Types of breaches: management fault and breach of bylaws or CSA

The Code of Companies and Associations (CSA) establishes two types of breaches for directors: (i) management fault and (ii) breach of bylaws or the CSA.

Directors should be aware of these responsibilities to avoid committing mistakes that could impact their management and reputation

A. Examples of management faults

• Risky investments
• Disadvantageous contracts for the legal entity
• Delay in filing financial statements or tax declarations
• Negligence in supervising daily management delegates or accountants
• Allowing non-repayable financial withdrawals by a financially troubled director

B. Examples of breaches of bylaws or CSA

• Exceeding the legal entity’s social purpose
• Non-compliance with CSA provisions in case of conflict of interest
• Abandonment of powers by the Board of Directors

Differences between management fault and breach of bylaws and CSA

The victim of a management fault is the legal entity, while the victim of a breach of bylaws or CSA can be the legal entity or third parties.

Additionally, liability for management fault can be joint or individual, whereas liability for breach of bylaws or CSA is always joint

Similarities between management fault and breach of bylaws and CSA

Directors can escape joint liability by proving they did not participate in the fault and reporting it. Directors’ liability is limited to gross negligence, except for certain specific situations.

Liability is also capped at amounts ranging from 125,000 to 12 million euros, depending on various criteria.

Lastly, the statute of limitations for management fault and breach of bylaws or CSA is five years from the commission of the fault or its discovery in case of fraudulent intent.

The situation in Ukraine gives us the opportunity to discuss the restrictive measures, commonly called “sanctions”, adopted by the European Union against the Russian Federation.

I. Context and objective

The end of the Cold War gave rise to cooperation within the international community in an attempt to maintain world peace. The fall of the USSR and the invasion of Kuwait allowed economic sanctions to be put forward as a tool for maintaining peace.

Indeed, traditionally, sanctions are presented as a fair measure between, on the one hand, passivity (the acceptance of violence or serious illegal acts) and, on the other hand, military intervention (war).

The inevitable collateral damage affecting mainly the civilian population in the context of comprehensive economic sanctions has led to the implementation of smart sanctions targeting specific individuals or institutions

Following the war unleashed by the Russian Federation against Ukraine and the serious consequences that ensued, the United States, the European Union and many other States wished to react without intervening militarily in order to avoid starting a world war.

Sanctions were therefore imposed because of their expected effectiveness.

Beyond their punitive nature, the goal is to weaken the Russian state economically in the hope of getting the Russian Federation back to the negotiating table.

II. Restrictive measures adopted by the European Union against Russia

Among the sanctions adopted by the European Union is the freezing of the assets and resources of more than 700 Russian individuals.

The EU has prohibited the direct or indirect provision of funds or resources to more than 700 Russian natural and legal persons:

– Responsible for actions or policies threatening the territorial integrity of Ukraine (including all deputies of the Russian Duma, President Putin, numerous ministers, members of the Russian National Security Council, and military officials);

– Providing material or financial support to actions threatening the sovereignty and independence of Ukraine, or to the Russian government and decision-makers responsible for the annexation of Crimea and the Donbass region (including the banks Promsvyazbank, Vnesheconombank VEB.RF and Bank Rossiya);

– Conducting transactions with separatist groups in Donbass;

– Operating in economic sectors that provide a considerable source of income to the Russian government (influential businessmen and women, oligarchs and directors of state-owned enterprises).

The Belgian Treasury has published on its website the list of persons and entities affected by the European sanctions and distributed it to the country’s banks.

III.        Prior identification of the persons to be sanctioned

The main legal issue of sanctions is therefore the (documented) identification of the (right) persons to be sanctioned.

Indeed, the challenge of targeted sanctions lies in their investigative effort. It is a matter of identifying a distinct group of persons engaged in the illicit activity, having a functional definition of the persons to be identified: those in power, followed by their families and those who benefit from the condemned activity.

However, this identification can be problematic when the Council of the European Union is not able to prove the link between the sanctioned person and the reason for the sanctions.

According to our experience with international sanctions, many decisions of the Council have been annulled by the Court of Justice of the European Union when the Council has not been able to prove this.

Indeed, it should be recalled that “the European Economic Community – now the European Union – is a community governed by the rule of law in that neither its Member States nor its institutions are exempt from the control of the conformity of their acts with the basic constitutional charter which is the Treaty of the European Union. (Court judgment of 23 April 1986, Les Verts V Parliament – case 294/83).

Since November 25, 2014, following the famous case Safa Nicu Sepahan Co v. Council of the European Union (T-384/11), https://bit.ly/3CLrG3F, damages have even been awarded to those who have been unjustly punished.

The latter can therefore bring an action before the European Court of First Instance in order to obtain not only the annulment of the restrictive measures as far as they are concerned, but also damages as compensation for the harm suffered.

This allows us to briefly discuss the conditions that must be met in order for those who have been illegally sanctioned to obtain compensation before the European courts.

IV. The non-contractual liability of the Union applied to sanctions

According to established case law, the non-contractual liability of the Union, within the meaning of the second paragraph of Article 340 of the Treaty, for the unlawful conduct of its organs, is subject to the fulfillment of a number of conditions, namely:

– the illegality of the conduct of which the institutions are accused

– the reality of the damage; and

– the existence of a causal link between the alleged conduct and the damage claimed (see Case C-120/06 P and C-121/06 P FIAMM and Others v Council and Commission [2008] ECR 476, paragraph 106, and the case-law cited therein; Case T-351/03 Schneider Electric v Commission [2007] ECR 212, paragraph 113).

• The unlawfulness of the conduct complained of

The mere illegality of an act is not sufficient to engage the non-contractual liability of the Union.

The case law requires a sufficiently serious breach of a rule of law intended to confer rights on individuals to be established (see, to that effect, Case T-341/07 Sison v Council [2011] ECR I-341/07, paragraphs 31 and 33, and the case-law cited).

In the field of international sanctions, it was held that the failure to adopt restrictive measures against a person without having the evidence to establish the validity of those measures constituted a sufficiently serious breach within the meaning of the above case law:

“68.  In view of all the foregoing, the Court considers that an administrative authority, exercising ordinary care and diligence, would, in the circumstances of the present case, have realised, at the time the first of the contested acts was adopted, that the onus was upon it to gather the information or evidence substantiating the restrictive measures concerning the applicant in order to be able to establish, in the event of a challenge, that those measures were well founded by producing that information or evidence before the EU judicature.

 69      Since it did not act in that way, the Council has incurred liability for a sufficiently serious breach of a rule of law intended to confer rights on individuals within the meaning of the case-law cited in paragraph 50 above.”

• On the reality of the damage and the existence of a causal link

As regards the condition of the reality of the damage, the Union’s liability can only be engaged if the victim has actually suffered “real and certain” damage (judgments of the Court of 27 January 1982, Birra Wührer e. a./Council and Commission, 256/80, 257/80, 265/80, 267/80 and 5/81 [1982] ECR 341, paragraph 9, and De Franceschi v. Council and Commission, 51/81 [1982] ECR 20, paragraph 9; judgment of 16 January 1996 in Case T-108/94 Candiotte v. Council [1996] ECR 5, paragraph 54).

It is for the victim to provide evidence to the Court of the Union in order to establish the existence and extent of such damage (Case 26/74 Roquette Frères v Commission [1976] ECR 69, paragraphs 22 to 24, and Case T-575/93 Koelman v Commission [1996] ECR 1, paragraph 97).

As regards the condition relating to the existence of a causal link between the alleged conduct and the damage claimed, that damage must result in a sufficiently direct manner from the conduct complained of.

This conduct must be the determining cause of the damage, whereas there is no obligation to make reparation for every harmful consequence, however remote, of an unlawful situation (see judgments of 4 October 1979, Dumortier and Others v. Council, 64/76, p. 1). a./Council, 64/76, 113/76, 167/78, 239/78, 27/79, 28/79 and 45/79 [1979] ECR 223, paragraph 21, and Case T-279/03 Galileo International Technology and Others v Commission [2006] ECR 121, paragraph 130, and the case law cited).

Here again, it is up to the victim to prove the existence of a causal link between the conduct complained of and the damage claimed (see Judgment of 30 September 1998, Coldiretti and Others v. Council and Commission, T-149/96, ECR, EU:T:1998:228, paragraph 101 and case law cited).

In the field of unlawful sanctions, a distinction can be made between non-material damage (B.1.) and material damage (B.2.).

B.1. Non-material prejudice

Non-material damage, to be distinguished from material damage (damage to the economic and commercial capacities of the sanctioned entity), was summarized in a particularly convincing manner in the case (T-384/11) between the Iranian company Safa Nicu Sepahan Co, irregularly sanctioned for having allegedly provided assistance to Iran’s nuclear proliferation program, and the Council of the European Union (https://bit.ly/3CLrG3F):

“(…) the Court observes that when an entity is the subject of restrictive measures because of the support it is has allegedly given to nuclear proliferation, it is publicly associated with conduct which is considered a serious threat to international peace and security, as a result of which it becomes an object of opprobrium and suspicion (which thus affects its reputation) and is therefore caused non-material damage.

The Court of Justice has held that “the opprobrium and suspicion provoked by restrictive measures such as those at issue in the present case do not relate to the economic and commercial capacity of the entity concerned but to its willingness to be involved in activities regarded as reprehensible by the international community. Thus, the effect on the entity concerned goes beyond the sphere of its current commercial interests.”

B.2 Material prejudice

The material economic or commercial injury can be divided into, on the one hand, the loss suffered (damnum emergens) and, on the other hand, the lost profit (lucrum cessans).

In the context of restrictive measures, this damage generally results from:

– the freezing of assets and the interruption of payments by European banks

If the victim is able to demonstrate that the freezing of assets and/or the interruption of payments prevented him from complying with these commitments, he can obtain compensation for his loss.

In addition to the causal link, the sanctioned entity must however be able to demonstrate the reality of the penalties incurred (penalty clause, late payment interest) and the loss of profit (e.g., loss of gross margin due to the breach of a contract).

– Refusal of delivery of products and/or services by business partners

The refusal to deliver does not in itself establish the victim’s material loss.

It has indeed been ruled that:

“the termination of relations with major suppliers disrupts a company’s business. However, a refusal to supply products does not, in itself, constitute damage.

 Damage arises solely where the refusal has an impact on the financial results of the company concerned.

That is the case, in particular, where the company is obliged to purchase the same products on less favorable terms from other suppliers or where the refusal to deliver causes delay in the performance of contracts concluded with customers, thus exposing the company to financial penalties. Similarly, where an alternative supplier cannot be found, existing contracts may be terminated and the company in question may be prevented from taking part in ongoing calls for tenders.”

The challenge of an action to engage the non-contractual liability of the Union lies mainly in the work of preparation and file building from the first days of the application of the measures.

In essence, a post-contractual non-competition clause can be defined as being a clause by which a person is prohibited, at the end of a contract (or for salaried workers, when they leave a company), to carry out similar activities, either by operating a personal business or by engaging with a competing employer/client, to prevent them from harming the business that has been left, by using, for themselves or for the benefit of a competitor, knowledge of the company that they have acquired while there, or in industrial or commercial matters.

Post-contractual non-competition clauses are frequently used in practice.

It is therefore important to identify the (correct) legal regime applicable to them.

We therefore considered it appropriate to summarize the main bodies of rules likely to govern non-competition clauses, namely those specific (I) to employees, (II) to the commercial agent, (III) to general commercial law and (IV) to European law.

I. Salaried workers

A. So-called “common” clause aimed at all salaried workers except certain employees and the sales representative

A.1. Conditions of validity

To be valid, a non-competition clause must:

• be entered into in writing,

• concern an employment contract for which the gross annual remuneration exceeds 36,785 EUR (amount on January 1, 2022) at the time of termination of the contract; a sub-distinction must also be made at this level:→ Between EUR 36,785 and EUR 73,571 (amounts on January 1, 2022) the clause is only valid if a collective labor agreement specifies the functions to which the non-competition clause can apply. This type of collective labor agreement exists, for example, in the hotel industry sector.→ At more than 73,571 EUR, the clause is always valid except for functions possibly excluded by a collective labor agreement,

• relate to similar activities,

• be geographically limited to places where the worker can compete effectively with the former employer (and in no case outside the national territory),

• not exceed 12 months in validity from the day the employment relationship has ended, for which the former employer must make a single, flat-rate compensatory indemnity payment, if they do indeed decide not to waive, within the first 15 days of the termination of the employment contract, the enforcement of the non-compete clause. The minimum amount of this compensation is equal to half of the gross remuneration of the worker corresponding to the period of application of the clause (for example, if the non-competition clause is provided for one year, the compensation must amount to a minimum of six months’ pay).

These conditions are cumulative. If one of them is not met, the whole clause is void.

A.2. Legal effects (if the clause is valid, certain conditions must still be met):

The clause takes effect when the contract ends after the first 6 months of its starting date:

• either in the event of dismissal for serious misconduct on the part of the worker,

• either in the event of the employee’s resignation without serious misconduct on the part of the employer,

• either by mutual agreement,

• either by the end of the term, or by the completion of the defined work.

On the other hand, the clause does not come into effect: 

• either in the event of termination during the first 6 months of the starting date of the contract,

• either, after this 6 month period, in the event of dismissal without serious misconduct on the part of the worker (for example, economic reasons or incapacity of the worker),

• or, after this 6 month period, in the event of the employee’s resignation for serious misconduct on the part of the employer.

A.3. Sanctions

If the worker violates a valid non-competition clause that is likely to produce the effects that it is intended to prevent, they must reimburse the single, lump-sum compensatory indemnity to the employer and pay them in addition, a sum equivalent to this indemnity by way of compensation.

The judge may possibly reduce this amount or increase it.

Legal references

Art. 65, 86 and 104 to 106 of the law of July 3, 1978 relating to employment contracts

B. The so-called “derogatory” clause for certain employees

It is permissible to derogate from the preceding provisions for certain employees employed by companies which have an international field of activity or significant economic, technical, or financial interests in international markets or which have their own research department.

For example, it is possible to extend the maximum period of 12 months or also to prohibit competition abroad.

Legal reference

C.C.T. n ° 1bis of December 21, 1978, concluded within the National Labor Council, adapting to the law relating to employment contracts the collective labor agreement n ° 1 of February 12, 1970, concerning the non-competition clause.

C.  The sales representative

C.1. Preliminary remark: eviction indemnity

First of all, in the event of dismissal, the employer is required to compensate the sales representative in return for any customers that the latter is supposed to have brought to the employer (eviction compensation). The sales representative must normally provide proof of customer inflow to their employer.

The existence of a non-competition clause in the employment contract, however, creates a presumption of customer inflow on the part of the agent. In this case, the burden of proof is reversed, and it is therefore up to the employer to demonstrate that the sales representative has not brought them any clients.

C.2. Conditions of validity

To be valid, a non-competition clause must meet the following conditions:

• the gross annual remuneration of the sales representative must exceed 36,785 EUR (amount on January 1, 2022), failing which the clause is deemed to be non-existent,

• relate to similar activities,

• cannot exceed 12 months,

• be limited to the territory in which the worker carries out their activity,

• must be recorded in writing on pain of nullity.

C.3. Legal effects (if the clause is valid, certain conditions must still be met):

The non-competition clause does not apply:

• when the contract is terminated during the first six months of the performance of the contract (for contracts that started before 1 January 2014 when it was possible to provide for a trial clause in the contract, the non-competition is not applicable only during the trial period),

• after the first six months, the clause has no effect if the employer dismisses the sales representative without serious reason (for example, economic reasons or incapacity of the worker), or if the sales representative resigns for a serious reason attributable to the employer.

C.4. Sanction

In the event of violation of the non-competition clause by the sales representative, the fixed compensation provided for in the contract may not exceed a sum equal to 3 months of remuneration.

However, the employer may claim greater compensation, on condition of proving the existence and extent of the damage.

Legal references

Articles 104 to 106 of the law of July 3, 1978 relating to employment contracts

II. The commercial agent

Like the protection afforded to the salaried worker, the legislator has intervened to regulate the non-competition clause binding the commercial agent (independent).

A. Preliminary remark: eviction indemnity

As with the sales representative, the legislator first provides for compensation for the contribution of customers in favor of the agent by way of eviction compensation (article X.18 of the CDE) and, similarly in this way, the existence of a non-competition clause creates, by way of derogation from the normal burden of proof, a presumption of customer input on the part of the agent – which makes it easier for the latter to obtain such compensation.

B. Conditions of validity

To be valid, the non-competition clause must meet the following conditions:

• be stipulated in writing,

• concern the type of cases for which the agent was responsible,

• target only the geographic area or group of persons, and geographic area assigned to the agent,

• not exceed 6 months after the termination of the contract.

C. Legal effects (if the clause is valid, certain conditions must still be met): 

The clause does not come into effect:

• when the agency contract is terminated by the principal outside the agent’s serious breach, or without exceptional circumstances within the meaning of the CDE, that is to say, circumstances which make any professional relationship between the parties impossible,

• when the agent terminates the contract for serious reasons on the part of the principal or by invoking exceptional circumstances.

D. Sanction

The sanction must be described in the agency contract. The parties will therefore be well advised to stipulate for a lump sum compensation in the agreement in the event of violation of the clause.

In this case, however, the amount stipulated cannot exceed one year of the agent’s remuneration (Article X.22 of the CDE).

As with what is provided for with the sales representative, the principal can claim compensation for the damage actually incurred, on condition that they can demonstrate it.

Legal references

Articles X18 and X22 of the Code of Economic Law

III. General commercial law

In common law, the guiding principle is free competition, which is public policy.

However, the parties may temper this rule with non-competition clauses.

To be valid, these clauses must meet three conditions, which are basic:

• temporal (the duration must be limited),

• space (the place of prohibition must be specified) and

• material (the prohibited activity must also be indicated).

Finally, the non-competition clause must also have been entered into in the legitimate interest of the creditor and, in this case, be proportionate to the realization of that interest.

These conditions being cumulative, failure to comply with any of them voids the clause.

In principle, therefore, the nullity is total, and it is not for the judge to give it any effect, however limited.

The Court of Cassation nevertheless authorizes the judge, under certain conditions, to limit the invalidity to the part of the clause, which is contrary to public order, that is, for example, to reduce the duration by hypothesis of the (illegal) clause for a maximum duration that they consider authorized (lawful).

According to this case law, the judge can “repair” the consequences of an illegal contractual clause only on the following three conditions:

• Partial nullity must be possible,

• The law should not prohibit such interference by the judge,

• The survival of the partially annulled clause must respond to the intention of the parties (for example by the presence of a clause in the agreement such as, “the clauses which will be nullified or declared invalid will remain binding on the legally authorized party.”).

Legal references

Articles II.3 and II.4 of the Code of Economic Law

Cass., 23 January 2015, C.13.0579.N. www.juridat.be

IV.  Rules for the protection of competition

A non-competition clause has by nature the effect of impeding the free competition of a market.

However, article 101 (formerly article 81) of the Treaty of the European Union prohibits, as a general rule, any association of companies having the objective of distorting the play of competition (101 § 1), except under certain sufficiently strict criteria, aimed at “improving the production or distribution of products, or promoting technical or economic progress, while reserving for users a fair share of the resulting profit” and for practices which are essential and will not give rise to companies the power to eliminate competition (101 § 3).

A distinction is made between horizontal agreements (agreements or concerted practice between enterprises operating at the same level of the market, i.e., generally cooperation between competitors) and vertical (agreements or concerted practice between enterprises operating at different levels of the market of the production or distribution chain, and regulating the conditions under which the parties can buy, sell, or resell certain goods or services).

The purpose of this note is not to go into overly technical detail.

Let us only devote a few words to the vertical agreements which are frequently encountered in practice.

Vertical contracts include major distribution contracts, such as franchise contracts, exclusive distributorships, and sales agency contracts.

Vertical contracts are normally supposed to escape the prohibition in principle of hindering competition, as laid down in Article 101 § 1 of the Treaty:

• either because the latter simply does not fall within the scope of this provision;

• or, because although they exceed the legal thresholds, they are expressly “excluded” by an exemption regulation and, as such, presumed to meet the conditions set by Article 101 § 3 of the Treaty.

However, even minor or exempt agreements are affected if they contain “hard-core restrictions” or “black clauses”, as listed in the various European exemption regulations.

These include, in particular, non-competition clauses whereby the duration is indefinite or exceeds five years, or even one year for franchise contracts.

In all these cases, the agreement falls outside the exclusion or exemption, which implies, in order to assess its validity, and thus to escape the principle prohibition laid down by Article 101 § 1, to demonstrate that the conditions of the exception enshrined in § 3 are met in the present case (competitive assessment). To be valid, the restrictive competition agreement must therefore “improve the production or distribution of products, or promote technical or economic progress, while reserving for users a fair share of the resulting profit” and relate to practices which are essential and will not give companies the power to eliminate competition (101 § 3).

These rules are applicable mutatis mutandis in national law.

Main legal references

Article 101 of the Treaty of the European Union

Communication from the Commission – Communication on agreements of minor importance which do not appreciably restrict competition within the meaning of Article 101 (1) of the Treaty on the Functioning of the European Union (de minimis communication) OJ C 291, 8/30/2014, p. 1–4

Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices.

Regulation (EU) No 461/2010 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the automotive sector.

Book IV of the Code of Economic Law