Non-competition obligation and final settlement receipt: what to do?

Imagine: you are the owner of a commercial building in Lingolsheim, leased to a company that goes bankrupt. A buyer is found, but the employees are made redundant for economic reasons as part of a transfer plan. Some had signed a non-competition clause with compensation. Can the buyer require compliance with this clause? And if the employees have signed a final settlement receipt with the former employer, can the buyer rely on it?

This question, crucial for any business real estate player, was decided by the French Supreme Court on 6 December 1994 (appeal no. 91-42.173). The High Court answered in the affirmative on both points. Explanations.

The facts: a story that happens every day

The company Huard UCF SCM, specialised in the exploitation of patents and licences, is placed in judicial reorganisation. A transfer plan is adopted, covering in particular the intangible assets of the business: leasehold rights, trade name, industrial property rights. As part of this plan, several employees are made redundant for economic reasons. Some of them had subscribed, upon hiring, a non-competition obligation accompanied by a compensatory allowance.

The buyer, a purchasing company, intends to rely on this non-competition clause against the employees. The employees, for their part, have signed a final settlement receipt with the company Huard UCF SCM (the former employer). This receipt mentioned the payment of all sums due in respect of the termination. The employees consider that this receipt releases the former employer, but not the buyer, and contest being bound by the non-competition clause vis-à-vis the buyer.

The case comes before the Rennes Court of Appeal, which rules in favour of the employees. The buyer appeals to the Supreme Court. The Supreme Court quashes the judgment and refers the case to the Douai Court of Appeal. For the High Court, the non-competition obligation is transferred to the buyer, and the final settlement receipt given to the former employer constitutes a discharge for the buyer.

The reasoning of the court — dissected

The reasoning of the Supreme Court rests on two pillars. First, the principle of the transfer of ancillary obligations of the employment contract. When a transfer plan transfers a business or part of a business, the employment contracts are automatically transferred to the buyer (Article L. 1224-1 of the French Labour Code, then Article L. 122-12). This transfer includes not only the contract itself, but also its accessories, such as the non-competition clause. This is not a personal obligation of the employee, but an obligation attached to the employment contract. It is therefore automatically transferred to the buyer, provided it is valid (limited in time, in space, and accompanied by compensation).

Second, the Court considers that the final settlement receipt given by the employee to the former employer has a discharging effect vis-à-vis the buyer. Why? Because the final settlement receipt constitutes a discharge given by the employee for all sums due in respect of the termination (redundancy payment, payment in lieu of notice, etc.). This discharge is opposable to the buyer, who is subrogated in the rights and obligations of the former employer. In other words, the buyer can rely on this receipt to demonstrate that all sums have been paid, and therefore that the non-competition obligation has been performed (the payment of the compensatory allowance is a condition of validity of the clause).

This decision is not a reversal, but a confirmation and clarification. The Supreme Court here applies the general principles of the transfer of employment contracts and the discharging effect of the final settlement receipt. It rejects the employees' argument that the receipt only applies to relations with the former employer. For the Court, the buyer is the new employer, and the receipt is opposable to it.

What this means for you — practically

For landlord owners: if you lease premises to a company that is the subject of a transfer after judicial reorganisation, and the buyer takes over the lease, note that the non-competition clauses subscribed by the employees of the former tenant are transferred. This may have an impact on the value of the business. For example, if the buyer intends to operate the same type of activity, it can require former employees to respect their non-competition clause, which limits competition. In Schiltigheim, recently, a buyer was able to prohibit a former employee from opening a competing business within 5 km for 2 years.

For tenants (companies): if you are a buyer, you must check for the existence of non-competition clauses in the employment contracts of the employees taken over. You can rely on the final settlement receipt signed by the employee with the former employer to demonstrate that the compensatory allowance has been paid. If not, you will have to pay it yourself, otherwise the non-competition clause may be void.

For employees: be careful not to sign a final settlement receipt too quickly. By signing, you release not only the former employer but also the buyer from all sums relating to the termination. If you wish to challenge the amount of the compensatory allowance for non-competition, you must do so before signing the receipt, or within six months of signing (time limit for challenge).

For real estate professionals (agents, notaries, judicial administrators): this decision reminds you of the importance of checking the clauses of employment contracts during a business transfer. The buyer inherits both obligations and rights. A well-drafted final settlement receipt can avoid future litigation.

Four tips to avoid this type of dispute

• Check non-competition clauses before the transfer: any buyer must ask the judicial administrator for the list of employees and their employment contracts. Identify those who are subject to a non-competition clause, check its validity (duration, area, compensation) and its performance (payment of the allowance).
• Obtain the signed final settlement receipt: upon termination, have the employee sign a final settlement receipt detailing the sums paid (redundancy payment, payment in lieu of notice, non-competition allowance). Keep it carefully, it will serve as your discharge.
• Anticipate the payment of the non-competition allowance: if the former employer has not paid it, the buyer must pay it within the prescribed time limits (usually monthly). Failing that, the non-competition clause becomes void. Provide a provision in the transfer plan.
• Inform employees of the transfer of the clause: the buyer must notify the employees concerned that it is taking over the non-competition clause. A simple registered letter is sufficient. This avoids any ambiguity and allows the employee to know to whom they must account.

Further reading: related case law and developments

This decision is part of a consistent line. Already, in a judgment of 25 November 1992 (no. 90-42.073), the Supreme Court had ruled that the non-competition clause is transferred to the buyer in the event of a business transfer. More recently, the Social Chamber (judgment of 10 July 2024, no. 22-17.348) recalled that the buyer can rely on the non-competition clause even if the former employer has not paid the allowance, provided that the buyer pays it itself. The trend is therefore towards protecting the buyer, considered as the new employer.

However, be careful: the final settlement receipt has a discharging effect only if it complies with legal provisions (mention of the six-month time limit for challenge, employee's signature, etc.). If it is irregular, the employee can challenge it. Furthermore, the non-competition clause must be proportionate and necessary. If it is abusive (too wide an area, excessive duration), it may be void.

For the future, courts may be called upon to clarify the consequences in the event of non-payment of the allowance by the buyer. Current case law tends to cancel the clause if the allowance is not paid, but some judges may grant a period for regularisation.

Summary and next steps

What to remember:

• The non-competition clause with compensation is automatically transferred to the buyer in the event of a business transfer after judicial reorganisation.
• The final settlement receipt signed by the employee with the former employer is opposable to the buyer, who can rely on it as a discharge.
• The buyer must pay the compensatory allowance for non-competition if it wants the clause to remain valid.
• The employee must challenge the receipt within six months if they consider they have not been fully paid.

Checklist for the buyer:

1. Obtain the list of employees and their employment contracts.
2. Identify non-competition clauses and check their validity.
3. Verify that the allowance has been paid (final settlement receipt).
4. If not, make provision and pay the allowance upon transfer.
5. Notify each employee of the takeover of the clause.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →