furthermore, the transfer of a company's registered office without relocating its actual place of business falls within the freedom of establishment.
The failure to ratify actions taken on behalf of a company in formation cannot be raised by the trial judges on their own initiative
Cass. 3rd civ., Jan. 25, 2018, n° 17-10.885, n° 44 FD
Reminder: Actions taken on behalf of a company in formation may be required by attaching a statement of commitments to the articles of association, either by authorizing one of the partners to make commitments on behalf of the company, or by a decision taken, unless otherwise stipulated, by a majority of the partners.
In this case, an architect's contract was concluded between an individual client and an architect. This individual formed a real estate company (SCI). Due to certain contractual breaches, the SCI sued the architect and his insurer for compensation.
The Court of Appeal ruled the SCI's action inadmissible not because of the lack of a contractual relationship invoked by the insurer, but because of the court's own failure to recognize the failure to assume the disputed contract according to one of the methods of assuming commitments provided for by the applicable regulations.
The Court of Cassation overturned the lower court judges' decision, considering that they could not raise the issue of the SCI's failure to take over the acts on their own initiative without first inviting the parties to submit their observations.
The principle of the immutability of the agenda
Cass. com., 14 Feb. 2018, No. 15-16.525, No. 131 F-P+B
The general meeting of a limited liability company (SARL) is convened to appoint auditors.
The corresponding resolution is rejected by the majority shareholder, who proposes the appointment of different auditors, which is then put to a vote. The manager refuses to acknowledge the vote on the amended resolution.
The Court of Cassation reiterates that, under the principle of the immutability of the agenda, the general meeting cannot deliberate on a draft resolution not included on the agenda. Any decision taken in violation of this rule is null and void except in the following cases:
- The assembly may modify, by way of amendments proposed during the session, the draft resolutions submitted to it, if it does not remove them from the agenda.
- the dismissal of company directors may occur on the basis of a simple incident during the meeting or on the basis of an agenda mentioning only the examination of the company's situation or the approval of the accounts and the discharge of the management;
- minor issues related to miscellaneous matters and issues that are a necessary consequence of the deliberations included in the agenda.
Survival of the delegation of powers after the cessation of the functions of the manager who granted it
Paris Court of Appeal, Chambers 5-9, January 25, 2018, No. 17/01883
The Court of Appeal recalls that in the event of a change of management, the delegations of powers granted by the former manager remain in force until they are revoked by his successor.
No appeal is possible against the application of Article 1843-4 of the Civil Code regarding the transfer of shares
Cass. Com., February 14, 2018, No. 16-24790
In this ruling, the Court of Cassation notably recalls that when the parties have agreed to use the provisions of Article 1843-4 of the Civil Code to have the sale price of the shares determined by an expert, no appeal is possible, either against the order taken on the basis of this text, or against the decision interpreting it.
Failure to effectively replenish equity capital and mismanagement
Cass. com., 24 Jan. 2018, No. 16-23.649, No. 43 FD
The manager of a limited liability company (SARL) can be held liable for part of the company's asset shortfall, which has been placed in judicial liquidation, due to several management errors that contributed to this shortfall.
The question here was whether the failure to effectively replenish equity capital constituted mismanagement.
The Court of Cassation held that "the failure to effectively rectify, within the legal timeframe, the equity situation of an SARL can only be attributed to the shareholders and not to the managers, who can only be faulted for failing to convene the shareholders to decide on the consequences of this situation."
The consequences of an act carried out contrary to the social interest
Cass. com. 14 Feb. 2018, No. 15-24.146, No. 132 FD
An act performed in the name of a limited liability company (SARL) is contrary to its corporate interest if it jeopardizes the very existence of the company.
This conflict with the corporate interest is not grounds for annulment if the act in question falls within the company's corporate purpose.
In that case, the act will be valid.
Enforceability of the limitation of the leader's power
Cass. com., 14 Feb. 2018, No. 16-21.077, No. 143 FD
In this case, the shareholders of a company had limited the manager's powers during an extraordinary general meeting, particularly regarding the conditions under which she could initiate legal proceedings on behalf of the company. To do so, she was required to obtain prior authorization from the shareholders.
The opposing party, seeking to have the summons served upon them declared null and void, cited the limitation of the manager's powers, arguing that she had not obtained the shareholders' prior authorization.
The Court of Cassation reiterated that a third party may rely on the articles of association of a legal entity to demonstrate that a person lacked the authority to appear in litigation as its representative.
