NEWS JUNE 2024 - LOGISTICS PENALTIES: HOW TO QUESTION THEM?
UPDATE OF PREVIOUS ARTICLE FROM MARCH 2022
This article is an update of the previous article published on the same subject in March 2022 following Egalim 2 law of 18 October 2021.
In those times of shortages of goods and very strong logistic tensions, some suppliers can be held responsible in case of late deliveries of supplies, in particular if late delivery penalties are contractually provided for in the contracts entered into with their customers.
Since contractual provisions legally bind the parties, is it possible to question or renegotiate such penalties for « late deliveries » (ie. hereinafter « logistics penalties ») ?
Focus on an interesting contractual negotiation tip.
1- Reminder
Since 2021, and probably to avoid abuses, the French legislator has considered it useful to clarify the status of logistical penalties that can be charged to a supplier:
- firstly, by introducing a new penalty for restrictive practices in connection with those logistics penalties (article L.442-1-I paragraph 3 of the French Commercial Code);
- secondly, by listing a certain number of conditions for the validity of contractual clauses relating to logistics penalties, under the terms of article L.441-17 of the French Commercial Code, a text of “public order” (ie. which is therefore not possible to contractually derogate from).
2- What is worth noting?
- on the penalty pursuant to article L.442-1-I paragraph 3: any person (engaged in activities related to production, distribution or services) imposing "logistics penalties that do not comply with article L.441-17 of the French Commercial Code" (article L.442-1 of the French Commercial Code) may be liable and incur sanctions under restrictive practices rules.
⚠️ As a reminder: the person regarded as liable (in addition to the indemnification of the damage suffered by the victim and the risk of having the related or contract cancelled) may incur a civil fine of the following maximum amount (either €5 million, or three times the amount of the benefits unduly received or obtained, or 5% of the turnover ex-tax achieved in France by the infringer (article L.442-4 of the French Commercial Code)).
- On the conditions of validity of clauses relating to logistics penalties:
Contractual provisions relating to logistics penalties applied by a distributor/customer to its supplier must meet the following conditions, which were further tightened by law of 30 March 2023 (article L.441-17, as amended by law no. 2023-221 of 30 March 2023).
For greater clarity, the new conditions for the validity of clauses relating to logistics penalties added by the Act of 30 March 2023 are shown in red in the text below.
- the clauses must provide for a sufficient margin of error based on the volume of deliveries provided for in the contract and a reasonable period of time must be granted for informing in the event of a hazard;
Edouard Leclerc Group, which indirectly initiated a “question prioritaire de constitutionnalité” (QPC) submitted by the Conseil d'Etat to the Conseil Constitutionnel, recently tried to challenge the legality of the concept of "sufficient margin of error" as referred to in the aforementioned Article L. 441-17 paragraph 1 and its related penalties. Despite relevant arguments, the Conseil Constitutionnel in its decision of 30 April 2024, ruled against E. Leclerc group’s claim.
Under the terms of this decision, the Conseil Constitutionnel considers that the concept of a "sufficient margin of error" is neither imprecise nor ambiguous, nor does it infringe the principle of legality of offences and penalties or any other right or freedom guaranteed by the French Constitution (Cons. Const, 30 April 2024, QPC dec. no. 2024-1087) since "it derives from the very terms [of the provisions of Article L.441-17] that the sufficiency of the margin of error must be assessed on a case-by-case basis with regard to the volume of deliveries provided for in the contract".
- Whereas in the 2021 version of article L.441-17, it was only stated that the penalties provided for may not exceed an amount corresponding to a percentage of the purchase price of the products concerned, it is now expressly provided that the penalties must be "proportionate to the loss suffered in respect of the non-fulfilment of contractual commitments, up to a maximum amount of 2% of the value of the products ordered";
- penalties may not be imposed for failure to meet contractual commitments that occurred more than 1 year ago;
- they cannot ground the refusal or return of goods, except in the case of lacking conformity issue or failure to meet delivery date;
- when the distributor sends the supplier a notice for logistics penalty based on an alleged contractual breach, the distributor must also evidence, at the same time, by any means, the breach and the loss suffered;
- such provisions may only be applicable if they cause stock-outs when the distributor can demonstrate in writing the existence of a loss;
- they may not automatically set-off from the supplier's invoice;
- the application of logistics penalties must take into account "circumstances beyond the control of the parties". In the event of force majeure, no logistics penalty may be imposed.
⭕️ this condition is interesting since it implies that a supplier may avoid logistics penalties under circumstances beyond its control, without having to evidence that all the conditions required by article 1218 of the Civil Code (force majeure) are necessarily met.
- The deadline for payment of the penalties cannot be shorter than the deadline granted to the distributor to pay for the goods.
- In the event of an exceptional situation, external to distributors and suppliers and seriously affecting supply chains in one or more sectors, the application of logistics penalties between such concerned operators may be suspended for a maximum period of 6 months, renewable;
- Article L.441-17 and its conditions do not apply to commercial relations with wholesalers.
3- What can be done in practice?
Any supplier contractually subject to logistics penalties may therefore raise those reasons to challenge/renegotiate the application of logistics penalties:
- if the related contractual provision does not meet the conditions of Article L.441-17 of the French Commercial Code, which have become even stricter since 2021
- if the distributor/customer attempts to impose logistics penalties that do not meet the conditions of validity set forth in Article L.441-17; the sanctions attached to such a practice should, per se, be sufficient to dissuade partner's attempts.
Furthermore, two additional provisions introduced by law of 30 March 2023 strengthen:
- on the one hand, the supplier's position vis-à-vis the distributor. Probably with a view to reciprocity and parallelism of forms, the supplier also has the possibility, in the event of non-performance of a contractual commitment by the distributor, to impose penalties which must also be "proportionate to the prejudice suffered with regard to the non-performance of contractual commitments within the limit of a maximum amount equal to 2% of the value, within the order, of the products ordered concerned by the non-performance". The conditions for establishing proof are the same as those laid down for the distributor under the terms of article L.441-17 paragraph 1" (article L.441-18 of the French Commercial Code).
- secondly, supplier's and distributor's obligations related to the information due to French Administration, which increase the latter's power of control and interference into the parties’ contract (article L.441-19 of the French Commercial Code) which raises concerns.
In a nutshell :
- the distributor must inform the DGCCRF of the amounts of the logistics penalties imposed over the last 12 months;
- the supplier must communicate the amounts of the logistics penalties imposed;
- any failure to comply with these disclosure obligations is punishable by a fine of €75,000 for an individual and €500,000 for a corporate entity; the fine is doubled in the event of a repeated offence.
More than ever, it seems rather bold now to include clauses imposing logistics penalties in contracts…
Sarah Temple-Boyer Claire Bricout
Lawyer Legal Trainee