France: Annual commercial negociations – Contributions and specificities of the EGalim 2 law for food products

The French Commercial Code strictly regulated the annual commercial negotiations between manufacturers and distributors in order to avoid imbalances between the rights and obligations of the parties. This framework implies the conclusion of agree­ments of a minimum duration of a year, without being able to exceed three years, before March 1st of each year for the current year.

This agreement must formalize the result of the negotiations between supplier and distributor or services provider and enable for a posterior control by the French administration (DGCCRF).

With the intention of working towards to rebalance the relationships between manufacturers, distributors and farmers, the legislator adopted the law of October 18, 2021, promulgated in the French Official Journal on October 19, aimed at protecting the remuneration of farmers, known as the EGalim 2 law.

  

The purpose of this law is to ensure “fair remuneration to farmers”.

The EGalim 2 law creates different mandatory contractual mechanisms both in the “upstream” relationship (between agricultural producer and first buyer) and in the “downstream” relationship (between supplier and distributor).

 

The primary purpose of these contractual mechanisms is to safeguard – throughout the food production, pro­ces­sing and distribution chain – the portion of the price corresponding to the price of agricultural materials. To this end, an obligation of transparency on the price of raw materials is provided for, portion of the price which then becomes non-negotiable, as well as several price adjustment mechanisms (automatic price revision clause, renegotiation clause, etc.) 

The EGalim 2 law impacts both the “upstream” relationship (producer – first buyer of “raw” agricultural pro­ducts) for sales of raw agricultural products that would be delivered in France and the “downstream” rela­tion­ship concerning the resale of these same products or the sale of processed agricultural products or non-agri­cul­tural food products (producers and industrial suppliers…).

 

One particularity: the EGalim 2 law is “overriding mandatory provision”, so that it is intended to be applied as soon as the supplier or the buyer is established in France and the agricultural and food products are sold on French territory. 

With some exceptions, the EGalim 2 law was applicable to the 2022 trade negotiations, which has not been without difficulties, and led in many situations to an approximate application of these provisions by suppliers and manufacturers belonging to SME’s (small and medium-sized enterprises).

 

It should be noted that the compliance of legal documents with EGalim 2 has been unanimously judged as com­plex, due to several circumstances: short delay between the entry into force of the law and the date annual agreements needed to be signed, clarification via a FAQ document from the Ministry of Agriculture published only in December 2021, publication of the implementation decrees still pending even though the signature was mandatory before March 1st, 2022!

 

In addition to these difficulties specific to the food sector, the unprecedent context resulting from the COVID has caused a shortage in certain markets and is responsible for a general increase in component prices.

 

A few days before the end of the timeframe for commercial negotiations, the war in Ukraine raised new difficulties, causing an unprecedent tension on the cost of agricultural raw materials.

 

In this context, as we know, in early March, the French government encouraged the actors of large-scale distribution to renegotiate their contracts, in particular by using the mechanisms introduced by the EGalim 2 law, which are notably:

 

In line with this government incentive, at the end of March 2022, the actors of large-scale distribution signed a (non-binding) Charter of Commitments, under the terms of which they undertook to carefully study rene­go­ti­a­tion requests made on the basis of the EGalim 2 mechanisms and, in the event these mechanisms were not applicable, to “reopen negotiations” in compliance with the rules governing both general contract law and restrictive competition practices. 

  

In the context of this “reopening” of negotiations, some brands have proposed – or even imposed – an auto­ma­tic renegotiation clause in the form of an amendment, with a triggering threshold being so difficult to reach that the clause is in fact deprived of its usefulness, or have limited the application of such a clause to the obser­va­tion of an increase in the price of plastic packaging over six consecutive months... 

 

Let us recall here the principle according to which agreements legally entered into operate as law for those who engaged in them. Consequently, and unless the parties agree otherwise, no price revision is possible in the absence of an indexation clause or a renegotiation clause. Only the mechanism of unforeseeability could be usefully invoked to request a renegotiation of prices, provided however that this mechanism has not been excluded contractually. It must be noted that the vast majority of agreements signed with large-scale distri­bu­tion – if not all – have obviously excluded such a mechanism.

For manufacturers and suppliers of food products, it now seems more than necessary, in view of the 2023 commercial negotiations, to start thinking now about bringing their general terms and conditions of sale into conformity with the provisions of the EGalim 2 law. 

 

This work may require the prior following research and analysis:  

 

Once these issues have been tackled, manufacturers and suppliers of food products will have to ensure that they include in their general terms and conditions of sale:

 

These different options can be summarized as follows: