News March 2022: Logistics penalties : how to question them (under French law)?

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 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”)?

Interesting tip on contractual negotiation.

1- Reminder

Taking the opportunity of the (Egalim2) law of October 18, 2021 (which only concerns the food-distribution industry), the French legislator clarified the regime of logistics penalties by introducing:

• on the one hand, in article L.442-1-I paragraph 3 of the French Commercial code (“FCC”) a new sanction for restrictive practices in connection with those logistics penalties

• on the other hand, by listing a certain number of validity criteria to be met for contractual provisions dealing with logistics penalties

2- What to remember

• Article L.442-1-I of the FCC paragraph 3 provides that any person (engaged in production, distribution or services) imposing logistics penalties that do not comply with Article L.441-17 of the French Commercial Code" may be liableand incur sanctions under restrictive practices rules.

⚠️ As a reminder : the person who is liable incurs (in addition to the indemnification of the damage suffered by the victim and the risk of having the related or contract cancelled) 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 Commercial Code)

• 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 (Article L.441-17)

• they 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;

• they may not exceed an amount corresponding to a percentage of the purchase price of the products concerned. They must be proportionate to the damage suffered;

• they cannot ground the refusal or return of goods, except in case of lacking conformity issue or failure to meet delivery date;

• they may only be applicable if they cause stock-outs or when the distributor can demonstrate in writing the existence of a loss ;

• they may not be automatically set-off from the supplier's invoice;

• it is up to the distributor/customer to prove, by any means, the breach justifying the logistics penalties and the supplier must be granted a reasonable time period to check and be able to question, if necessary, the grievanc ;

• 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 that he is subject to, without having to evidence that all the conditions required by Article 1218 of the French 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.

3- What could be done in practice?

These new provisions are applicable since October 20, 2021.

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 Commercial Code;

• 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, in and of themselves, be sufficient to dissuade the partner's attempts.

 

By Sarah Temple-Boyer, Attorney