The duty of loyalty under French law: An integral guide for SME managers and CEOs

Introduction: Why is the duty of loyalty crucial for SMEs?

The obligation of loyalty, the founding principle of contractual relationships and corporate life, requires each party to act with honesty, transparency and respect for commitments. For SME managers, understanding and anticipating this obligation is essential, both during the formation of the contract and in its execution and termination. It conditions the trust of business partners, the internal stability and the legal security of the company.

Definition and Foundations of the Duty of Loyalty

What is a duty of loyalty?

The obligation of loyalty refers to the duty, for each contractor, to adopt honest and transparent behavior towards his business partner, avoiding any deceitful or hidden attitude. In the context of professional relationships, it requires communicating essential information, not harming the legitimate interests of the other, and executing commitments in good faith.

Concrete example:
In a distribution relationship, a supplier must inform his distributor of any changes that would impact the continuity of the contract (modification of conditions, termination, etc.), failing which he may be sanctioned for breaching his obligation of loyalty.

Legal basis: Civil code and doctrine

Contractual loyalty is based on article 1104 of the Civil Code: “Contracts must be negotiated, formed and executed in good faith.” The concept of loyalty derives directly from this requirement of good faith, enriched by case law and doctrine.

Educational framework:
The Court of Cassation regularly recalls that “good faith cannot be presumed, it is required”. In a judgment of 10 July 2007, one party had voluntarily withheld crucial information during the contractual negotiation, the Court sanctioned this behavior as contrary to loyalty.

The various aspects of the duty of loyalty in commercial relationships

The obligation of loyalty at each stage: negotiation, conclusion, execution

• Negotiation: You must transparently provide the material data of the contract (price, technical conditions, regulatory constraints).
• Conclusion: Any obscure or equivocal clause may be considered contrary to loyalty.
• Execution: The partner cannot abuse their rights or harm the other party.

Concrete example:
During a business transfer negotiation, hiding significant financial liabilities is a clear violation of the duty of loyalty, exposing the transferor to severe sanctions.

Reinforced loyalty obligation: when and why?

In certain relationships, such as an employment contract, exclusive distribution, commercial agency or franchise, case law requires “reinforced” loyalty: a duty of non-competition, increased transparency, compliance with ethical rules.

Practical case:
A franchisee must honestly inform the franchisor of the economic difficulties, otherwise he risks termination for serious misconduct.

The 5 main obligations of the contract and the place of loyalty

Here is a summary table that shows the 5 main obligations of the contract and their relationship with loyalty:

Duty of loyalty in the Civil Code: main articles

Article 1104 of the Civil Code establishes the concept:
“Contracts should be negotiated, formed, and executed in good faith.”
Loyalty is thus a transversal requirement, which irrigates all contractual activity, whether it is distribution, service provision, company or the transfer of business assets.

Example of a clause:
“The parties undertake to perform this contract with loyalty and good faith, to prevent the other from any difficulty that may affect the performance of their obligations and to collaborate loyally for the success of the contractual relationship.”

Obligation of loyalty on the part of the employer and the employee

Reciprocal obligations in the employment contract

Throughout the duration of the employment, the employee must respect genuine loyalty to his employer: not harm the company, do not distract customers, respect the confidentiality of information. The employer, for its part, must act transparently, provide all the information that allows the employee to carry out his missions, and respect the dignity of the employee.

Concrete example:
The embezzlement of customers by an employee or the refusal of strategic information from the employer can constitute serious violations of the obligation of loyalty.

The obligation of loyalty after the termination of the contract

Even after the contract is dissolved, some obligations survive. A former employee, partner or distributor cannot act against the interests of his previous contractor through unfair maneuvers (denigration, misuse of know-how, unfair competition).

Example:
An ex-distributor who actively solicits the customers of his former supplier is liable to prosecution for breach of the post-contractual loyalty obligation.

Key case law on the duty of loyalty

The duty of loyalty is illustrated by a wealth of case law.

• “Manoukian” judgment (2003): Condemnation for abusive breakdown of talks, based on disloyalty during negotiations.
• “Canal+/TF1” judgment (2011): Termination of the distribution contract considered unfair, because there was no prior information.
• Judgment of 7 October 1998 (Court of Cassation): Enshrines the duty of loyalty of the mandatary, who must defend the interests of his principal.

Educational framework:
Case law states that the duty of loyalty may be reinforced by the nature of the contract, the circumstances, or the previous relationships between the parties.

Obligation of Loyalty FAQ

What is the duty of loyalty?

It is the duty, imposed by the Civil Code, to perform the contract in an honest, transparent and respectful manner with respect for the other party, adopting behavior that facilitates the execution of the contractual relationship.

What does “duty of loyalty” mean?

This duty involves not deceiving, not withholding important information, not abusing one's position, and acting in the interests of healthy collaboration.

What are the 5 main obligations in the contract?

Good faith, non-competition, confidentiality, information, respect for public order rules. Loyalty permeates each of these obligations.

What is the reinforced duty of loyalty?

It exists in certain contracts characterized by dependence or imbalance; it requires greater transparency and ethical respect.

What article of the Civil Code regulates loyalty?

Article 1104 of the Civil Code establishes the principle of good faith and, by extension, that of loyalty throughout the contractual relationship.

How does the obligation of loyalty to the employer apply?

The employer must faithfully inform the employee of any change affecting his work, act with respect for the person and avoid any abuse or unfair maneuver during or at the end of the contract.

What is the legal and doctrinal definition of the obligation of loyalty?

It is the duty of each party not to harm the interests of the other, to avoid dishonest behavior or abuse of rights, and to contribute, through sincere cooperation, to the success of the contract.

What happens after the contract is broken?

Obligations remain: confidentiality, non-denigration, prohibition of unfair competition. A breach can be heavily penalized.

What are the major case law decisions on loyalty?

Manoukian judgments, Canal+/TF1, Court of Cassation 7 October 1998: gross disloyalty during the negotiation, execution, or termination of the contract.

How to integrate the obligation of loyalty into contracts?

Include a specific clause:

The parties undertake to execute this contract in a spirit of loyalty and cooperation, to inform each other of any difficulties and to refrain from any conduct likely to harm the contractual relationship.

Practical advice for SME managers

• Systematically include a loyalty clause in your contracts, adapted to the nature of the partnership and the sector of activity.
• Demand transparency during negotiations.
• Train your teams on the importance of loyalty and ethical behavior.
• Document each stage of the contractual relationship: correspondence, exchanges of information, alerts in case of difficulty.
• Consult a specialized lawyer to secure your business when drafting, negotiating, or breaking a contract.

The regulatory framework and the value of expert support

Contractual loyalty law is a regulated subject. Its implementation varies according to the circumstances, the nature of the contract and the objectives pursued. To anticipate risks and adapt the clause to your needs, it is essential to seek the advice of a specialized lawyer, who will be able to guide you in drafting, negotiating or terminating the contract.

Article written by Guillaume Leclerc, lawyer in commercial contracts and commercial litigation in Paris.

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