Customer-Supplier Relationships: How to Secure Your Business Agreements

The structuring and management of relationships with suppliers is a cornerstone of the performance and sustainability of organized trade networks, especially franchising. For the network head, who orchestrates these relationships, mastery of the applicable legal frameworks is essential to secure his interests, optimize his business model and prevent litigation. Whether the network head acts as a purchasing center, buying to resell to the members of the network, or as a referencing center, negotiating conditions on behalf of the latter, the points of vigilance are numerous and strategic.

This article aims to analyze the mechanisms for securing commercial agreements in the context of a customer-supplier relationship, based on the fundamental distinctions between the different procurement models and detailing the legal obligations and the risks associated with them.

The choice of the procurement model: a structuring decision

The first step in securing relationships and contracts with its suppliers is to clearly define the role of the network head. Two main models stand out, with radically different legal consequences

The central purchasing model: control through interposition

In this configuration, the network head (or a dedicated subsidiary) buys the products in its own name from the suppliers and then resells them to the members of its network. Legally, this model is based on two successive and separate sales contracts.

The main advantage for the headend is the clarity and security of the relationship. As a buyer-reseller, it is the sole point of contact for its suppliers. The terms negotiated in advance, including discounts, rebates and other financial benefits, are acquired by it in its own right. Therefore, it has no obligation of transparency or accountability to franchisees on the margins it achieves.

This model allows the network manager to retain all the benefits negotiated with suppliers, which are a direct and confidential source of revenue. The relationship with franchisees is that of a seller to a buyer, governed by the general conditions of sale of the power plant.

The referral center model: a legal complexity to master

More flexible operationally, the referral center model is for the head-end to select suppliers and negotiate framework commercial terms, under which franchisees will place their orders directly. The head-end does not buy or resell the merchandise.

This structure, while reducing logistics and stock risks, generates increased legal complexity, particularly with regard to the status of the head of the network and the fate of financial benefits (rebates, commercial cooperation budgets) paid by suppliers

Managing financial benefits: qualifying the role of the head end

When the network head acts as a referral center, the question of ownership of the sums paid by the suppliers is a major source of litigation. The answer depends on the qualification of its intervention, which must be precisely defined in the franchise contract or a referencing framework agreement.

The mandate or commission hypothesis: transparency and restitution of principle

If the contract stipulates that the head of the network acts “in the name and on behalf” of the franchisees, it is qualified as an agent (Civil Code, Art. 1984). If it acts “on behalf” of the franchisees but in its own name, it is a commission agent (C. com., art. L. 132-1)

In both cases, the head of the network is subject to an obligation to report on its management, in accordance with Article 1993 of the Civil Code. Combined with the free nature of the mandate, this implies that it must, in principle, return to franchisees all sums received from suppliers in their name and on their behalf.

In order for the head of the network to retain part of these sums, the franchise agreement must explicitly provide for this, for example by stipulating that this retention constitutes the remuneration by the franchisee of the franchisor’s trading and referencing services.

The Brokerage Hypothesis: Increased Contractual Flexibility

The headend can also be referred to as a broker. In this role, she simply connects suppliers and franchisees to contract together. The broker is not a representative and has, by default, no accountability obligations.

This model offers greater flexibility. The head of the network may negotiate with the suppliers that a portion of the financial benefits be paid directly to it, not as an agent of the franchisees, but as remuneration by the supplier of its referral service with its network.

As for the negotiation of the conditions applicable by the supplier to the franchisees, this may be organized via a stipulation for others, where the supplier undertakes to the franchisor to apply certain contractual conditions to the franchisees.

However, this freedom is not without risk. Judges may reclassify a brokerage contract as a mandate if, in fact, the head of the network interferes too significantly in the conclusion or execution of contracts between suppliers and franchisees. In addition, transparency is required. The principle of remuneration paid to the broker must be brought to the attention of the franchisees in accordance with Article L.131-11 of the Commercial Code: a clear clause in the franchise agreement, informing the franchisees that the head of the network has an interest in the operation due to the receipt of remuneration from the referenced suppliers, is essential.

Attention, if the agreement provides, in addition to the remuneration of the franchisor for its connection, discounts or rebates for the franchisees according to their individual purchase volumes, these sums must in any case be paid to them, even if the payment is centralized by the supplier with the franchisee. It is essential in agreements with suppliers to properly categorize and qualify the various sums to be paid in order to properly identify their own legal regime.

The Negotiation and Execution of Trade Agreements: Controlling the Risks of “Trade Cooperation Services”

Referral centers frequently charge suppliers for “business cooperation services”. These services, intended to promote the marketing of their products (promotional promotion, transmission of information, etc.), must be formalized in the single annual (or multi-annual) agreement provided for in Article L. 441-3 of the Commercial Code

The case law is consistent and severe with regard to services deemed fictitious, not distinguished from the natural function of distributor, or disproportionately remunerated.

• The reality and specificity of the service: The invoiced service must be real, effective and precisely defined. It must be “detachable from buying and selling”, or from referencing alone, that is to say going beyond what a distributor or referrer would naturally do as part of their activity.
• Proportionality of remuneration: Even if a service is real, its remuneration must not be “manifestly disproportionate” to its value. The assessment is made on a case-by-case basis, but an exorbitant remuneration for a minor service will be sanctioned.

Other practices are also prohibited and require special attention:

• Retroactive advantages: Clauses or contracts providing for the retroactive benefit of commercial cooperation agreements are null and void (C. com., art. L. 442-3)
• The “entry fee”: Requiring payment as a prerequisite for listing, without a written commitment on a proportionate purchase volume, is an illicit practice

Practical recommendation: The head of the network must establish strict discipline in the contracting and monitoring of commercial cooperation services. Each service must be described precisely in the single agreement, its realization must be proven (photos, reports, etc.), and its valuation must be justifiable.

Securing the relationship over time: anticipating the risks of breakdown and unpredictability

Beyond the initial structuring, securing commercial agreements is long-term and involves anticipating the vagaries of business life.

The risk of sudden termination of established business relationships

When a network head decides to terminate its relationship with a referenced supplier (de-referencing), it exposes itself to the risk of an action based on the sudden termination of an established commercial relationship (Article L. 442-1, II of the Commercial Code). This risk is particularly high when the relationship is long-standing, stable and the supplier achieves a significant share of its turnover with the network.

To protect itself, the head of the network must notify its decision by respecting a written notice of sufficient duration, which takes into account, in particular, the duration of the commercial relationship but also other circumstances: the existence of economic dependence of the victim of the breach, the importance of the volume of business, the existence of specific investments not amortized or the existence of any exclusivity. The law provides for a maximum duration of 18 months. It is therefore crucial to document the de-referencing decision, to base it on objective reasons (performance, evolution of the network strategy, etc.) and to manage the transition in a professional manner to minimize the damage to the supplier.

Managing economic upheaval and unpredictability

Network contracts, concluded for a long period, are exposed to economic upheavals (crises, soaring raw material costs, etc.).

First of all, Article L.441-3 of the Commercial Code relating to the single agreement provides that in the event of a multiannual single agreement, it must set “the modalities according to which the agreed price is revised. These arrangements may provide for the taking into account of one or more available indicators reflecting the evolution of the price of factors of production “.

It is also required that contracts for “agricultural and food products whose production prices are significantly affected by fluctuations in the prices of agricultural and food raw materials and agricultural and food products, energy, transport and materials used in packaging include a clause relating to the terms of renegotiation of the price to take into account these upward and downward fluctuations” (art. L. 441-8 Ccom).

For all contracts, since the 2016 reform of contract law, Article 1195 of the Civil Code has introduced the theory of unpredictability into common law. This mechanism allows a party to request renegotiation of the contract when its performance has become excessively onerous due to an unforeseeable change in circumstances.

For a headend, this text represents a risk of contractual instability. It is therefore common and recommended to insert in franchise agreements and referencing agreements a clause that excludes the application of Article 1195, thus making each party bear the risk of unforeseeability. This obviously does not prevent the parties from renegotiating if they wish, but avoids, in the event of disagreement, submitting the contract to the sovereign discretion of the judge, who may decide to modify the conditions or even terminate it.

However, the validity of such an exclusion clause must be assessed in the light of the law of restrictive practices. If it has not been freely negotiated and if it creates a significant imbalance in the rights and obligations of the parties (Article L. 442-1, I, 2° of the Commercial Code), it could be called into question

In addition, it should be noted that Article L. 442-1, I, 1° of the Commercial Code, in its wording resulting from the 2019 ordinance, makes it possible to sanction the obtaining of a manifestly disproportionate advantage “within the framework of […] the execution of a contract”. This text could be interpreted as a gateway to a form of judicial review of the price during the contract, thus circumventing the exclusion clauses of unforeseeability

In conclusion, securing supplier relations for a network headend is not simply a matter of negotiating tariffs. It requires a rigorous and proactive legal architecture. Choosing between a central purchasing and central referencing model is the first strategic decision. In the second case, precise contractual drafting on the qualification of the role of the head of the network (mandate, brokerage) and on the fate of the financial benefits is imperative to prevent litigation. Finally, the dynamic management of the contract, including the anticipation of the risks of disruption and the contractual neutralisation of unforeseen events, is the key to protecting the interests of the head of the network and ensuring the stability of the entire distribution network. In this context, do not hesitate to seek legal advice adapted to the situation of your company.