A Q&A guide to outsourcing in France.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcingmjg.
French law does not specifically regulate outsourcing transactions. However, certain regulations may have an impact on these transactions (see Questions 2, 9 and 18).
Regulations governing outsourcing in the financial services sector include:
Regulation No. 97-02 relating to the internal control of credit institutions and investments firms, issued by the Banking and Finance Regulation Committee (Comité de la Réglementation Bancaire et Financière).
This regulation provides specific rules for the outsourcing of services that are considered to be essential or important within the meaning of Article 4r of the regulation. These include the fact that the:
outsourcing must be covered by a written contract with the supplier and must be part of the customer's internal control procedures;
customer must also be entitled to terminate without any impact on business continuity or the quality of services supplied to the customer's clients.
In addition, the customer must ensure that the supplier:
commits to a level of quality corresponding to the normal operation of the service outsourced;
ensures the protection of confidential information in relation to the customer and its clients;
implements contingency measures in the event of a critical issue affecting the continuity of the service. Alternatively, the customer must ensure that its own contingency plan is in place to minimise disruption of its operations if the supplier fails or is unable to perform the services;
does not impose a material change in the service without the customer's prior consent;
complies with procedures (as defined by the customer) concerning the organisation and implementation of the control of the services provided;
allows the customer access, including onsite, to any information on services;
informs the customer of any event that may have a significant impact on the supplier's capacity to perform the outsourced services efficiently and in compliance with applicable laws and regulations;
allows the French financial regulator and any other equivalent foreign regulator to access information, including onsite.
Article L522-16 of the Monetary and Financial Code (Code monétaire et financier). This provides that:
any outsourcing payment services company that wants to outsource operational functions in relation to payment services must inform the Prudential Control Authority (Autorité de Contôle Prudentiel) prior to any outsourcing;
the outsourcing of important operational functions must not seriously alter the quality of the regulated entity's internal controls and must allow the Prudential Control Authority to verify that the regulated entity continues to comply with its obligations.
The General Regulations of the Financial Markets Authority (Autorité des Marchés Financiers) (AMF). These provide that when a portfolio management company outsources operational tasks or functions that are critical to or important for its services or activities, it must take reasonable measures to avoid undue additional operational risk (Article 313-72).
An operational task or function is considered critical or important when a defect or a default in its performance is likely to seriously harm the (Article 313-74):
company's capacity to comply, at any time, with its professional obligations or with the conditions required by its regulatory licence and its professional obligations;
company's financial performance;
business continuity of the company's activities.
The portfolio management company remains fully responsible for the performance of its professional obligations and must ensure that the outsourcing does not (Article 313-75):
result in a delegation of the managers' liability;
modify the relationship with (or its obligations to) its clients;
undermine the conditions or commitments that govern its regulatory licence.
In addition, the AMF Regulation provides some obligations for the portfolio management company and the supplier, especially in terms of monitoring, control and audit of the supplier by the customer and the AMF (Article 131-75).
Finally, the Regulation provides specific rules as to when outsourcing activities are granted to a supplier which is not located in the European Economic Area (EEA) or the EU. In particular, the supplier must be a portfolio management company in its country and an agreement must be in place between the AMF and the local authority (Article 313-76). If conditions are not met (outsourcing to a non EEA/EU supplier) the outsourcing agreement must be notified to the AMF (the outsourcing can be implemented if the AMF does not make any comment within three months from the notification date).
There are no specific regulations for business process outsourcings.
There are no specific regulations for IT outsourcings.
There are no specific regulations for telecommunications outsourcings.
Outsourcing in the public sector must comply with public procurement rules and public/private partnerships regulations.
These rules provide and regulations apply in particular to:
Tender procedures.
Applicable criteria and conditions for the selection of bidders.
Performance of contracts. In particular, there are specific rules concerning termination, penalties, warranties, and transfer of employees to private operators. Generally the scope for negotiation with public entities is quite narrow.
All parties to an outsourcing transaction must always ensure that a proposed outsourcing is not subject to specific regulatory requirements in any relevant sector.
Some financial activities (such as banking activities, or services payment activities) must be outsourced to a regulated or specially licensed supplier (see Question 2, Financial services).
Specific regulations apply for matters such as tender procedures, and so on (see Question 2, Public sector).
Any outsourcing payment services company that wants to outsource operational functions in relation to payment services must inform the Prudential Control Authority prior to any outsourcing (see Question 2, Financial services).
There can be circumstances (for example, if the outsourcing is deemed to constitute a merger) in which notification of an outsourcing transaction to anti-trust authorities is required.
Description of structure. The most common structure is direct outsourcing, where a customer enters into an outsourcing contract directly with a supplier. There are two possible models within this structure, simple and complex.
The simplest model is the centralised model, where the customer is entering into the contract for the provision of services to itself. Where the supplier is not the main entity within its group, the customer should require a parent company guarantee.
In a more complex structure such as the complex model, the customer can outsource services for itself or on behalf of its affiliates. In the latter case, either of the following can be used:
Centralised structure: the customer is the only party to the agreement and pays for all of its affiliates, who are beneficiaries (and not parties) under the agreement.
Decentralised structure: the customer acts as agent on behalf of its affiliates, or as is more common, the contract includes a third-party rights clause which gives the customer's affiliates directly enforceable rights against the supplier or the right to enter into separate local agreements.
Advantages and disadvantages. The advantages of a simple model include that it is:
Easy to put in place.
Flexible.
The disadvantages of a simple model concern:
Loss of know-how. The supplier generally retains ownership of know-how (see Question 33).
Loss of control of the outsourced activities.
Tax liability (see Question 37). An outsourcing can include a transfer of assets to the supplier which could be characterised as a sale of business subject to registration duties and capital gains.
The advantages of a complex model are:
No internal re-invoicing.
Only the signing central entity has payment obligations.
Reduced tax issues.
The disadvantages of a complex model are:
Increased invoice processing and contract management internally for the customer.
A potential issue for the supplier regarding payment by affiliates. This can be avoided by including joint and several liability (responsabilité solidaire) in the contractual relationship (applies equally to customer procuring services from a supplier which is not the parent company).
Description of structure. The customer enters into contracts with different suppliers for separate elements of the services required. The suppliers are usually selected according to their geographical location and strengths in respect of the particular business activities or processes being outsourced.
Advantages and disadvantages. The advantage of this structure is the flexibility and freedom of choice for the customer. The disadvantage is the potential disruption to service procured from multiple suppliers. It is recommended that the customer place co-operation obligations on the various suppliers under an umbrella agreement signed by all parties to ensure a seamless supply of service.
Description of structure. The customer and the supplier set up a joint venture, through a joint venture company, partnership or contractual joint venture, which can operate onshore or offshore.
Advantages and disadvantages. The advantages of this model are that it allows the customer to:
Retain a greater degree of control than in other models, while benefiting from the supplier's know-how.
Share in profits generated by any third-party business conducted by the joint venture.
However, the joint venture structure is relatively complex and costly to implement.
Description of structure. The customer enters into a contract with a third-party supplier (often operating offshore) to build and operate a facility which then transfers to the customer. In some cases the customer will request that the supplier operates the facility in the long-term.
Advantages and disadvantages. The advantage of this structure is that it is low risk for the customer. It is, however, potentially expensive to set up.
Specific procurement rules apply to the public sector (see Question 2, Public sector). There is, however, no specific legal rule in the private sector. However, there are general rules relating to negotiation of contracts and best practices.
The request for proposal (RFP) and invitation to tender (ITT) phases are not mandatory. However, they are standard practice in France, to enable the customer to have a clear understanding of:
The activities, processes and data to be outsourced.
The employees that may be affected by the transfer (that is, the employees that will transfer to the supplier).
The scope of the services to be outsourced (that is, the geographical scope, and the entities impacted) and the economics of the operation.
Depending on the complexity of the outsourcing project, the customer may wish to organise a due diligence procedure. The scope and the method of that due diligence will depend on the scope and/or complexity of the project.
However, even if no formal due diligence is organised, each party (in particular the supplier which has the outsourcing expertise) must provide the other party with any information that could be considered material to the other party's decision to enter into the agreement. This includes drawing the party's attention to any particular risk in entering the agreement.
Under French law, parties must negotiate in good faith. Therefore, the parties must:
Exchange sufficient and appropriate information.
Try to reach an agreement in good faith.
In principle, either party is free to terminate negotiations at any time. However, termination must be made in good faith and without fault. If negotiations are terminated, the terminating party can be held liable in tort (responsabilité quasi-délictuelle) for damages if the court considers termination to be abusive. What constitutes abusive termination depends on the circumstances of the negotiations.
Where the outsourcing operation involves a change of supplier, the customer must verify that it gives reasonable termination notice before terminating the relevant ongoing contract to avoid being held liable for sudden termination of long-standing commercial relationships (Article L441-6-I 5° , French Commercial Code).
Title to real property must be transferred by entering into a deed before a French civil notary (notaire). The transaction must be published at the Mortgage Registry (Conservation des Hypothèques) after completion of the sale. In certain cities, the municipality has a pre-emption right over the transfer of real property. The transferee must therefore notify the municipality before the transfer is complete.
The transferor must provide the transferee with supporting reports and certificates if the property:
Is in an area that is considered to present natural or technological risks.
Was built before a certain date (depending on the required certificates).
Assignment of IP rights. The assignment of trade marks and patents must be in writing and registered with the French National Industrial Property Institute (Institut national de la propriété industrielle) (INPI) to ensure enforceability against third parties. The assignment of copyrights (droit d' auteur) must also be in writing.
Assignment of an IP licence. IP licences require the licensor's consent (provided for in a licensing agreement or separately) for assignment (or sub-licence).
In principle, the transfer of movable property has no specific requirements except in certain limited cases, such as sales of assets registered with an administrative authority (for example, a motor vehicle).
The assignment of a contract requires the other party's consent. The assignment can be provided for by written assignment in the contract or granted separately. The transferor must obtain express consent to assignment (the transferor cannot rely on implied consent). In the absence of consent, the transferor is still bound by the contract and liable for its performance.
No specific formalities are required to lease real property. However, a commercial lease agreement must be executed through a deed before a French civil notary (notaire) and published at the Mortgage Registry (Conservation des Hypothèques) if the initial term of the agreement exceeds 12 years.
The licensing party must ensure it is entitled to license (or sub-license if the licensor itself was granted a licence) IP rights and licences.
A patent or copyright (droit d' auteur) licence must be in writing. A trade mark licence does not need to be in writing to be valid. However, it is recommended to have a written agreement for evidential purposes.
Patent and trade mark licences must be registered with INPI to be enforceable against third parties. If a licence is exclusive, registration with INPI is required for the licensee to bring an infringement claim against third parties.
There are no specific requirements for the leasing of movable property.
Leasing a contract to a third party is not permitted. The customer can:
Assign a key contract.
Retain a key contract.
Sub-contract the contract to the supplier, provided this is not contractually forbidden.
If there is a change in the customer's legal situation (in particular due to succession, sale, merger, transformation of the business, or incorporation of the business), all employment contracts in force at the date of the change remain in force between the new employer and the customer's employees (Article L.224-1, French Labour Code).
This automatic transfer of employment contracts applies when three conditions are met:
Transfer of an autonomous economic entity.
The entity continues the same (or similar) business activity.
The entity retains the identity of the business after the transfer.
French case law has confirmed that Article L.1224-1 applies to all transactions that concern the transfer of an organised activity. An organised activity includes employees and tangible or intangible assets that allow for the conduct of a business.
Among the characteristics found in the case law supporting the existence of an "autonomous economic entity" which triggers the application of Article L.1224-1, the following points are important:
The existence of tangible and/or intangible assets necessary to carry out the activity of the economic entity.
The existence of personnel specifically dedicated to the activity to be transferred.
The existence of personnel with qualifications specific to the activity to be performed.
Assets dedicated to the activity.
An autonomous organisation, including the possibility that the management of that organisation can make decisions.
The financial autonomy of the economic entity to be transferred.
The existence of customers or clients of the economic entity.
The continuation of the activity means that the organisation of the activity must remain the same (for example, if the new employer uses new techniques, completely different from those of the previous employer, the identity is not retained).
Where Article L.224-1 of the French Labour Code does not apply, a conventional or voluntary transfer of the employment contracts may apply.
The change of supplier may involve a transfer of employment contracts if the three conditions are satisfied (see above, Initial outsourcing).
The transfer of all concerned employment contracts occurs automatically as a result of the transfer of the activity. The employees cannot refuse to be transferred to the new employer. If an employee does so, he may be terminated on the basis of "serious cause". In addition, the transferee employer cannot refuse to take over the employees assigned to the transferred business.
Any termination of employment prior to the transfer to avoid the application of the legal requirements would be considered unfair, and the employee may consequently either:
Bring the transferor employer and the transferee employer to court to claim for damages.
Claim to be reinstated within the transferee.
If the conditions of Article L.224-1 are met, all employment contracts in force are transferred to the new employer under the same terms and conditions. As a consequence, the new employer will be required to uphold the elements of the employment contract with the former employer, such as:
Duties.
Grades.
Level of salary.
Length of service.
The new employer is liable for all salaries, bonuses and benefits of the employees, including those accrued prior to the transfer of the activity. In this situation, the transferee employer can claim reimbursement from the transferor employer for the portion of the debts owed relating to the period preceding the transfer.
The employees cannot refuse to be transferred to the new employer and the new employer cannot refuse to take over the employees assigned to the transferred business.
If the pension scheme is provided for in the employee's contract it will be transferred to the new employer.
If the pension scheme is provided for in a company agreement, it will be transferred to the new employer who will be able to terminate it, subject to a specific procedure depending on the act implementing the scheme (company agreement, agreement ratified by the employees, unilateral decision of the employer).
Benefits resulting from other company agreements, custom and practice, and unilateral undertakings, automatically bind the new employer, but they may be terminated subject to compliance with a specific procedure information of the employee’s representatives, individual information of the employees and sufficient notice.
Generally, the transfer of employment contracts does not require the new employer to maintain the collective bargaining agreements (CBAs) that applied to the affected employees. However, the new employer must maintain all benefits resulting from CBAs for a period of 15 months (a three-month notice period plus 12 months) (Articles L.2261-9 and L.2261-10, French Labour Code). During this period, the new employer must initiate negotiations with employee representatives to reach an agreement replacing the benefits granted by the CBAs. If such an agreement is reached, the agreement will immediately terminate the previous agreement, which is then replaced. In the absence of an agreement, employee benefits which are considered to be individual acquired rights are automatically incorporated into their employment contracts and retained by the employees.
The redundancy pay includes:
Dismissal indemnity. This is set by the law, unless there is an applicable CBA. The legal indemnity is of one fifth of monthly salary per year of service within the company, and one third of monthly salary after 10 years of service.
Indemnity in lieu of notice if an employee is dismissed during all or part of the notice period.
Where an employee brings a court action against the dismissal, he may be entitled to damages for unfair dismissal. In the case of litigation, the parties may settle, but even where a settlement agreement is entered into between the employer and the employee, the employee could bring a claim before the courts for a fraudulent attempt to avoid Article L.1224-1 fraud (see Question 13).
The harmonisation of the working terms and conditions of the transferred employees depends on the nature of those terms and conditions. For example, harmonisation of the employment contracts will usually require the employee's consent.
Harmonisation of collective status is subject to a specific procedure defined above (Question 10).
There is a high risk in dismissing an employee before the transfer as it could be considered by the court to be a fraudulent attempt to avoid Article L.1224-1 of the Labour Code. In such a case, the employee could either claim:
Reinstatement with the transferee employer company under the same conditions as before.
Damages for unfair dismissal from the transferor employer.
The dismissal can be implemented after the transfer, provided the formal dismissal procedure is complied with and the dismissal is based on a real and serious cause, which can never be the transfer itself. In practice, it is recommended not to implement a dismissal just after the transfer.
There are no restrictions in France.
If Article L.1224-1 of the Labour Code applies, all employment contracts in force will automatically transfer to the transferee employer.
However, if the conditions of Article L.1224-1 are not met, a secondment can be organised through an agreement between the employer and the employee. This could trigger a risk of the transfer being considered to be an illegal loan of employees, or for the transferee and transferor to be considered co-employers.
The employee representatives must be provided with information regarding the changes to the legal status of the company and the impact of the operation on employment terms and conditions, including:
The reasons, terms and conditions and timeline of the contemplated operation.
The consequences for employees (for example, when employees are transferred to another employer (or not transferred) and the number of employees affected).
The stages of the transaction when the obligations arise.
The typical duration of the information and consultation process.
The potential criminal and civil consequences of taking any of these actions before the obligations must have been completed (including information as to whether these actions can be prevented or delayed).
Whether any of these consequences can be avoided or mitigated by contractual means.
The transferor employer must inform and consult with the works council on any modification of the economic or legal organisation/structure of the company (Article L.1224-1, French Labour Code). This can include a merger, transfer or a major change to manufacturing patterns, as well as acquisitions or transfers of subsidiaries.
If the company employs fewer than 50 people, it is only necessary to inform, and not consult, the employee delegates. However, if the company employs more than 50 employees, the company is required to consult with either the employee delegates or the works council (if one is in existence), to obtain their opinion on the transaction.
Notification or consultation must occur before any binding decision is made and in sufficient time for the proposal to be discussed at the works council meeting and for the members to give a well-reasoned opinion. In practice this means it must occur before the outsourcing agreement is signed or implemented.
Failure to inform and consult with the works council constitutes a criminal offence of hindering employee's representatives' rights. This can be punished by:
A fine of up to EUR3,750 (as at 1 February 2012, US$1 was about EUR0.8) and or up to one year imprisonment for the company's legal representative.
A fine of up to EUR18,750 for the company.
Further, the employee representatives could obtain a court order restricting the transfer. These consequences cannot be contractually avoided or mitigated.
The transferee employer must also inform and consult its works council on the planned transfer.
General requirements. Parties must comply with data protection rules and regulations which may apply to outsourcing services. Under French law, the protection of personal data is regulated by the French Data Protection Act No 78 -17 of 6 January 1978 (Loi n° 78-17 du 6 Janvier 1978 relative à l'informatique, aux fichiers et aux libertés).
The customer as "data controller" remains primarily responsible for data protection compliance, which includes:
That the processing of the data is fair and lawful.
That the processing of the data is limited to the stated purpose.
That prior notice and consent requirements concerning the data subject are complied with.
That the processing is secure.
The rules on onward transfers.
Respect of restrictive rules regarding data transfers outside the EU.
Respect of privacy rights of individuals.
Filings with the French Data Protection Authority.
The Data Protection Act requires the work to be carried out by the processor and supplier. It must be specified in detail, in writing, including a list of requirements that must be complied with. The most important include:
The processor must provide sufficient guarantees to ensure the implementation of security and confidentiality measures specified in the Data Protection Act.
The contract must:
specify the obligations on the processor concerning the protection of the security and confidentiality of the data;
provide that the processor may act only on the instruction of the data controller.
The supplier must be bound by the instructions of the customer and cannot substantially modify security and confidentiality conditions without the client's prior authorisation.
Mechanisms to ensure compliance. Transfers of personal data outside the EEA are subject to the prior authorisation of the French Data Protection Authority unless:
The non-EEA recipient country is recognised as ensuring a sufficient level of protection by the European Commission.
The supplier is based in the US and complies with the US Safe Harbor principles.
Transfer is also possible if it is based on the data subject's consent or on a statutory provision permitting the transfer (such as protection of the data subject's life, meeting of obligations, ensuring the establishment, exercise or defence of legal claims, and so on). However, those exceptions are interpreted in a very restrictive manner by the French Data Protection Authority (Commission nationale de l' informatique et des libertés)(CNIL) and therefore are rarely applied.
If none of the above conditions are met, CNIL must specifically authorise the transfer. To get authorisation, the parties must have entered into either binding corporate rules (within a group of companies) or an agreement based on the EU-standard contractual clauses.
French law sets out strict requirements regarding the processing of sensitive data (that is, information on race or ethnicity, origin, political opinions, religious or philosophical beliefs, trade-union membership, health or sex life). Accordingly, CNIL may refuse to grant an authorisation where the transfer of sensitive data is not justified or would be disproportionate.
International standards. An agreement based on EU-standard contractual clauses may enable transfer to be authorised where authorisation is necessary (see above, Mechanisms to ensure compliance).
General requirements. Banking and financial institutions are bound by professional secrecy (Article 511-33, Monetary and Financial Code). Further, outsourcing often falls under Regulation 97-02, which provides specific contractual and operational requirements to ensure effective control of outsourced tasks or services and to deal with associated risks (see Question 2).
Accordingly, banking and financial institutions must ensure (by contractual, technical and organisational measures) that the outsourcing project complies with these rules.
General requirements. Confidentiality of customer data (which do not fall under specific legal obligations with respect to secrecy) must be covered by a non-disclosure clause specifying the following:
The kind of data that must be considered as confidential/non confidential.
The obligations of each party with respect to the use of such information.
The cases where such information may be disclosed (with or without the authorisation of the other party).
The specific remedies that could apply in the case of a breach of confidentiality obligations.
The customer usually draws up the services specification (sometimes with the assistance of outside consultants). The supplier reviews the specification (for example, during the tender process) and may be modified, depending on the supplier's comments.
The services description is usually part of the outsourcing agreement and must detail the output of the supplier's activities and, in some cases, how the services will be provided.
As most outsourcing contracts run for a number of years, they must allow a degree of flexibility for change. Change procedures must therefore be agreed in the contract outlining.
Generally, the agreed service levels are included in a service level agreement (SLA) and are based on objective and measurable performance indicators. Depending on the customer's expertise, the SLA may be first drawn up by the customer or by the supplier.
The SLA generally specifies:
Exceptions to service levels measurement or application (that is, transition period, and maintenance windows).
Operational procedures and escalation processes in case of non-achievement of service levels.
Procedures that must apply to adjust and/or modify the initial SLA over time.
It is common practice that the SLA also provides the application of service credits (or some other form of financial mechanism) if the supplier fails to achieve the agreed service levels.
Legal qualification of the service credits will depend on the parties' intention and the drafting of the contract. Service credits can be considered the sole remedy (clause pénale) of the customer in the following instances:
as financial incentive; or
as a correction/adjustment (resulting in a reduction) of the charges allowing the customer to claim damages in addition to these service credits.
These two instances allow the customer to claim damages in addition to these service credits.
Furthermore, it is possible to cap the amount of service credits due from the supplier.
Various factors affect the choice of charging method adopted in any given outsourcing transaction, including the type of services being provided, risk allocation between the parties, and tax implications arising from the geographical location of the chosen supplier (see Question 37). The principal methods set out below can be used by themselves or in combination with each another.
This is commonly favoured by customers as it gives predictability for budgeting purposes. It is used where the volume of services to be provided is predictable.
The unit price for certain services is pre-agreed between the parties. This method is often used where the volume of services is not as predictable and suppliers require minimum fees to be in place.
The customer pays the actual cost of providing the services plus an agreed profit margin.
Deliverables based charges follows the approach of a simple service supply agreement where the charges are paid on the receipt of deliverables/achievement of milestones agreed under the terms.
Outsourcing agreements are generally long-term so various contractual provisions must be included to allow flexibility, although the customer will seek certainty of price and protection against price increases (see Question 23). The contractual mechanisms often included are:
Change control mechanisms. These deal with changes during the life of the contract.
Benchmarking. Typical market prices for the same services are reviewed against the prices (usually by an external third party).
Indexation. Prices are made subject to index-based fluctuations (usually official indexes) to reflect inflation. The index used must have a direct connection with the purpose of the contract or the business of one of the parties. Case law suggests that the index used cannot be the French retail price index. In IT-related contracts, it is common practice to refer to the Syntec Index (index of salary costs published by the association of professionals). However, “most favoured nation” clauses, clauses by which a contracting party (usually the supplier) commits to grant to the other the same terms as are then granted to its other customers which receive from that supplier the most favorable terms, are void under French law.
Only direct damages can be compensated under French law and there must be a direct link between the damage and the default.
The parties are free to identify certain types of damages which are excluded and included. However, the judge is able to override any contractual provisions regarding damages and can decide that the excluded damages are directly linked to the default and therefore must be compensated by way of damages. Several types of damages that would typically be viewed as indirect under common law are often considered direct under French law (for example, loss of profits).
The supplier's breach must be serious (see Questions 31 and 32). Under French law, only a court can order termination. However, it is possible to allow for termination as of right where it is for breach. The termination provisions should expressly state that termination for breach will be as of right (de plein droit) in such instances.
The court may order, on an exceptional basis, an equitable remedy of specific performance that compels a party to execute a contract according to the precise terms agreed on or to execute it substantially so that, under the circumstances, justice will be done between the parties.
The following customer protections are typically included in the contract documentation:
Audit rights. This allows the customer/its auditors to audit performance, price and so on.
Benchmarking (see Question 22).
Compliance with a quality assurance plan.
Clear and effective reporting and governance provisions.
Service levels with a service credit mechanism, enabling the customer to receive credit in the event of service level failure.
Liquidated damages/penalties that are payable to the customer in the event of particular failures (for example, missed milestones).
Step-in rights that are triggered by identified events, including poor performance.
Insurance. The supplier must obtain and maintain insurance to a sufficient level, including nominating the customer as a party to the policy.
Parent company guarantee. This is advisable when the signing party is a member of a group (see Question 5).
There are several statutory warranties that can apply to an IT supplier business:
Warranty against latent defect (garantie des vices cachés). This warranty applies only to sales and lease contracts. In sales contracts, if there is a hidden defect, the customer has the right to either:
terminate the contract and recover damages.
obtain a reduction in price.
In lease contracts, the customer can only claim for damages. In sales contracts, any clause limiting or excluding this warranty will only be valid against professionals in the same specialist field. In rental agreements, a clause limiting or excluding this warranty is valid, subject to the same restrictions as a clause limiting or excluding contractual liability (see Question 36).
Infringement warranty against dispossession (garantie eviction). The scope of this warranty is generally negotiated and expressly stated in the outsourcing agreement. In addition, the supplier often reserves the right to:
replace the infringing item;
repair the infringing item;
withdraw the infringing item if replacement or repair is not reasonably practicable.
Generally, the parties include indemnification against third party claims such as:
Infringement of IP rights.
Claims by transferred employees.
Third-party claims arising from the supplier's performance under the outsourcing agreement.
Breach of specific representations or warranties.
French law does not impose or imply fitness for purpose and quality of service warranties in outsourcing agreements.
However, the customer often requires these as part of the specifications to be complied with.
Indemnities and clauses limiting/excluding liability of either party are often included in outsourcing agreements to protect either the customer or the supplier regarding liabilities and obligations arising in relation to outsourcing (see Questions 25, 35 and 36).
Concerning the employee arrangements, the supplier may want to hold the customer liable for inaccurate information regarding the employees to be transferred, for costs in respect of employees that were not accounted for but were transferred by mandatory law to the supplier.
Outsourcing agreements generally include an obligation for the supplier to have/obtain and maintain insurance policies. These policies may cover:
Employee liability.
Damages to properties.
Defects relating to services performance.
Professional liability.
Third parties' liability.
French law does not impose any maximum or minimum term on an outsourcing. However, perpetual obligations and commitments are prohibited under French law.
The usual practice in outsourcing agreements is to enter into a fixed term contract, which may include a provision that it is automatically renewed in the absence of notice to the contrary by the customer.
In addition, exclusive supply agreements are subject to special and complex rules governing their duration under French and EU competition law.
French law does not regulate the length of a notice period required but a party can be held liable for abrupt termination of a contractual relationship without sufficient notice.
To be sufficient, the notice period must be calculated on the basis of the time reasonably necessary to carry out termination assistance and must take into account, among other things, the length of the contractual relationship and exclusivity commitments. For contracts of three to seven years duration, notice periods from six to 12 months are usually considered to be sufficient.
French law does not state which specific events can justify termination of an outsourcing. In principle, a party to a contract can terminate the contract:
As a matter of public policy, insolvency events cannot justify automatic termination of the contract. However, there are specific procedures for termination of the contract at the bankruptcy trustee's discretion.
The parties are generally free to agree specific termination rights. It is advisable to expressly include provisions for automatic termination (de plein droit) for each triggering event included in the contract, as without these provisions termination requires a court decision.
The triggering events giving rise to a right to terminate a contract include:
A material, persistent or recurring breach (the breaching party is normally given reasonable opportunity to remedy the breach within a fixed period).
A change of control or any other specific reason.
Termination for convenience (this often requires the terminating party to pay a termination fee and it is important that reasonable prior notice is expressly given to the other party for the reasons explained above (see Question 30)).
There are no implied rights for the supplier to continue using licensed IP rights following termination.
A customer has no legal right to access the supplier's know-how following termination.
However, the customer can negotiate certain terms forming part of the termination assistance provisions which allow it, in certain circumstances, access to the supplier's know-how.
Outsourcing contracts traditionally include provisions such as:
Smooth transfer of the supply of the services outsourced.
Allowing the transfer of certain assets and data to the customer on termination and an obligation on the supplier to train the customer or even the replacing supplier.
Requiring the supplier to provide the customer with access to the supplier's know-how (in the spirit of enabling effective and smooth transition of the services).
It may also be possible for the customer to indirectly gain access to the supplier's know-how if employees are transferred to the customer or if employees of the customer return to the customer on termination of the contract.
Some common law concepts of damages (for example, incidental, consequential and special damages) are meaningless under French law because French law only distinguishes between direct and indirect damages.
In principle, only direct damages (that is, damages that are certain, foreseeable and are the immediate and direct consequences of the contractual breach) may be compensated, not indirect damages. Indirect damages are not defined by law but it is possible in (B2B) relationships to include in the agreement an express list of damages (for example, loss of profits, loss of revenue) that the parties agree to consider as indirect (and which are therefore excluded from any compensation).
In B2B relationships, it is possible to exclude or limit contractual liability. It is therefore possible to agree a cap on liability.
However, courts consider that liability cannot be limited or excluded in cases of gross negligence, wilful misconduct, or death or injury. In addition, limitation or exclusion clauses that result in removing an essential obligation of its essence or substance may be held to be unenforceable. In practice, the courts tend to consider such clauses as valid if they were freely negotiated, agreed by the customer and provide for a reasonable cap. The cap usually corresponds to the total value of the contract or to a set period of months of services. It is standard practice to have a cap corresponding to between 12 and 36 months of fees.
The cap can also be global (whatever the scope or the structure of the deal), per event, per agreement and so on.
For corporate income tax purposes, if the transfer of assets is for cash, the seller is liable for capital gains tax (CGT) at a rate of 33.33% (up to 36.1% for large companies) on the asset value transferred. A reduced corporate tax rate (15%) applies to certain patent concessions.
For registration duties, depending on the assets transferred, transfer duties may be due from the purchaser either:
At a fixed duty (for example, EUR125 for patent transfers).
Up to 5% if the transfer concerns a business, goodwill (fonds de commerce) or an activity (see Question 9, Initial outsourcing).
If the transfer of the assets is in exchange for shares, there is a way to limit both CGT and transfer tax due, subject to fulfilling conditions, for example:
The transfer must concern a complete and autonomous line of business (branche complète d' activité).
Shares received in exchange must be held for at least three years.
As a result, tax structuring should be carefully studied before any transfer of assets.
If the transfer of employees could be considered as a transfer of business activity, then CGT and registration duties could be due (see above, Transfer of assets to the supplier).
Where the outsourcing concerns the supply of services, the place of taxation, for VAT purposes, will depend on the nature of services and the geographical location of both the beneficiary and the supplier.
If French VAT is due, four different VAT rates can apply (2.1%, 5.5%, 7% or 19.6%).
The 19.6% rate is the standard French VAT tax rate which apply in every circumstances unless otherwise stated.
As from 1 January 2012, the 7% rate is the new French reduced rate which applies to goods and services listed on Appendix III of the EU directive n° 2006/112/CE dated November 28, 2006. For example, books are subject to this reduced rate.
The 5% rate is the former French reduced rate. However, this rate still applies for specific kind of goods and services such as food, medical devices, services rendered to individuals (Services à la personne).
The 2.1% rate is the specific VAT tax rate which applies in the newspaper industry, for several drugs and other identified products and services.
In case of transfer of assets, it should be checked whether the transfer is subject to French VAT and/or to French transfer duties.
VAT or sales tax will apply as service taxes.
No stamp duty should apply to outsourcing operations except registration duties (see above).
When corporate income tax is due in France, the effective tax rate could be:
15% (reduced tax rate applicable on some patents incomes).
33.33% (standard tax rate).
34.43% (if the turnover exceeds EUR7.6 million and CIT due is above EUR763,000).
36.1% for large companies (temporary rate).
A specific tax rate can apply to transfers of real estate shares or assets.
Transfer prices should be carefully analysed and documented in the context of the transfer of assets or the activity within a group.
Withholding taxes should also be carefully studied depending on the nature of revenue and the localisation of the assets or activity transferred. Relevant country tax treaty provisions should be analysed to avoid double taxation.
T +33 1 42 68 60 00
+33 1 42 68 6371
F +33 1 42 68 60 11
E sarah.pearce@twobirds.com
W www.twobirds.com
Qualified. France, 2002
Areas of practice. General commercial; IT, outsourcing; e-commerce.
Recent transactions
T +33 1 42 68 6000
+33 1 42 68 6077
F +33 1 42 68 6011
E julie.ruelle@twobirds.com
W www.twobirds.com
Qualified. France 2003
Areas of practice. IT; outsourcing; e-commerce; commercial.
Recent transactions
T +33 1 42 68 60 00
+33 1 42 68 63 64
F +33 1 42 68 60 11
E laurence.clot@twobirds.com
W www.twobirds.com
Qualified. France, 1997
Areas of practice. Tax.
Recent transactions
