An agreement that was void due to a violation of competition law ‘can be revived’
To preserve the validity of an original contract where there is a null clause violating competition law, contracting parties need to make clear that such a clause is separable and the other clauses remain valid.
In the very recent M-EPLI’s blog, Caroline Cauffman raised a question: What happens if an agreement that was in violation of competition law and void recaptures benefits through Block Exemption Regulations? In this blog, she introduced a hypothetical situation in which one party’s market share is reduced within the maximum market threshold, which is one condition for an exemption under the Block Exemption Regulations, after the contract has been declared void. In response to this scenario, she proposed that, with the purpose of preserving the existing contract, the parties should include a statement in the original agreement that, at the time the Block Exemption Regulations apply again, a new agreement with the same content as the original one is deemed to have been concluded. However, what happens if during the course of the new agreement the party’s market share exceeds the threshold again? Is the new contract void for a second time? Here, I offer a more simple way of dealing with this situation, by taking a situation in franchising as an illustration.
In practice, franchise contracts are normally detailed documents, consisting of a number of contractual clauses. For example, a standard form of a 7-Eleven individual store franchise contract is a 36-page standard form, containing 31 clauses. In this case, it is not necessary that ‘all’ terms or agreements in the contract contravene competition law, which would render the whole contract invalid. What happens if a franchise contract’s clause is prohibited by competition law rules, for example, Article 101(1) of the TFEU? In cases where a franchise contract is not exempted by Regulation No.330/2010 because, for instance, a franchisor’s market share exceeds the threshold of 30% imposed by the Regulation, only the clause that falls within the ambit of Article 101(1) automatically becomes void, unless it has been granted an individual exemption by Article 101(3) of the TFEU. Therefore, it is possible that the null provision might not affect the contract as a whole because of the application of a general contract law’s principle of partial invalidity. Certain Civil Codes in EU member states, for instance, Section 139 of the German Civil Code, and Article 3:41 of the Dutch Civil Code, provide that if a part of a contract is void, the remaining clauses remain valid to the extent that the null provision can presumably be separated from the other valid clauses. This principle is also true in English common law.
In conclusion, I would suggest an alternative option: the contracting parties should incorporate an express covenant with a common intention that if any term of a contract is void by virtue of, for example, competition law rules, it shall be separable and the remaining clauses will still be valid. This option allows for the rest of the original contract to remain enforceable. My proposition is suitable for preserving the validity of the original agreement. However, a question needing further discussion is what happens to the null clause if the market share of the parties becomes lower than the threshold again?
1 Comment
Dear Chalermwut,
Many thanks for discussing my Mepli-blog post. I agree that EU law only requires the nullity of the specific clause infringing the competition rules and leaves it up to the Member States to decide whether or not to extend the nullity to the remainder of the agreement. I wonder, however, whether the severance clause your propose would only confirm the default rules on severability or also allow severability outside those boundaries? More specifically, do you know of any English cases that recognise the validity of a severance clause limiting the voidness for infringement of the competition rules to the specific clause where the common law requirements for severance are not fulfilled? A reason not to recognise severability purely based on party autonomy could be that it limits the deterrent effect of the nullity. Leaving public law sanctions aside, the consequence of including a competition law infringing clause in a contract, combined with an effective severability clause, would be that the clause is void. The parties, or at least the stronger party, have (has) more to lose when (given the impact of the clause on the entire agreement) the entire agreement is void. You may also reply by e-mail if you prefer.
Kind regards,
Caroline
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