Penalty Clauses in French Contracts: What They Secure and How Judges Police Them

Penalty clauses in French contracts: what they secure and how judges police them

The clause pénale (penalty clause) fixes in advance, as a lump sum, the damages that will sanction a party's breach of contract. Since the 2016 reform the Civil Code no longer defines it, but Article 1231-5 organises its whole litigation life: the sum applies without the creditor proving any prejudice, the judge applies it as written without owing reasons, and the same judge may, even of his own motion, reduce a manifestly excessive figure or raise a derisory one, within rules that are public policy.

This article sets out the definition and the two functions of the penalty clause, the qualification disputes that decide whether the revision power applies at all, its validity, opposability and survival after termination, the drafting points that determine when it can be invoked, the conditions of its enforcement, and the complete regime of judicial revision, including partial performance and the increase of derisory penalties.

Is your clause a penalty clause, and will it hold?

What a clause pénale is: definition and its two functions

The former Article 1226 of the Civil Code, which defined the penalty clause, was repealed by the ordinance of 10 February 2016 reforming contract law. What remains, in Article 1231-5, is the authorisation itself: the parties may fix in advance the amount of the damages that will sanction the debtor's failure to perform. The courts continue to recognise the clause's two functions: it evaluates the damage, and it presses the debtor to perform (Cass. com., 5 mai 2021, n° 19-20.824). Because the stipulation carries that element of constraint within itself, the qualification rests on three cumulative features.

• An engagement to pay something more. The penalty clause supposes an undertaking that adds to the obligations of the contract, leading the debtor to pay more than what the contract itself made him owe; it may accordingly oblige payment of a sum higher than the prejudice. The clause providing that all sums paid by a buyer and all improvements made to the property sold will remain definitively acquired to the seller as lump-sum damages carries such an engagement (Cass. 3e civ., 26 janv. 2011, n° 10-10.376).
• The sanction of a breach. The clause supposes that its debtor owes the sum because he failed to perform a contractual obligation. An indemnity attached to the exercise of a right is outside the category: the internal rules of a professional body keeping six months of dues payable after a member's resignation stipulate no penalty, resignation being the exercise of a statutory right and not a breach (Cass. 1e civ., 23 mars 1983).
• A constraint towards performance. The clause is an evaluation of the damage stipulated to sanction the party who fails to perform. A clause obliging the departing tenant to carry out the reinstatement works and to pay, during those works, a rent computed at double the last rent was a penalty clause, because its effect was to constrain the tenant to perform his obligations (Cass. 3e civ., 1 juill. 1998); so is the clause stipulating an indemnity for early termination equal to the full price that performance to term would have produced (Cass. com., 5 sept. 2019, n° 18-14.427; Cass. 2e civ., 18 déc. 2025, n° 23-23.751).

The clause's practical force is considerable. It applies without the creditor having to prove the existence of any prejudice, and the stipulation of a minimum amount changes nothing to the qualification (Cass. com., 25 juin 2025, n° 24-14.675). The creditor who simply invokes the clause as written owes no demonstration of loss at all (Cass. 3e civ., 20 déc. 2006, n° 05-20.065).

Qualification: which stipulations are penalty clauses, and which are not

The qualification is often the whole dispute, because the judicial revision power of Article 1231-5 attaches to penalty clauses only, whatever label the parties chose. Have been qualified as penalty clauses:

• the clause fixing a sum, other than interest, for late performance (Cass. 3e civ., 6 nov. 1986, n° 85-10.809);
• the clause obliging a lessee, after termination of the lease, to pay the rents for a period in which he no longer enjoys the asset (Cass. com., 8 févr. 2023, n° 21-21.391);
• the occupancy indemnity charged to the lessee who keeps the equipment after the contract ends, even where it is no higher than the agreed rent (Cass. com., 14 juin 2016, n° 15-12.734);
• the clause increasing the rate of a distributor's commission where it is paid late (Cass. com., 11 janv. 1994);
• the clause providing for performance of an obligation under a contractual astreinte (a fixed sum per period of delay) (Cass. 2e civ., 3 sept. 2015, n° 14-20.431);
• the leasing clause fixing in advance a lump-sum indemnity for holding over after termination, where its amount is excessive (Cass. 3e civ., 16 janv. 2025, n° 23-15.256).

Are not penalty clauses, each stipulation following its own regime instead:

• the clause requiring a party only to restitute what it received (Cass. 1e civ., 22 févr. 1977, n° 75-13.717);
• the clause merely fixing the rate of default interest, moratory interest being due as of right at maturity;
• the clause résolutoire (automatic-termination clause) (Cass. 3e civ., 20 juill. 1989, n° 88-13.586);
• the clause fixing only the maximum the indemnity may reach, not its amount (Cass. 2e civ., 31 mars 2022, n° 20-23.284);
• the immobilisation indemnity of a unilateral promise of sale (Cass. 3e civ., 10 mars 2015, n° 13-27.942), unless it sanctions a refusal to buy after every suspensive condition is fulfilled (Cass. 3e civ., 30 janv. 2020, n° 18-24.105);
• the dédit (a paid withdrawal right) (Cass. com., 18 janv. 2011, n° 09-16.863) and the financial counterpart of a non-compete undertaking (CA Paris, 25 avr. 1984);
• the clause evaluating the prejudice consecutive to the termination of the contract (Cass. com., 22 mai 1978, n° 76-15.171) and the indemnity for early repayment of a loan or early termination of a contract (Cass. com., 14 oct. 1997);
• the lump-sum indemnity for revoking a company director without cause (Cass. com., 11 mars 2014, n° 13-10.188), and the notice clause (CA Paris, 25 févr. 1992);
• the clause reproducing the statutory late-payment sanctions of Article L 441-1 of the Commercial Code, which is moratory interest and does not cumulate with legal default interest (Cass. com., 2 nov. 2011, n° 10-14.677; Cass. com., 24 avr. 2024, n° 22-24.275).

Validity, opposability and survival of the penalty clause

The penalty clause is valid even in the absence of any prejudice: aiming at performance as much as at reparation, the parties are free to use it purely as a penalty (Cass. 3e civ., 2 oct. 1974, n° 73-10.951; Cass. 3e civ., 20 déc. 2006, n° 05-20.065). It is an accessory of the obligation whose performance it secures: where the secured obligation is a nullity, the clause falls with it, while the nullity of the clause leaves the obligation standing, and the caducité (lapse) of the contract leaves the penalty clause in place.

No particular form conditions its opposability. The clause has been held opposable although it sat on a barely legible page of a leasing contract in microscopic type, the lessee having signed the contract (Cass. civ., 23 juill. 1979), and although the documents carrying it were unsigned, their addressee having raised no protest after receiving them while the sender had detailed the modalities of the penalties (Cass. com., 25 juin 1991). It was inopposable, in contrast, where it appeared on a wholesaler's invoices and nothing established that the buyer had known of it before the contract or the order (CA Limoges, 20 mai 1996).

The clause survives the résolution (termination for breach) of the contract where it was designed to repair the consequences of that termination (Cass. 3e civ., 12 janv. 1994, n° 91-19.540; Cass. 3e civ., 15 févr. 2005, n° 04-11.223). The survival has two limits: it extends only to the breaches the clause sanctions (CA Paris, 23 oct. 1998), and it is excluded where the termination is due to a cause imputable to the party claiming the penalty, as where a leased truck's sale was resolved for hidden defects and the lessee could not be ordered to pay the penalty for unpaid rents on equipment never fit for service (Cass. com., 13 juin 1977). A clause sanctioning late performance also cannot survive, delay being impossible once the contract is gone.

Drafting the clause: the points that decide when it can be invoked

Because the clause is applied within its terms, the drafting determines its reach. The points the case law has made decisive:

• The triggers. The clause may cover every breach without distinguishing the causes of termination, in which case it applies even where the counterparty terminated the contract abusively (Cass. com., 17 mai 2023, n° 22-10.369), or it may name specific breaches. The choice is strictly applied: a clause stipulated for non-performance cannot be invoked for mere delay or defective performance (Cass. 3e civ., 14 févr. 2019, n° 17-26.758), and one stipulated for unilateral termination cannot be invoked on a judicial termination (Cass. com., 9 oct. 1990, n° 89-12.955).
• The prejudices covered. The penalty extinguishes only the prejudice it takes into account: the penalty repairing an exhibitor's default on the reorganisation of the stand left intact the distinct claim for the lost fees (Cass. com., 20 mai 1997), and a delay penalty leaves room for a claim in reparation of a distinct financial prejudice (Cass. com., 7 déc. 1993).
• The formal notice. The clause should state whether the penalty is incurred without a prior mise en demeure (formal notice to perform). The dispensation can be deduced from the wording, as where performance was due by a fixed date under a stated sum per day of delay from that date (Cass. civ., 9 juin 1999). But where the clause itself requires a formal notice, that notice is mandatory even where it would have been pointless (Cass. 3e civ., 2 févr. 2022, n° 20-21.705).
• The amount and its calculation, which may include the VAT borne by the creditor (Cass. com., 4 juill. 1972).
• The guarantee. Unless the guarantee excludes it, a guarantor engaged for an undetermined amount of the principal debt also guarantees the penalty; the guarantor may seek its moderation, but only through the oblique action, after establishing that the principal debtor does not seek that reduction himself (CA Paris, 18 mars 1985).
• Its outer limit. The clause cannot procure the price twice: the stipulation that sums already paid remain acquired to the seller, who may also sue for payment or termination, does not permit the creditor to collect the cession price twice over (Cass. com., 11 mai 2023, n° 19-24.977).

Would a French judge revise your penalty clause?

Enforcing the penalty: the conditions for collecting it

The clause must be executed where the following conditions are met, and their converse states the debtor's defences:

• The beneficiary has not renounced it, for instance by taking delivery and paying the invoices without reserve (Cass. com., 10 avr. 1964), or by claiming only the amount of the actual prejudice where the clause stipulated a higher indemnity (CA Paris, 29 sept. 1981).
• The sanctioned breach occurred. That condition being sufficient, it does not matter that the delivered equipment was returned, that the buyer had access to the premises before the late handover of the keys, that the security for the penalty was extinguished, or that the beneficiary proves no prejudice (Cass. 3e civ., 20 déc. 2006, n° 05-20.065). The beneficiary may also invoke the clause on proof that the breach was fraudulently concealed from him (Cass. 1e civ., 8 avr. 2010, n° 09-14.597).
• The debtor was put on formal notice to perform (C. civ. Art. 1231), and payment of the penalty can be demanded only after a mise en demeure (formal notice) unless the non-performance is definitive (C. civ. Art. 1231-5).
• The debtor invokes no cause of exoneration. The penalty for the contractor's delay was set aside where the delay was due to the profound modifications the client itself demanded (Cass. civ., 3 févr. 1976), and the penalty for non-performance where each party had shown its will to end the contract (CA Aix, 8 juin 1979).
• The claim comes from the party entitled to it: an architect cannot invoke the penalty clause of the contract between the contractor and the client (Cass. 3e civ., 13 nov. 1974, n° 73-12.220).
• The beneficiary does not simultaneously demand performance of the secured obligation, principal and penalty being incompatible; the lessor who, after termination for unpaid rents and recovery of the vehicle, claims the stipulated indemnity of the remaining rents less the resale price is only pursuing the termination, not performance (Cass. com., 12 mai 1987).
• The beneficiary is not himself at the origin of the breach the clause was meant to sanction (Cass. civ., 10 juill. 1978).

Where those conditions are met, payment can be obtained by provision in référé (interim proceedings) (Cass. 2e civ., 10 juill. 1978, n° 77-11.897; Cass. com., 1 mars 1983), and the judge asked to order payment is not obliged to verify the clause's validity first, his power to revise being a faculty he need not raise (Cass. 2e civ., 5 avr. 1993, n° 91-19.979). Payment of the penalty purges the breach: it cannot cumulate with a pursuit of performance. But it extinguishes only the prejudice the clause took into account: the debtor can still be ordered to pay arrears (Cass. com., 2 juill. 1991), any prejudice the trial judge finds distinct (Cass. com., 12 juill. 2011, n° 10-18.326), the delay in paying the penalty itself (Cass. civ., 30 janv. 1979), or the prejudice of unfair-competition acts committed alongside the breach of a non-compete undertaking (CA Paris, 5 nov. 1979).

Judicial revision under Article 1231-5: the rules the judge must follow

The judge may, even of his own motion, reduce or increase the agreed penalty if it is manifestly excessive or derisory (C. civ. Art. 1231-5). The power is public policy, no advance stipulation can exclude it, and it applies even to penalties agreed between professionals (Cass. 1e civ., 1 déc. 2011, n° 10-22.767). Its exercise follows settled rules:

• The measure is the prejudice actually suffered (Cass. com., 3 déc. 2002), regard being had to the nature of the performance (Cass. 3e civ., 11 mai 2004), and appraised at the day of judgment, not at the contract's conclusion (Cass. 1e civ., 19 mars 1980, n° 78-13.151) nor at the date the penalty fell due (Cass. 1e civ., 10 mars 1998). Where the clause combines the indemnification of the prejudice and a pressure component, the judge may appraise it globally without separating the two (Cass. com., 3 déc. 2002). As indications he may consider the penalties usually stipulated in similar contracts and established usage (CA Rennes, 27 sept. 2022), but he cannot rely solely on the debtor's economic position and good faith, which condition payment respites, not revision (Cass. com., 11 févr. 1997), and he cannot annul a contractual dismissal indemnity without demonstrating its manifestly excessive character (Cass. soc., 5 mars 2014, n° 12-23.106).
• The floor is the prejudice. The judge must in every case award at least its value: he cannot reduce a penalty that does not cover the prejudice (Cass. com., 7 nov. 1978, n° 77-10.653), reduce it below the prejudice (Cass. com., 3 févr. 1982, n° 80-13.061), or wipe it out without finding an absence of prejudice (Cass. com., 28 avr. 1980, n° 78-16.461; Cass. com., 21 oct. 2014, n° 13-30.600).
• A lower prejudice does not compel reduction: the clause may lawfully include, beyond the indemnification, a pressure component the judge finds justified (Cass. com., 21 juill. 1980; Cass. 1e civ., 8 juin 2004). Where the creditor suffered no prejudice at all, the judge is neither bound to reduce nor entitled to refuse application, but he may then limit the award to one euro (Cass. com., 13 mars 1979) or suppress the penalty (Cass. com., 16 juill. 1991).
• A deliberate breach forfeits the moderation: the judge must not modify the penalty where the non-performance was intentional, the reduction being reserved to the debtor in good faith (CA Rouen, 7 mars 1991); nor may he revise a penalty resulting from a court-recorded settlement (Cass. com., 12 oct. 1993).
• The permitted grounds are narrow. The judge can found a reduction only on the manifest excess of the amount against the prejudice, not on the fact that the penalty procures the creditor more than normal performance would have (Cass. com., 14 déc. 2010, n° 09-68.275), nor on its disproportion to the services supplied (Cass. com., 16 févr. 2010, n° 09-13.380). He may moderate an obligation to do as well as an obligation to pay (CA Douai, 21 mai 2015, n° 14/06130), but he cannot reduce of his own motion without first inviting the parties' observations (Cass. com., 23 mars 1993).
• Motivation is asymmetric. Applying the clause as written requires no reasons (Cass. 1e civ., 12 juill. 2001, n° 99-13.555), and neither does a reduction resulting from the beneficiary's own partial renunciation (Cass. com., 18 déc. 1986); modifying the figure requires the judge to state in what respect it is manifestly excessive or derisory (Cass. 3e civ., 1 juill. 1980, n° 79-11.366), a finding that it is "a little high" being insufficient (Cass. ch. mixte, 20 janv. 1978, n° 76-11.611).
• Derisory figures go up. The judge may increase a manifestly derisory penalty, with the same duty of motivation: a leasing termination indemnity worth less than half the lessor's prejudice was raised to the prejudice actually suffered (CA Amiens, 23 nov. 1976), while a forfeiture of 10% of the price against a buyer who refused to complete a property sale was held not manifestly derisory although the seller's prejudice was higher (Cass. civ., 3 juill. 1979). Arbitrators, for their part, constantly refuse to adjust penalties for the devaluation of the currency in which they are expressed.
• Interim relief is limited: the référé judge (interim judge) cannot exercise the revision, but can award a provision where the obligation is not seriously disputable (Cass. 3e civ., 19 févr. 2003).

The sum as corrected by the judge bears interest at the legal rate from the day of the demand for payment (Cass. com., 21 juill. 1980).

Partial performance: the proportioning rule

Where the obligation secured by the penalty has been performed in part, the amount is fixed, even of the judge's own motion, under two public-policy rules (C. civ. Art. 1231-5). First, the judge must proportion the penalty to the partial performance he finds established, notwithstanding any contrary clause; the obligation to pay a double-rent occupancy indemnity had been partially performed by the payments made under it (Cass. 3e civ., 8 avr. 2010, n° 08-20.525). No proportioning is due where the parties themselves scaled the penalty to the interest the partial performance gives the creditor, as with termination indemnities set at four fifths of the outstanding rents (Cass. com., 21 juill. 1980; Cass. com., 5 nov. 1981, n° 80-10.090), where the partial performance gave the creditor no interest (CA Amiens, 23 nov. 1976), or where the obligation could only be performed as a single indivisible whole (CA Paris, 21 janv. 1970). Second, once the proportion is restored, the judge may still moderate the resulting figure if it remains excessive (Cass. 3e civ., 8 avr. 2010, n° 08-20.525); but where the parties agreed a quantified reduction proportional to the duration of performance, he cannot reduce further without stating in what respect the penalty is manifestly excessive (Cass. com., 5 nov. 1981, n° 80-10.090).

Frequently Asked Questions

This article is for general information only and reflects French law as published at the date shown above. It does not constitute legal advice. Always seek qualified advice before acting.