Key points
- The protection of the buyer of a business (fonds de commerce) rests largely on the seller’s statutory and contractual warranties.
- The warranty against eviction under Article 1626 of the French Civil Code (Code civil) is the basis of the seller’s non-compete obligation, even without a clause.
- The warranty against hidden defects under Article 1641 of the Civil Code may apply, but applying it to a business is delicate.
- The warranty as to the statements in the deed protects the buyer against inaccuracy in the information the seller declares in it, for example on turnover, profits or the lease.
- Contractual warranties (non-compete, liability warranty (garantie de passif), escrow) tailor the allocation of risk.
- Prior due diligence, both accounting and legal, is inseparable from the warranties: you can only usefully cover what you have first identified.
Buying a business means acquiring a going concern, with its customers, its contracts and its risks. For the buyer, the protection of the transaction rests largely on the seller’s warranties. Some are statutory and apply automatically; others are contractual and are negotiated. Combining them well protects the buyer against unpleasant surprises and clarifies responsibilities.
The warranty against eviction
The first statutory warranty is the warranty against eviction (garantie d’éviction). Article 1626 of the Civil Code provides that “even if no stipulation was made on the warranty at the time of the sale, the seller is obliged by law to warrant the buyer against eviction suffered in respect of all or part of the thing sold” (unofficial translation). Applied to a business, this warranty protects the buyer against disturbance caused by the seller: in particular, it prohibits the seller from setting up again in a competing activity that would divert the customers transferred. It is the basis of the non-compete obligation that weighs on every seller of a business, even without a clause.
The warranty against hidden defects
The second statutory warranty is the warranty against hidden defects. Under 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” (unofficial translation). It may apply, subject to conditions, to defects affecting elements of the business. Applying it to a universality of assets (universalité) such as a business is, however, delicate, and it is often supplemented or excluded by contractual provisions.
The warranty as to the statements in the deed
Specific to the sale of a business, the warranty as to the statements in the deed protects the buyer against inaccuracy in the information the seller declares in it, for example on turnover, profits or the lease. Since Law No. 2019-744 of 19 July 2019, these statements are no longer mandatory: only the document setting out monthly turnover provided for by Article L. 141-2 of the French Commercial Code (Code de commerce) remains. Where they appear in the deed, the seller warrants their accuracy notwithstanding any clause to the contrary, under the conditions of Articles 1644 and 1645 of the Civil Code (Article L. 141-3 of the Commercial Code (in French)). The buyer may then obtain a price reduction, or even return the business against repayment of the price, provided they act within one year of taking possession (Article L. 141-4 (in French)). This warranty underlines the importance of the accuracy of the information provided during the sale.
Contractual warranties
Beyond the statutory warranties, the deed of sale may provide for contractual warranties negotiated between the parties. The non-compete clause reinforces and specifies the seller’s statutory obligation: its duration, geographical scope and the activities covered must be proportionate. A liability or asset warranty (garantie de passif ou d’actif) may cover debts or risks that arose before the sale but come to light after it. A turnover or customer warranty clause may also be considered. These tailored provisions adjust the allocation of risk to the reality of the transaction.
Combining and calibrating the warranties
The buyer’s protection comes from a coherent combination of these warranties. Prior due diligence on the business (accounting, legal, employment) identifies the risk areas to be covered. Contractual warranties fill what the statutory warranties do not cover, or cover imperfectly. Holding part of the price in escrow can also help ensure that a claim under a liability warranty can actually be enforced. The whole must be balanced: unbalanced warranties often turn against the party that imposed them.
Prior due diligence, the foundation of the warranties
No warranty replaces serious due diligence. Before acquiring a business, analysing the accounts, current contracts, the lease, and the employment and tax position makes it possible to identify the real risks. It is this due diligence that steers the negotiation of contractual warranties: you can only usefully cover what you have first identified. Incomplete due diligence leads to unsuitable warranties, either too general to be effective or silent on the risk that will materialise. Due diligence and warranties are thus an inseparable pair in protecting the buyer.
On the seller’s side, due diligence is also an opportunity to prepare accurate, documented information, which limits the risk of later disputes over the statements in the deed.
How we act
- Legal due diligence before the sale.
- Drafting and negotiating statutory and contractual warranties.
- Structuring the liability warranty and the escrow.
- Post-sale disputes and warranty claims.
Points to watch
- Do not overlook the warranty against eviction, the source of the seller’s non-compete obligation.
- Carry out prior due diligence to target the risks to be covered.
- Calibrate the non-compete clause (duration, scope, activities).
- Provide, if needed, for a liability warranty and its escrow.
- Check the accuracy of the statements in the deed.
FAQ
Can the seller of a business set up again next door?
No: the warranty against eviction (Article 1626 of the Civil Code) prohibits the seller from diverting the customers transferred, even without a non-compete clause. A clause specifies and reinforces this obligation.
Which warranties cover hidden debts?
A contractual liability warranty, negotiated in the deed, makes it possible to cover debts that arose before the sale but come to light after it. Its effectiveness depends on its drafting and on any escrow.
Does the warranty against hidden defects apply to a business?
It may apply subject to conditions (Article 1641), but applying it to a universality of assets such as a business is delicate; contractual warranties usefully supplement it.
Is a non-compete clause for the seller mandatory?
The warranty against eviction already requires the seller not to divert the customers transferred (Article 1626). A non-compete clause specifies and reinforces this obligation: its duration, scope and activities must be proportionate for it to be valid.
What is a liability warranty?
It is a contractual warranty under which the seller undertakes to bear debts or risks that arose before the sale but come to light after it. Its effectiveness depends on its drafting and, often, on holding part of the price in escrow.
Business sale warranties checklist
- Prior due diligence (accounting, legal, employment, tax).
- Warranty against eviction and a proportionate non-compete clause.
- Warranty against hidden defects and warranty as to the statements in the deed.
- Liability warranty suited to the risks identified.
- Escrow of part of the price, if necessary.
- Accurate, documented information.
Official sources
- Article 1626 of the Civil Code, warranty against eviction: Légifrance (in French)
- Article 1641 of the Civil Code, warranty against hidden defects: Légifrance (in French)
Every situation is different and we make no promise of outcome. To make the warranties in a sale of a business (fonds de commerce) legally sound, our fonds de commerce sale and purchase lawyers assist you.
