The legal guarantee against eviction: conditions of implementation

Cass. com, 16 November 2022, n°21-13.561

In its judgment of 16 November 2022, the Court of Cassation ruled on the conditions for triggering the eviction warranty in an assignment contract.

1. The legal framework

Article 1626 of the Civil Code states that:

“Although no stipulation on the guarantee was made at the time of the sale, the seller is obliged by law to indemnify the purchaser against eviction from the whole or part of the property sold, or against charges claimed on the property and not declared at the time of the sale.

2. The facts

A SAS acquires shares in two companies specialising in pneumatic tools for car maintenance.

The price is set according to an “earn out” clause, which provides for the payment of a part of the price at the time of the transfer, and a complement paid according to the results of the transferred company over the following three financial years.

In order to ensure a smooth transition in the management of the transferred companies, the transferors become managers of one of them. The deed of transfer provided for a non-competition and non-reinstatement clause for the transferors, and the employment contracts provided for a non-competition and exclusivity clause.

Following a dispute between the parties concerning the payment of the price, the transferors summoned the SAS to pay the additional price provided for in the transfer deed.

The SAS filed a counterclaim for damages, claiming that the assignors had breached their non-compete obligation and their legal obligation to guarantee against eviction.

The Lyon Court of Appeal rejected the SAS’s counterclaims, considering that the warranty of eviction was inapplicable, as the company had not been able to justify a restriction of its economic activity due to the activities of the assignors.

The SAS appealed to the Court of Cassation on the grounds that the transferee of the shares of a company is entitled to rely on the legal guarantee of eviction, which prohibits the transferor from acting in such a way as to prevent it from pursuing the economic activity and achieving the corporate purpose of the transferred company.

3. The opinion of the Court of Cassation

The Court of Cassation overturned the decision on the grounds that it follows from the aforementioned text that the legal guarantee of eviction entails, for the transferor of the shares in a company, the prohibition of re-establishing himself if such reinstatement is likely to prevent the purchaser of such shares from continuing the economic activity of the transferred company and from achieving the corporate purpose.

In rejecting the transferee company’s counterclaim under the legal warranty against eviction, the Court of Appeal held that the company was unable to justify any restriction of its own economic activity as a result of the activities pursued by the transferor.

In doing so, the Court of Appeal did not correctly apply the legal warranty of eviction.

This restriction should not be assessed in relation to the activity of the transferee company. On the contrary, it is a matter of assessing whether the purchaser is prevented from continuing the economic activity of the transferred company and achieving its corporate purpose, which may be separate activities.