Non-Compete and the Warranty Against Eviction When Selling a Business in France

The non-compete when selling a business in France: two layers of protection

What a buyer pays for in a fonds de commerce is, above everything else, the clientele. French law protects that purchase twice over. First by the warranty against eviction, owed by every seller with or without a stipulation: the buyer must not be disturbed in what it bought - not by third parties' prior rights, and not by the seller itself (C. civ. Art. 1626). Second by contract: nearly every deed adds a non-compete (or non-reestablishment) clause, sharpening the legal duty into defined activities, territories and durations. The seller who reopens across the street, poaches the customer file or competes through a spouse, a son or a shell company meets both layers at once - and the sanctions run from damages and penalty clauses to an injunction to shut the competing activity down.

This guide covers both layers as they apply to the sale of a business: the warranty against eviction by third parties and its remedies, the public-order legal non-compete that exists without any clause, the validity conditions and reach of the contractual non-compete, who benefits from it and who is bound, and how it is enforced.

The warranty against eviction: the base beneath any non-compete

The rule. Even with no stipulation in the deed, the seller must warrant the buyer against the eviction it suffers in all or part of the thing sold, and against charges on it not declared at the sale (C. civ. Art. 1626). The warranty has two faces: the seller answers for disturbances caused by third parties, and for those it causes itself.

Third parties' acts. Against third parties, the buyer can invoke only disturbances of right, challenges to the existence, nature or extent of its ownership, whose origin predates the sale. Two features single this face out: the parties may lawfully derogate from it in the deed (C. civ. Art. 1628 forbids that only for the seller's personal acts), and the seller owes nothing where the buyer could have avoided the eviction or brought it on by its own fault.

Total eviction. Eviction is total when it stops the buyer operating the business at all - as where a court-ordered closure of a hotel emptied the acquired fonds of all value. The good-faith buyer then claims restitution of the price, the costs of its warranty claim, and damages (C. civ. Art. 1630). The price restitution has its own arithmetic: if the fonds lost value after the sale, the seller still refunds the whole price (C. civ. Art. 1631) - less only the profit the buyer drew from degradations it caused (C. civ. Art. 1632); if the fonds gained value independently of the buyer, the seller refunds the price plus the increase (C. civ. Art. 1633), the value being assessed at the date of the eviction decision.

Partial eviction. Eviction is partial when a third party claims ownership of one or more elements of the fonds - the lease being the classic battlefield, covered in this series' guide to the lease in a business sale. The buyer can have the sale itself rescinded only if the element lost was essential - one without which it would not have bought (C. civ. Art. 1636); otherwise the remedies are damages or a price reduction (C. civ. Art. 1637).

The seller's own acts. Applied to the fonds, the warranty for the seller's personal acts means, at its core, that the seller must not undermine the buyer's rights by diverting the clientele of the business sold. It reaches further than competition in the market sense: the seller must abstain from any act depriving the buyer of the advantages of the fonds and causing it loss - the case law includes a seller who canvassed former clients with private-life slurs against the buyer, costing the fonds 97 of its 201 clients. That personal-acts warranty is the doorway to everything below: the legal non-compete is its main expression, and the contractual clause its negotiated extension.

The legal non-compete: it binds the seller even with no clause

What it forbids. The seller may set up in business again - but must abstain from any act of a kind to diminish the custom and divert the clientele of the fonds sold. The leading illustration is deliberately extreme: given the very special nature of the business (broom and heather-fence making) and of its clientele, the seller breached the legal duty by resuming the same activity, in the same commune, the day after the buyer started trading, deliberately competing for suppliers, workforce and customers.

Public order, twice. The duty is public order, with two consequences: it applies even where the deed contains no non-reestablishment clause - and it keeps applying after an agreed clause expires; and the deed cannot limit or exclude it (C. civ. Art. 1628).

Who owes it. The duty rests on the seller. Where the seller is a company, the bar on diverting the clientele binds the company, its executive, and anyone the executive interposes to escape it. The case law's example: after a group company sold its fonds, its chairman, a shareholder in every group company, who had signed the deed and knew its undertakings, gradually steered a sister company he also chaired into selling similar, then directly competing products; the sister company was held liable and ordered to stop.

Is the seller's new activity a non-compete breach?

Pick what the seller is doing - the check maps it against the case law.

The non-compete clause: what makes it valid

Almost every fonds sale adds a contractual non-compete on top of the legal duty - sometimes reciprocal, notably on a partial sale where each party keeps an activity. The deed may pair it with a distinct non-solicitation clause barring the seller from hiring the staff of the business sold: the two are independent unless one is drafted inside the other. Validity turns on three conditions:

• Untainted consent. The seller's agreement must be free of defects (C. civ. Art. 1128) - a commitment extracted by pressure, threats or blackmail, unlimited in time and gravely harmful to the seller's professional future, does not stand.
• Proportionality. The clause is legitimate only if it stops short of a general and absolute prohibition and restricts the seller's activity no further than the buyer's protection requires. The Cour de cassation tests it against the object of the contract, or against the commercial interests at stake: the buyer's interest is that the clientele not be diverted and that a competitor not profit at once from the seller's knowledge; the seller's is to go on earning a living.
• Limits in time and in space. The clause must be limited in duration and territory - and satisfying those two limits does not automatically clear it of disproportion. Everything rides on the clause's terms and the facts; the conditions apply even where the seller is retiring.

The sanction of a bad clause. A non-conforming clause, in the deed or a separate act, is null, with a relative nullity prescribed in five years (C. com. Art. L 110-4). Nullity of the clause is not the end of the buyer's protection: the buyer can still sue the seller in liability on proof of unlawful unfair competition - and the public-order legal duty stands regardless.

What the non-compete clause forbids - and what it does not

Strict interpretation. Because they restrict the freedom of competition, trade and industry, non-compete clauses are read strictly. A clause naming a precise field forbids that field only - an agent barred from the very specific business of fonds and property advertisements stayed free to work the profession's other branches. The commoner drafting, no business "of the same nature" or "similar" to the one sold, hands the assessment to the trial courts.

What "similar" has meant. Held similar: a café-club and a restaurant; bulk stationery supply to businesses and retail stationery; a solarium and a beauty salon; a hotel and the letting of two tourist rooms nearby; and a maker of breeze blocks barred from an "analogous" business could not trade in them either. Held not similar: a fruit-and-vegetable seller selling his own garden's produce (no acts of commerce); a bakery's artisanal loaf-by-loaf trade against industrial bread sold to bakers and depositaries; a drinks bar serving snacks against a fast-food outlet next door - and a café-bar-restaurant seller whose company hired out an upstairs reception room to private parties who catered for themselves.

Measured against real activity. Where the buyer is a company, the clause's protection is measured, save contrary agreement, against the company's real activity, not its statutory objects or its registry extract. A seller of an ambulance business who opened a taxi business in the forbidden zone could not be condemned on the buyer's statutes listing "taxi": the courts had to check whether the buyer really ran taxis at the sale.

Territory. The ban can cover a town, a département, a region, a country or a defined zone - strictly read: a clause naming only the town where the fonds traded left the seller free to reopen in the neighbouring commune. Two measuring rules: a "rayon" (radius) runs as the crow flies; a "distance" follows the shortest usual routes. And a seller lawfully reinstalled beyond the limits may serve clients who live inside them.

Forbidden modes. Parties should spell out the forms of reestablishment they mean to bar; courts will not apply a general "in any manner, directly or indirectly" formula without finding the new activity really falls within it. Under the general formula, the case law has allowed the seller to: work as an employee in a competing fonds (unless the role confuses the clientele), take part in the fonds of a partner (concubine), become a sales representative - and, where the seller had reserved a restaurant with a drinks licence, to buy a brasserie whose hours and main activity differed. It has condemned the seller who: abetted a family member's competing opening, created a competing company or its subsidiaries, signed a competing company's statutes even as a minor shareholder's representative, took part in its management or became its managing partner, or moved a lawfully-kept fonds into a new one while expanding it beyond the narrowly-drawn competitive balance. Merely financing a relative's purchase of a fonds is not, alone, a breach.

Who benefits from the non-compete - and who is bound

Beneficiaries. The clause protects, first, the buyer of the fonds. On successive sales of the same fonds, the clause benefiting (or binding) the first seller does not pass to the next buyer unless it is inserted in the new deed and accepted - the same holds for a third party to the deed. The drafting answer is to say expressly that any sub-purchaser will benefit from the seller's undertaking on a resale; whether the first buyer keeps its own action against the seller after reselling is a question the Cour de cassation has left open. A tenant-manager operating the buyer's fonds cannot invoke the clause for itself. One adjacent caution on what a clause does not promise: an undertaking to "present the clientele" does not warrant that the fonds' clients will remain clients.

Debtors. The seller, owner of the fonds, is the primary debtor. The circle widens on the facts and by succession:

• a non-owner can be bound where he behaved as the true master of the business - the seller's son who operated the fonds, ran the negotiations, had the clause amended and signed the deed was held a debtor;
• the undertaking passes to the seller's heirs, unless they renounced the succession or the clause excludes the transmission;
• spouses who both subscribed the clause are solidarily bound - both answer even if only one violated it; but a husband's personal undertaking over a community-property fonds does not bind his wife, even one who helped run the business, absent a clear intent on her part to take the undertaking on;
• where a company subscribes, its executives or shareholders may bind themselves alongside it; the duty then weighs on the company, on them, and on anyone they interpose - the seller of a restaurant company's shares who managed another company running the barred activity in the same building violated his clause.

Enforcing the non-compete: your options as buyer

Pick the outcome you need - the check gives the legal route and its risks.

Sanctions for breaching the non-compete

Damages. Violation of a valid clause exposes the seller to damages for the buyer's loss (C. civ. Art. 1231-1).

The penalty clause. The deed may fix the sum payable on breach - a penalty the judge can reduce if manifestly excessive or increase if derisory (C. civ. Art. 1231-5).

Injunction. The seller can be ordered, under a daily penalty (astreinte), to stop the competing activity: a seller hired, in breach of his clause, as technical director of a direct competitor was ordered to quit all his functions, and the competitor to end the relationship. The counterweight for buyers moving fast: enforcing an interim order that is later overturned obliges the enforcing party to repair the consequences - provisional enforcement is at the risk of the party pursuing it.

The notary's liability. The professionals are in the frame too: a notary instrumenting the sale answers for failing to warn the seller of the risks of its non-reestablishment undertaking, or for failing to verify that no competing fonds existed within the clause's perimeter.

The employment cross-over. One boundary point with the employees guide in this series: a non-compete clause binding an employee of the fonds passes with the employment contract to the buyer, who owes its financial consideration and can enforce it - the seller no longer can. The seller-side clause discussed here and the employee-side clause travel by different rules; a closing checklist should track both.

Frequently Asked Questions

This article is for general information only and states French law as published in the sources available at the date shown above. It does not constitute legal advice. The validity and reach of a clause depend on its terms and your facts. Always seek qualified legal advice before acting.