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Unilateral termination clauses without cause in collaborative R&D agreements governed by French law are lawful
Francine Le Péchon-Joubert
De Gaulle Fleurance & Associés, Paris
De Gaulle Fleurance & Associés, Paris
In a decision* dated 31 March 2021, the French Court of Cassation held that a unilateral termination clause in a fixed-term contract for the exclusive benefit of one party may be valid. A party may then terminate a contract unilaterally and for personal convenience if the contract provides for this option.
This decision primarily concerns a patent valorisation agreement, but the solution may interest all biotechnology practitioners in case of collaborative research and development, or product manufacturing and supply agreements.
In this case, a service provider that assists companies in the development of innovations by structuring their intellectual property rights had entered into a contract with a client, the purpose of which was to strengthen and develop the client’s patent portfolio and to develop a licensing programme.
The contract was concluded until the expiration of the protection of the last patent concerned, unless terminated early. The contract was eventually terminated early by the service provider. In response, the client sued for damages for wrongful termination of the contract and for failure to perform its contractual obligations.
The absence of a potestative condition
Under French Law, any obligation is void when it has been contracted under a potestative condition on the part of the party obligated. This is when the performance of the agreement is dependent on an event that it is within the power of either of the contracting parties to cause or prevent. In this case, the client company asked the judge to deem the termination clause implemented by the service provider company unwritten as potestative. This was a serious argument since the obligated party could stop the performance of the agreement at its convenience, simply by terminating the agreement.
In this case, the French High Court adopted a very favourable approach to the insertion of discretionary termination clauses by validating the reasoning of the Court of Appeal, which considered that:
‘[T]he disputed clause only opened to one of the parties the option to terminate the contract with any conditions and did not have the effect of making the performance of this contract dependent on an event that only one party had the power to cause to occur or to prevent, from which it follows that the clause did not affect the very existence of the obligation but only its duration.’
Such an approach may seem artificial, since the performance of the obligation that is the subject of the contract seems to depend solely on the will of the debtor, who was able to terminate the contract in a discretionary manner without being constrained by the obligations which they had nevertheless entered into.
This liberal approach contrasts with certain decisions that the French Court of Cassation has rendered in the past, under which it considered more classically that a termination clause of the contract that offers to the sole co-contractor the purely discretionary possibility to terminate the contract with a very short notice period, presented a purely potestative character and had to be set aside for this reason.
By this decision, the Court of Cassation sanctions the co-contractor wishing to set aside clauses that had been negotiated at length and accepted without reservation on the pretext that they would suddenly appear to be illegal. Thus, the principle of the prohibition of potestative clauses yields here to the will expressed by the parties, who must clearly measure the scope of their commitments before the conclusion of the contract.
Moreover, the client company also argued that the disputed termination clause created a significant imbalance to its detriment. Thus, it requested that its co-contractor be ordered to pay the costs incurred by the patents concerned and damages for wrongful termination. In this respect, the client company argued that its manager could not understand the English terms of a legally complicated contract.
After taking into consideration the general economy of the contract and the fact that negotiations had lasted several months, the French Court of Cassation also rejected this argument.
While it is normal to make concessions during negotiations, it is risky to accept clauses that may allow the other party to undermine all the efforts and investments made during the performance of the contract. This reminder seems particularly relevant in the area of co-development of new technologies, where the financial and intellectual investments of the parties are, by their very nature, particularly important and must therefore be secured at the negotiation stage.
* Commentary on the ruling: French Court of cassation, Commercial ch, 31 March 2021, no 19-16.214, www.legifrance.gouv.fr/juri/id/JURITEXT000043352325?init=true&page=1&query=19-16214&searchField=ALL&tab_selection=all.
 Since 2016, the notion of potestativity is no longer formally mentioned in the French Civil Code. However, its regime persists under the terms of Article 1304-2, which states that ‘an obligation contracted under a condition whose performance depends solely on the will of the debtor is null. This nullity cannot be invoked where the obligation was performed with full knowledge of the facts’. www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000032029496.
 Cass, Com Ch, 20 September 2011, no 10-30.567, www.legifrance.gouv.fr/juri/id/JURITEXT000024592355.