Business Contracts

Article 1123, paragraph 2, of the Civil Code sets out the various sanctions applicable in the event of breach of a pre-emption agreement in favor of a third party: “Where a contract is concluded with a third party in breach of a pre-emption agreement, the beneficiary may obtain compensation for the harm suffered. Where the third party was aware of the existence of the agreement and of the benefici …

Sale to a third party in breach of pre-emption agreement

Article 1123, paragraph 2, of the Civil Code sets out the various sanctions applicable in the event of breach of a pre-emption agreement in favor of a third party: “Where a contract is concluded with a third party in breach of a pre-emption agreement, the beneficiary may obtain compensation for the harm suffered. Where the third party was aware of the existence of the agreement and of the beneficiary's intention to avail himself of it, the beneficiary may also sue for invalidity or ask the court to substitute him/her for the third party in the agreement concluded”.

Article 1123 first establishes the rule that the beneficiary may obtain compensation for harm suffered. This provision codifies case law to the effect that in principle, the beneficiary of a pre-emption agreement has no more than a bare right to claim where his or her right has been disregarded . Although the text does not specify the person or persons who may be sued for damages by the beneficiary, a promisor who intentionally makes it impossible to perform the pre-emption agreement clearly owes damages to the beneficiary who has been deprived of his or her right . Thus, a shareholder who, having committed himself to offering his shares or clientele to a company as a first priority, commits a fault by breaking off negotiations and transferring his shares to a third party, without first inviting the latter to purchase them under the same conditions, when said undertaking had demonstrated its firm intention to acquire the shares in question by unreservedly accepting the suggested procedure and taking all the necessary steps to provide the requisite financial guarantees . Similarly, if the titleholder of a notarial office is free to exercise his right of nomination and to choose his or her successor until the Minister of Justice appoints a new appointee - which gives him or her the option, until that appointment, of withdrawing a previous candidate and replacing it with another - such an option does not exclude, in accordance with the rules of private law, the obligation to make good the damage resulting from the non-fulfillment of the pre-emption agreement previously entered into in the event of the transfer of his or her notarial office .

The beneficiary cannot invoke the third party's contractual liability, since no rights can be asserted against the latter for non-performance of the pre-emption agreement, to which he is not a party . In respect of tort, the Court of Cassation distinguishes between third parties acting in good faith and those acting in bad faith. In the latter case, the Court considers that the courts are free to award damages as they see fit . In some cases, the courts have ordered both the promisor and the third-party purchaser to pay damages based on bad faith . To obtain damages, the beneficiary must, in all cases, prove the harm suffered as a result of the breach of the agreement .

Article 1123 also grants the beneficiary the opportunity to sue either for invalidity or to substitute the third party to the sale, but only when the latter has acted in bad faith. This provision, which has its origins in case law, enshrines the beneficiary's right of option between invalidity of the agreement and substitution against a third party acting in bad faith, following various developments in case law. Initially, the Court of Cassation accepted that when the third-party purchaser acted in bad faith, the courts could annul the sale  . Then, the Court specified that the invalidity of a sale implemented in breach of a pre-emption agreement could only be ordered if the purchaser, presumed to be acting in good faith, had contracted under fraudulent conditions, such fraud implying his knowledge, not only of the existence of the pre-emption clause, but also of the beneficiary's intention to invoke it . With regard to the possibility for the beneficiary to ask to be substituted for the third party in bad faith in the sale agreement, the Court initially refused  , before making it conditional on the third party's knowledge, at the time he contracted, of the existence of the pre-emption agreement and of the beneficiary's intention to avail himself of it . The burden of proof lies with the beneficiary . Knowledge of the pre-emption agreement and of the beneficiary's intention to avail himself of it must be assessed at the date of the bilateral promise of sale granted to the third party, which is equivalent to a sale, and not at the date of its reiteration in an authenticated deed . In the case of a unilateral promise of sale, this knowledge must be assessed at the time when the beneficiary gives his consent, i.e. at the date when the option is exercised. Consequently, a court of appeal cannot reject the claim of the beneficiary of a pre-emption agreement for annulment of the sale, and substitution in the rights of the purchaser, on the grounds that the letter of the pre-emption agreement does not allow the conclusion that, in the event of an intention to sell, the obligation to give preference to the beneficiary encumbers the unilateral promise of sale, concluded before the expiry of the term of a pre-emption agreement but for which the option was exercised subsequently, even though the pre-emption agreement implies an obligation on the part of the promisor to give preference to the beneficiary when he decides to sell the property . Finally, according to the Court of Cassation, where the beneficiary fails to prove that the third party had been informed of his intention to avail himself of the pre-emption agreement, breach of the agreement cannot be sanctioned by annulment and/or substitution in the sale agreement , but only by the award of damages .

Cass. 1re civ., 20 February 1962, LawLex202300006355JBJ.

Cass. 3e civ. 1 April 1992, LawLex202200000983JBJ.

Cass. 3e civ. 30 April 1997, LawLex202300006332JBJ, holding that a court of appeal cannot order the substitution of a beneficiary in place of a third-party purchaser in a sale implemented in breach of the pre-emption agreement and hold that his rights are enforceable against the latter insofar as fraud has been committed, whereas the obligation to act or not to act must be resolved in damages in the event of non-performance on the part of the promisor.

Cass. mixt. 26 May 2006, LawLex202200001078JBJ; 14 February 2007, LawLex202200001079JBJ.

Cass. 3e civ, 4 March 2021, LawLex202200002683JBJ.

Cass. 3e civ, 25 March 2009, LawLex202200000998JBJ.

Cass. 3e civ. 6 December 2018, LawLex202200001076JBJ.

Cass. 3e civ. 29 June 2010, LawLex202200001080JBJ, specifying, in such a case, that beneficiaries who do not demonstrate that the third party, aware of the pre-emption agreement, had been informed of their intention to avail themselves of it, are not entitled to reproach the latter for not having taken the initiative to verify their intention.

Cass. 3e civ, 31 January 2007, LawLex202200001080JBJ.

Cass. com. 12 May 1992, LawLex202200002311JBJ

Cass. 1re civ, 16 July 1985, LawLex202200001077JBJ.

Cass. 3e civ, 24 March 1999, LawLex202200000996JBJ.

Cass. 1re civ, 20 February 1962, LawLex202300006355JBJ, cited above.

Cass. 3e civ. 22 April 1976, LawLex202200000995JBJ, in a case where, in order to sell the disputed property to a third party with whom he had fraudulently colluded to defeat the provisions of the pre-emption agreement, the promisor offered the beneficiary a price that the beneficiary would be unable to accept.

On the sale of shares by a shareholder to a third party undertaking, in breach of the pre-emption agreement benefiting the other shareholders, Cass. com, 9 April 2002, LawLex202300005779JBJ, rejecting, in the absence of proof of harm, the beneficiaries' claim for compensation on the grounds that they were seeking to sell their shares and not to acquire a larger stake in the undertaking, did not claim to be in a position to purchase the shares in question at the price set by the transferor, or even at a price set by an expert, nor did they establish that, as a result of the disputed transfer, they would have been prevented from selling their shares with a guarantee substitution.

Cass. 1st civ. 20 February 1962, LawLex202300006355JBJ. See also Cass. 3e civ., 4 March 1971, LawLex202300006354JBJ, criticizing a judgment by a court of appeal which had declared the sale implemented in violation of the pre-emption agreement valid and enforceable against the beneficiary, on the grounds that publicity of the agreement, which was not compulsory, did not amount to a presumption of fraudulent collusion between the vendor and the purchasers, but only to a presumption of knowledge, whereas a pre-emption agreement is only enforceable if it has been publicized.

Cass. 3e civ, 26 October 1982, LawLex202300006348JBJ; Cass. com, 11 March 2014, LawLex202200000351JBJ.

Business Contracts

106. Sale to a third party in breach of pre-emption agreement

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106. Sale to a third party in breach of pre-emption agreement

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