Hidden Defects After a Business Sale in France: What Remedies?

A few months after acquiring a business (fonds de commerce), the buyer sometimes discovers a defect they were unaware of: unusable equipment, an operating authorisation in jeopardy, premises affected by a problem that makes the activity impracticable. The disappointment is all the sharper as the price was paid in reliance on a business presented as sound. The law then offers several remedies, including the statutory warranty against hidden defects provided for by the Civil Code. The conditions must still be met, the right legal basis chosen and action brought within the time limit. The sale of a business adds a difficulty of its own: the defect must affect an element of the business, which raises often technical questions of characterisation and proof.

Every situation is different and depends on the nature of the defect as well as on the drafting of the deed of sale. The analysis below sets out the applicable framework, not advice tailored to a specific case.

The warranty against hidden defects applied to a business

Article 1641 of the Civil Code requires the seller to warrant the buyer “in respect of hidden defects in the thing sold which make it unfit for its intended use, or which so diminish that use that the buyer would not have acquired it, or would only have paid a lower price for it, had they known of them” (unofficial translation).

Three conditions emerge from this text. The defect must be hidden, that is, not apparent to a normally diligent buyer. It must pre-date the sale. Finally, it must be of a certain seriousness, making the business unfit for its use or significantly diminishing that use. Applied to a business, this warranty requires the defect to affect an element of the business and to compromise its operation. Characterisation remains a question of fact, often decided after an expert assessment.

The two remedies available to the buyer

Article 1644 of the Civil Code gives the buyer a choice: “the buyer may choose to return the thing and have the price repaid, or to keep the thing and have part of the price repaid” (unofficial translation).

The rescission action

The first option is the rescission action (action rédhibitoire). The buyer returns the business and obtains repayment of the price. This route corresponds to the most serious situations, where the defect deprives the business of its usefulness. For a business in operation, it raises practical questions of mutual restitution that are assessed case by case.

The price reduction action

The second option is the price reduction action (action estimatoire). The buyer keeps the business and obtains a price reduction corresponding to the loss in value. It is often preferred where the buyer intends to continue the activity despite the defect. The amount of the reduction depends on the extent of the defect and is for the court to assess; no “standard” percentage can be put forward.

What is the time limit to act?

Article 1648 of the Civil Code sets the time limit: “the action resulting from redhibitory defects must be brought by the buyer within two years of discovery of the defect” (unofficial translation). The starting point is therefore not signature of the deed, but the moment the buyer becomes aware of the defect in its extent and consequences. This time limit means acting methodically from discovery: gathering evidence, having the defect formally recorded and, where appropriate, applying for an expert assessment.

Fraudulent misrepresentation (dol): a ground separate from the warranty against hidden defects

The warranty against hidden defects is not the only remedy. Where the seller has concealed a decisive element, the buyer may rely on fraudulent misrepresentation (dol). Article 1137 of the Civil Code defines dol as obtaining the other party’s consent by schemes or lies, and treats as dol “the intentional concealment by one of the contracting parties of information which it knows to be decisive for the other party” (unofficial translation).

This ground concerns a defect in consent, not a defect in the thing. It requires proof of an intention to deceive, which makes it a separate route, sometimes complementary to the warranty against hidden defects. The choice of the most suitable ground depends on the elements of the file and is decided case by case.

Warranty clauses in the deed of sale

Deeds of sale frequently contain clauses relating to the warranty: seller’s representations, warranty and indemnity (garantie d’actif et de passif) clauses, or clauses limiting the warranty. Their scope depends on their drafting. A clause excluding the warranty does not protect a seller who knew of the defect: good faith governs the outcome.

Analysing these clauses is decisive before any litigation. It determines which ground to favour and the extent of the remedy. This assessment is specific to each deed and cannot be generalised.

Points to watch

• The defect must be hidden, pre-date the sale and be sufficiently serious: three cumulative conditions to establish.
• The time limit is two years from discovery of the defect, not from signature of the deed.
• The price reduction action and the rescission action address different situations: the choice needs to be prepared.
• Fraudulent misrepresentation (dol) is a separate ground, useful where intentional concealment can be established.
• The scope of the warranty clauses in the deed must be analysed before taking action.

When should you consult a lawyer?

A lawyer’s assistance is useful to characterise the defect, choose between the warranty against hidden defects and dol, and bring the action within the time limit. These difficulties often arise after a sale of a business and, when a dispute arises, call for commercial litigation support, for the buyer as well as for the seller facing a claim.

Each matter deserves its own analysis: the solution depends on the facts, on the nature of the defect and on the drafting of the deed of sale.

What the law says

The buyer of a business has several legal bases in the event of a defect. First, the warranty against hidden defects, provided for in Article 1641 of the Civil Code: “The seller is bound by the warranty in respect of hidden defects in the thing sold which make it unfit for its intended use, or which so diminish that use that the buyer would not have acquired it, or would only have paid a lower price for it, had they known of them” (unofficial translation). It requires a defect that pre-dates the sale, is hidden and is sufficiently serious.

Added to this, specific to the sale of a business, is the warranty as to the statements in the deed: where the seller declares information in it (turnover, profits, lease), the seller warrants its accuracy under the conditions of Articles 1644 and 1645 of the Civil Code (Article L. 141-3 of the French Commercial Code (Code de commerce) (in French)). These statements have no longer been mandatory since Law No. 2019-744 of 19 July 2019, and the action must be brought within one year of taking possession of the business (Article L. 141-4 (in French)). The boundary between hidden defect, dol and the warranty as to the statements determines the strategy and the time limits for action.

Official sources

• Article 1641 of the Civil Code, warranty against hidden defects: Légifrance (in French)
• Articles L141-2 to L141-4 of the Commercial Code, deed of sale of the business and warranty as to the statements: Légifrance (in French)

Every situation is different. To bring or challenge a claim after the sale of a business, our fonds de commerce sale and purchase lawyers assist you.

For assistance: fonds de commerce sale and purchase lawyer.