French law reform may give new impetus to automobile equipment suppliers in OEM contracts

The reform introduced two notable provisions in Article L.442-1 of the French commercial code which prohibit a co-contracting party from:

• Imposing disproportionate financial penalties (or liquidated damages) in case of breach or non-performance of contractual obligations; or
  
  
• Refusing or returning goods or deducting automatically sums against invoices submitted by supplier, where penalties or discounts corresponding to non-compliance with delivery dates or conformity obligations, where the debt is not certain, liquid or due, without even the supplier being in position to verify the reality of the claim.

Automotive part suppliers and equipment makers often have relatively little choice in their contractual terms, which are frequently imposed by the buyer, usually an OEM, or car manufacturer.

Liquidated damage clauses are often inserted by buyers to sanction suppliers for late delivery. They sometimes are designed as a substitute for consequential damages where the supply chain is interrupted. The contractual amounts claimed by car makers against suppliers can be considerable for even a very brief interruption (24h or 48h) where hundreds or thousands of vehicles are immobilized.

Although excessive liquidated damages could be challenged in theory under separate statutory provisions, it generally never occurs because the likely commercial cost for the victim typically outweighs any possible gain. The cost for the buyer in most cases would be merely a reduced or slightly reduced liquidated damage claim, which is of little benefit for the supplier who is likely to lose business as a result of resisting the claim.

Now, however, the stakes have been raised substantially because under this reform a party who is victim to such clause may nullify the liquidated damages entirely and recover damages, and the French authorities may prosecute the buyer in view to inflicting a fine up to 5 million Euros or 5% of the latest annual sales in France. The sanction also includes the possible publication of the fine.

In addition to heavily liquidated damages, certain buyer procurement departments seek to set off the buyer’s claim against supplier invoices without obtaining supplier’s consent and without proving the contractual validity of the buyer’s claim. The buyer may attempt to rely on broad contractual terms permitting claim set-offs. The reform expressly bars this kind of practice and triggers sanctions.

Ultimately this reform may spur certain suppliers to challenge these conditions and practices and it may give buyers reason to pause in light of the administrative sanctions.