Business partners might currently be tempted to try to obtain increased payment terms from their suppliers, while reducing the payment terms that benefit their own clients. The exercise is possibly illegal: payment terms are public policy and their breach is a punishable restrictive practice.

After COVID-19, investigations on large corporations and mid-cap companies may flourish. According to François Villeroy de Galhau, Governor of the Banque de France: “we will monitor all practices from very closely, value good behaviors and we will penalize the bad ones. What is a good behavior? It is to meet its payment terms applicable before the crisis, if they were correct, or to reduce them if possible: a bad behavior is to increase them. (Wansquare, interview given on 23 March 2020). On 25 March 2020, Bruno Le Maire called for respecting payment terms, or risk a penalty of being excluded from being able to benefit from the state guarantee for bank loans.

What are the sanctions if the DGCCRF finds infringements during an investigation?

Since the end of 2016, the administrative fine applicable to legal entities has gone from €750,000 to a maximum of €2 million, or €4 million euros in case of repeated infringement (Art. L. 441-16 of the French Commercial Code), and the publication of the sanction (“name and shame”). In 2019, fines quite often ranged from €300,000 to €500,000. Retained cash flow, i.e. the advantage obtained, is one of the main evaluation elements. Companies whose accounts are audited include in their management report information on payment delays (Article L. 441-14 and D. 441-4 French Commercial Code). If they are serious, the statutory auditor will report them in its certificate (Article 823-7-1 of the French Commercial Code).

What are the public order rules applicable to payment terms?

Payment terms are short, but let us also recall the short period of 45 days that a manager usually has to declare a suspension of payments (Art. L. 631-4 of the French Commercial Code). There are four mandatory rules to respect (Art. L. 441-10 of the French Commercial Code):

• The principle, in the absence of contractual provisions, is that invoices are paid within 30 days of the receipt of the goods or services.
• The invoice must be issued as soon as the delivery takes place or the service is performed.
• Any exception to this 30-day period must be provided for in a written document between the business partners.
• The exceptional payment period must itself comply with certain mandatory terms (see below).

Apart from those negotiated in inter-professional agreements, the derogations are limited to those provided by law:

• Other terms agreed in writing: (i) 60 days maximum after the date of invoicing, (ii) 45 days after the end of the month of invoicing without abuse.
• Certain goods specifically listed in Art. L. 441-11 of the French Commercial Code.
• A postponed issuance of the invoice in case of periodic invoicing (Art. 289 & I. – 3. of the French Tax Code);
• In case of contractual procedure for the verification of the conformity of the goods and services (Art. L441-10, III of the French Commercial Code).

What flexibility is there to renegotiate payment terms for ongoing contracts?

It is small. It is impossible to agree contractually to exceed 60 days from the date of invoicing. In case of renegotiation to reach this limit, be careful not to compel a weaker partner.

What about international agreements?

To state it simply:

1. For deliveries as is and free of VAT outside the European Union, the maximum limit is 90 days from the date of invoicing (Art. 441-12 of the French Commercial Code and Art. 275 of the French Tax Code);
2. For deliveries in the European Union, the limit is 60 days (Art. 3 & 5 of Directive No. 2011/7/EU; see also Art. 7, Art. 58 of the Vienna Convention of 11 April 1980 and the decisions No. 16-01 and 16-21 of the CEPC).

Why can’t COVID-19 justify late payments?

Force majeure does not exempt parties from obligations to pay. Please click here to access to our article published on 20 March 2020 and available on the France COVID-19 Hub page.

What do the orders of March 2020 say?

No provision was adopted to increase expressly payment terms. The report on the order No. 2020-306 of 25 March 2020 recalls that “the payment of contractual obligations must always take place on the date agreed in the agreement”. However, the following orders provide for arrangements:

• Order No. 2020- 306 provides that the application of penalty clauses, automatic cancellation clauses or forfeiture clauses is suspended (but not indemnity of Art. D. 441-5 C. com.) until the end of the national health emergency (Art. 4.). Accordingly, no termination is possible for payment default during the national health emergency and one month thereafter.
• Order No. 2020-341 provides that, until three months after the end of the national health emergency, the suspension of payments reflects the debtor’s status as of 12 March 2020. Therefore, financial difficulties of companies leading to a state of suspension of payments during the national health emergency period will not be taken into account. But the company will then have to get back on its feet. (See the article written by Audrey Molina and Gwenaëlle de Girval, Dentons: « COVID-19: The adaptation of French bankruptcy law to the crisis » published on the France COVID-19 Hub page.
• For companies eligible for the solidarity fund (Order No. 2020-317 of 25 March 2020) and legal entities under a judicial safeguard, recovery or liquidation procedure, the order No. 2020-316 prohibits:

1. The suspension, interruption and reduction of the supply of electricity, gas and water, and gives debtors the possibility request payment of the related invoices in instalments, without penalties;
2. The application of financial penalties, damages, automatic cancellation clauses or penalty clauses or the activation of guarantees or securities, due to a payment default of rents or rent charges related to the professional and commercial premises of these companies.

How to use the grace periods of Article 1343-5 of the French Civil Code?

The judge may postpone an outstanding debt or order payment by instalments for up to two years, under certain procedural and substantive conditions (Article 510 of the French Civil Procedure Code, Article R. 121-1 of the French CPCE).

Is there another way?

Business partners may negotiate a settlement if the debt remains unpaid. There is no derogation from public policy payment terms. The dispute is settled by the signing of a settlement with the defaulting business partner as an alternative to litigation, which implies concessions by both parties. Asking for assistance from a lawyer is preferable. Court approval of the settlement is conceivable after the end of the lock down (Art. 1567 of the French Civil Procedure Code, see also Art. 631-1 C and L. 650-1 C of the French Commercial Code).

What if the business partner cannot perform its obligation in consideration for the payment?

It is possible to invoke the principle of the defence of non-performance (Art. 1220 C of the French Civil Code). See the aforementioned article “COVID-19: Force majeure, fait du prince » (mandatory act of government), hardship and non-performance defence”.

What about hardship?

If the business partner does not agree to renegotiate the agreement, it is not easy to invoke hardship to force it to do so (Article 1195 of the French Civil Code). The agreement (if it does not exclude the Article) must still be performed (paragraph 1 in fine) and the circumstances must have the effect of “rendering the enforcement of the agreement excessively expensive”. Cash flow difficulty does not, in itself, make the performance of an agreement excessively expensive: the balance of the agreement is not upset by it. However, it could be considered excessively expensive, for example, if materials become rare or too expensive. This must be examined on a case-by-case basis. In case of hardship, the judge may revise the agreement in the absence of agreement between the parties.

At a time when many companies will be running out of cash, it is recommended to keep these strict rules in mind before making any decision.