Buying a business or taking over a professional clientele is a major investment for any entrepreneur. Over and above the premises and equipment, it is the customer base, the fruit of years of work, that constitutes the real value of the transaction. It is therefore natural to want to protect this asset against any competition from the seller. The law provides safeguards, but their effectiveness often depends on the clarity of the undertakings given. This protection, which is one of the sources of the non-competition obligationis part of a broader legal framework that all managers need to master in order to secure their transactions. This article sets out the rules applicable to the sale of businesses and civil clienteles.
The non-competition obligation in agreements relating to business assets
When a business changes hands, whether by sale, transfer to a company or even lease, the question of competition from the previous operator immediately arises. To guarantee the value of the assets transferred, the law has put in place protective mechanisms, the most important of which is the eviction guarantee.
Transfer of a business: an essential legal guarantee against eviction
When selling a business, the seller is legally bound to provide a guarantee against eviction to the buyer. In practical terms, this means that the vendor has an obligation not to seek to divert the clientele that he has just sold. This non-competition obligation is considered to be a direct consequence of the legal warranty set out in article 1626 of the Civil Code. It applies even if the deed of sale contains no express clause on the subject.
This protection is a matter of public policy. In other words, the parties cannot totally disregard it. The seller cannot take back with one hand what he has sold with the other. Case law is consistent on this point: any act by the seller that is likely to reduce goodwill or divert customers from the transferred business constitutes a breach of this guarantee. This applies primarily to the re-establishment of a similar business which, because of its proximity or nature, would inevitably attract the former customer base. The aim is simple: to ensure that the purchaser enjoys the benefits of the purchase and is able to retain the customer base that has been transferred.
Even if a time-limited non-competition clause is included in the contract, the legal warranty against eviction continues to apply beyond its term. The expiry of the clause does not release the seller from its fundamental obligation not to divert the customers transferred.
Other business transactions: exchange, contribution, sharing and management lease
The principle of non-competition also applies, with certain adaptations, to other legal transactions involving a business.
In the case of a partnership contributionUnder the terms of the agreement, the contributor of the business is bound to the company by the same guarantee as a seller to a buyer. He must therefore refrain from competing with the company to which he has contributed his business. This obligation derives directly from article 1843-3 of the Civil Code.
During a shareIn the event of a division of a business, for example as a result of an inheritance or the dissolution of a company, the person who receives the business benefits from protection against competition from his former co-sharers. Case law considers that it would be contrary to the balance of the division for one of the co-divestors to empty the business of its substance by creating a competing business.
La lease management presents a special situation. For the duration of the contract, the lessor (owner of the business) must guarantee the tenant-manager peaceful enjoyment of the business. This obligation prevents him from competing with the leased business. Conversely, the tenant-manager must not misappropriate the customer base for his own benefit. However, at the end of the contract, and in the absence of a specific clause, the tenant-manager regains full entrepreneurial freedom and may open a competing business. This is why a post-contractual non-competition clause is often included, and is necessary to protect the lessor.
Non-competition in civil customer agreements
For a long time considered to be "non-tradable" because they were attached to the person of the professional, civil clienteles (doctors, lawyers, architects, etc.) have undergone major changes. Recognition of their asset value and the possibility of transferring them has logically led to the application of non-competition mechanisms, which are essential to enhancing the value of this transfer.
The statutory non-competition obligation: specific cases of regulated professions
For many liberal professions, non-competition rules are not left to the sole discretion of the parties. They are often governed, or even imposed, by legislation or the codes of conduct of professional bodies.
For example, the Code rural et de la pêche maritime (Rural and Maritime Fishing Code) stipulates that a veterinary surgeon who transfers his or her clientele may not relocate within a defined area and timeframe. Similarly, the statutes of general insurance agents stipulate a non-re-establishment obligation for agents selling their portfolios. In the context of replacement contracts, the replacing professional is often prohibited from setting up in the vicinity of the practice of the colleague being replaced for a certain period of time. These provisions are designed to preserve the value of the client base and ensure an effective transfer.
Non-competition in the absence of legislation: the contribution of case law
The major turning point came with the Court of Cassation's ruling of 7 November 2000, which accepted the validity of transfers of clients under civil law, provided that the patient's or client's freedom of choice was preserved. This decision paved the way for a "patrimonialization" of the liberal profession's business, bringing it closer to that of a business.
As a result, even in the absence of a profession-specific text, case law tends to recognise an implicit non-competition obligation on the part of the transferor of a civil clientele. The reasoning is similar to that applied to business assets: the undertaking to introduce a successor and to transfer a customer base to him would be rendered meaningless if the transferor could immediately capture that same customer base again. This obligation is based on the requirement of contractual good faith, a general principle of contract law. The transferor must act loyally to enable the transferee to benefit from the essential element of the contract: the customer base.
Content and scope of the obligation: determining prohibited activities
Defining the scope of the ban is a fundamental step. An obligation that is too vague risks being ineffective, while an obligation that is too broad could be deemed excessive and annulled by a judge. The scope of the obligation is assessed according to two factors: the nature of the prohibited activity and the ways in which competition is exercised.
The prohibited activity is generally one that competes directly with the business or customer base being transferred. These are activities that are aimed at the same customers for identical or substitutable products or services. For example, the vendor of a bakery-pastry shop may not open a similar business nearby.
Competition may be direct or indirect. The prohibition does not apply only to the creation of a new business under one's own name. It often extends to more subtle forms of competition:
- Acquire a stake in a competing company, even as a minority or limited partner.
- Taking up a salaried or management position in a rival company.
- Acting through an intermediary, such as a spouse, child or shell company.
The wording of the clause must be as precise as possible to cover these different eventualities and avoid any ambiguity that could be exploited at a later date.
Challenges and legal certainty: the importance of drafting clauses
Although the law offers basic protection, it remains general. In the case of business transfers, as in the case of civil clienteles, legal certainty inevitably requires the drafting of a tailor-made non-competition clause. Such a clause removes uncertainties by precisely defining the scope of the prohibition: duration, geographical area, nature of the activities covered and prohibited forms of competition.
However, this contractual freedom is not without limits. To be enforceable, the clause must be proportionate to the buyer's legitimate interests and must not prevent the seller from carrying on any professional activity. A clause that is deemed excessive in terms of its scope or duration may be struck down by the courts. Knowledge of criteria for the validity of a non-competition clause is therefore essential to guarantee its effectiveness.
Transferring a business is a complex operation in which the financial and legal issues are closely intertwined. To ensure that your transactions are secure and that your interests are protected, it is wise to be accompanied by an expert lawyer. Contact our firm for an analysis of your situation.
Sources
- Commercial code
- Civil Code
- Rural and Maritime Fishing Code
- Law no. 71-1130 of 31 December 1971 reforming certain judicial and legal professions
- Law no. 2015-990 of 6 August 2015 for growth, activity and equal economic opportunities
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