Relief from Commitment Fee or Penalty Clause? What Changes in the French Court of Cassation's Ruling of 15 February 2006

Imagine: you sign a preliminary contract for the sale of a house in Roubaix. You pay a deposit of €10,000. Then, for a personal reason, you withdraw from the purchase. The seller keeps the deposit. You believe he has suffered no real loss and ask for its return. Can the judge reduce this sum? It all depends on the legal classification of this deposit.

This is precisely the question Mr and Mrs X put to the French Court of Cassation in 2006. And the answer is final: if the contract provides that the deposit remains with the seller in case of the buyer's withdrawal, and that the seller must pay double in case of his own withdrawal, it is a relief from commitment fee (article 1590 of the Civil Code) and not a penalty clause. Consequence: the judge cannot reduce the indemnity, even if the loss is smaller.

This decision, handed down by the third civil chamber, clarifies a fundamental distinction in French property law. For an owner in Comines as for a developer in Lille, understanding the difference between a relief from commitment clause and a penalty clause can save – or lose – thousands of euros. So, how should you read your preliminary contracts? I'll explain everything.

The facts: a story that happens every day

In 1986, Mr and Mrs X, owners in Comines, signed a preliminary contract of sale with Mr and Mrs Y, buyers, for a property. A deposit of 140,000 francs (approximately €21,340) was paid. The preliminary contract stipulated: if the buyers withdraw, the deposit remains with the seller; if the seller withdraws, he must return double. This is the classic so-called 'relief from commitment' clause, in accordance with article 1590 of the Civil Code.

But then: the sale did not go through. Mr and Mrs Y, the buyers, withdrew. The seller kept the deposit. Dissatisfied, the buyers sued the seller, claiming that this indemnity was excessive and constituted a penalty clause (article 1231-5 of the Civil Code) which should be reduced by the judge. Their argument? The seller had suffered no real loss – or at least less than 140,000 francs.

The Tribunal de Grande Instance of Lille ruled in their favour at first instance: it reduced the indemnity to 1 franc in damages. The seller appealed. The Court of Appeal of Aix-en-Provence (to which the case was referred) overturned the judgment and dismissed the buyers' claim. The buyers appealed to the Court of Cassation.

The French Court of Cassation, by a ruling of 15 February 2006, dismissed the appeal. It confirmed that the disputed clause was not a penalty clause but a relief from commitment fee. The judge therefore cannot reduce its amount.

The court's reasoning — broken down

To understand, we must go back to article 1590 of the Civil Code: 'If a promise to sell has been made with earnest money, each of the contracting parties is free to withdraw from it, the one who gave it by losing it, and the one who received it by returning double.' This is the relief from commitment fee: an option allowing each party to free themselves from their commitment by losing (or returning double) the earnest money.

Conversely, a penalty clause (article 1231-5 of the Civil Code) is a fixed sum intended to compensate for the loss caused by non-performance of an obligation. It can be reduced by the judge if it is manifestly excessive or inadequate.

The Court of Cassation recalls that the classification depends on the intention of the parties. If the contract provides that the deposit is 'the property of the seller' in case of the buyer's withdrawal, and that the seller must pay 'double' in case of his own withdrawal, it is a relief from commitment fee, even if the sum is high. The lower courts had noted that the clause allowed the buyers to free themselves from their commitment: this is the essence of relief from commitment.

The High Court adds that the clause does not fix the loss in a lump sum, but offers an option: either perform the contract, or pay to be released. Therefore, the judge does not have to check whether the loss is less than the indemnity.

This position is consistent: the Court of Cassation strictly distinguishes relief from commitment (option to withdraw) from a penalty clause (indemnity for non-performance). The ruling confirms earlier case law (Civ. 3e, 18 May 1994, No. 92-14.063) and excludes any possibility of judicial reduction.

What this means for you — in practice

For seller-owners: if your preliminary contract includes a relief from commitment clause (with double payment in case of your withdrawal), you can keep the deposit without fear of judicial reduction, even if the buyer claims your loss is small. Example: a buyer pays a €15,000 deposit on a house in Roubaix, then withdraws. You keep the €15,000, even if you resell the property two days later at the same price.

For buyers: be careful. Once the preliminary contract is signed, if you withdraw without a suspensive condition (obtaining a loan, etc.), you lose the deposit. There is no recourse to recover it, unless you can prove a defect of consent (fraud, mistake) or an unfair term. But mere disproportion between the deposit and the loss is not enough.

For property professionals: drafting the clause is crucial. If you use the terms 'earnest money' or 'relief from commitment', the judge cannot adjust the sum. However, if you speak of 'fixed indemnity' in case of non-performance, you risk reclassification as a penalty clause with possible reduction. In Comines, a developer recently lost €50,000 because his preliminary contract mentioned 'damages' instead of 'relief from commitment'.

For co-owners: this rule also applies to promises to sell co-ownership lots. If you sell your flat and the buyer withdraws, the deposit remains with you if the contract so provides in these terms.

Four tips to avoid this type of dispute

• Draft the relief from commitment clause clearly: use the terms 'earnest money' or 'relief from commitment fee' and repeat the wording of article 1590: 'the deposit remains with the seller in case of the buyer's withdrawal, and the seller returns double in case of his own withdrawal'.
• Avoid confusion: do not mix a relief from commitment clause and a penalty clause. If you want a fixed indemnity for non-performance (for example, if the buyer does not sign the final deed without expressly withdrawing), draft a separate penalty clause.
• Provide for suspensive conditions: for the buyer, include suspensive conditions (obtaining a loan, planning permission, etc.) that allow recovery of the deposit if the condition is not fulfilled. In Roubaix, a buyer lost €20,000 because he withdrew without a valid suspensive condition.
• Have your preliminary contract reviewed by a lawyer: before signing, a professional will check the classification of the clauses and warn you of the risks. For €200 in advice, you avoid a €15,000 dispute.

Further reading: related case law and developments

The Court of Cassation has maintained this distinction in several subsequent rulings. For example, in a ruling of 12 September 2019 (No. 18-18.866), it held that a clause providing for payment of a fixed indemnity in case of the buyer's withdrawal constituted a penalty clause and not a relief from commitment, because it did not mention a reciprocal relief from commitment. Thus, the judges were able to reduce the indemnity from €30,000 to €10,000.

Conversely, in a ruling of 6 May 2021 (No. 19-24.613), the Court confirmed the classification of relief from commitment for a clause that exactly repeated the terms of article 1590. The trend is therefore clear: drafting is decisive.

For the future, professionals must be careful: a poorly drafted clause may be reclassified as a penalty clause, exposing the seller to judicial reduction. Conversely, a well-drafted relief from commitment clause offers total legal certainty. The Court of Cassation seems to want to protect contractual freedom, but sanctions ambiguous clauses.

Frequently asked questions

1. What is the difference between earnest money and a penalty clause? Earnest money (or relief from commitment) allows each party to withdraw by losing (or returning double) the sum paid. The penalty clause fixes a fixed indemnity for non-performance, reducible by the judge.

2. Can I recover my deposit if the seller withdraws? Yes, if the relief from commitment clause is reciprocal: the seller must return double the deposit. If he refuses, you can sue him.

3. What if I signed a preliminary contract without understanding the clause? You can invoke a defect of consent (mistake, fraud) within 5 years of signature. But this is difficult to prove. It is better to consult a lawyer before signing.

4. Does article 1590 apply to property sales between individuals? Yes, it applies to any promise to sell, whether between individuals or with a professional. The relief from commitment clause is valid if it is clear and reciprocal.

5. Can a judge reduce a relief from commitment indemnity if it is 'excessive'? No, because relief from commitment is not an indemnity but the price of the right to withdraw. However, if the clause is unfair (for example, 50% of the price), it could be annulled on the basis of consumer law (for a non-professional buyer).

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