Contractual Penalties and the Defence of Non-Performance: The Court of Cassation Rules

You signed a preliminary contract for the sale of a flat in Meylan. The developer was supposed to deliver in March, but the work is not progressing. You stop payments. The developer demands the penalties provided for in the contract. Is he entitled to do so? Until this decision, some courts of appeal considered that the penalty clause excluded any other remedy. The Court of Cassation sets the record straight.

In this judgment of 14 February 2019, the highest French court affirms a simple but fundamental principle: contractual penalties are not a shield that prevents a contracting party from protecting himself in the face of serious non-performance. Concretely, if your seller does not deliver or delivers a non-conforming property, you can suspend your payments even if the contract provides for late payment penalties.

This decision is of interest to purchasers in VEFA (sale off plan), commercial tenants, and landlord-owners alike. Let's see together what this judgment changes in your daily life.

The facts: a story that happens every day

In 2012, the company Odélia Développement acquired co-ownership units in a residence under VEFA (sale off plan: you buy off plan and pay as the work progresses) in Meylan. The contract provides for late payment penalties in the event of non-payment of calls for funds. But very quickly, defects appear: poor workmanship, delivery delays, non-conformities. Odélia stops paying the instalments. The seller, company XXX, raises the contractual penalties against it and takes the matter to court.

At first instance, the court ruled in favour of the seller: the penalties provided for in the contract are the only possible sanctions. Odélia appeals. The Grenoble Court of Appeal confirms: it holds that the stipulation of contractual penalties in the event of late payment prevents the other contracting party from raising the defence of non-performance (the right to refuse to perform one's obligation as long as the other has not performed theirs).

Odélia appeals to the Court of Cassation. The Court of Cassation quashes the appeal judgment: it recalls that Article 1184 of the Civil Code (old) allows the injured party to suspend the performance of his obligations if the other party does not perform theirs, unless there is an express and unequivocal clause to the contrary. Late payment penalties do not constitute such a clause.

The reasoning of the court — broken down

The Court of Cassation relies on the old Article 1184 of the Civil Code (now Articles 1219 and 1220 of the same code). This article provides that "the resolutory condition is always implied in synallagmatic contracts (contracts that create reciprocal obligations), in the event that one of the two parties does not fulfil their undertaking." In other words, if one does not do what they promised, the other may not do what they owe.

But the Court goes further: it specifies that the parties may arrange this defence of non-performance, but this arrangement must be express and clear. A simple penalty clause in the event of late payment is not enough to exclude the right to suspend one's own payments in the event of serious breach by the seller. A clause that explicitly states that "even in the event of non-performance by the seller, the purchaser remains obliged to pay on the due dates under penalty of penalties" would be required. Such a clause would probably be abusive anyway.

This judgment confirms previous case law (notably Civ. 3e, 12 May 2015, No. 14-14.993) but extends it to the area of VEFA and joint sureties. It is part of a protective trend for non-professional contracting parties or weaker parties. The Court reminds that contractual penalties are only an option offered to the creditor, not an exclusive one.

Odélia had also waived the benefits of discussion and division as a joint surety for the assignees. The Court specifies that this changes nothing: the waiver concerns the surety, not the principal obligation.

What this changes for you — concretely

For a purchaser in VEFA: You signed an off-plan sale contract for a flat in Seyssinet-Pariset. The developer is accumulating delays and defects are visible. If you stop paying the calls for funds, the developer cannot hide behind the penalty clause to demand payment. You can suspend your payments until the work is compliant. Caution: this suspension must be proportionate (e.g., not paying the last tranche if the defect is minor).

For a landlord-owner: Your tenant has not paid their rent for three months. The contract provides for a penalty clause of 10% of the unpaid rent. You can both claim the rent due and the penalties, but also, if the tenant has committed other breaches (damage, disturbance of enjoyment), you can invoke the defence of non-performance to refuse to carry out repairs for which they ask you for reimbursement. Numerical example: rent €800, arrears €2,400, penalties €240. You can also suspend rental repairs as long as they have not paid.

For a co-owner: The managing agent does not provide the annual accounts despite your reminders. The co-ownership rules provide for penalties in the event of late payment of charges. You can refuse to pay the charges until the managing agent performs its obligation to provide the accounts, without the penalties being enforceable against you. If you are in Meylan, contact your managing agent by registered letter with acknowledgement of receipt to formalise your request.

Time limits: The defence of non-performance can be invoked immediately, without prior formal notice. But to secure your position, send a written notice.

Four tips to avoid this type of dispute

• Never sign a clause excluding the defence of non-performance without legal advice. If a contract provides that "payment remains due in all circumstances," that is a red flag. Have it amended or refuse.
• Formalise your complaints in writing before suspending your payments. A registered letter with acknowledgement of receipt detailing the breaches (e.g., "I note that the windows are not installed, I suspend payment of the call for funds No. 4").
• Proportion your suspension to the non-performance observed. Do not stop all payment for a minor defect. Case law requires proportionality, otherwise you risk being accused of wrongful non-performance.
• Keep all evidence: photos, emails, bailiff's reports. If the dispute goes to court, you will need to prove the reality of the breaches.

Further reading: related case law and developments

This judgment is part of a protective line. Already in 2015, the third civil chamber (judgment No. 14-14.993) had ruled that the penalty clause does not exclude judicial resolution of the contract for non-performance. Here, the Court extends this principle to the defence of non-performance, which is a form of provisional unilateral resolution.

Since the ordinance of 10 February 2016, Articles 1219 and 1220 of the Civil Code codify the defence of non-performance and unilateral resolution. The trend is clear: French law strengthens the means of pressure of parties in the face of non-performance, to the detriment of overly rigid contractual clauses.

In 2020, the Court of Cassation even ruled that the defence of non-performance can be invoked even if the contract provides for an express resolutory clause (Civ. 3e, 10 Sept. 2020, No. 19-16.081). The way is therefore open for aggrieved purchasers.

Summary and next steps

FAQ: 5 practical questions

1. Can I stop paying my mortgage if the developer delays delivery? No, your loan agreement is independent of the VEFA. But you can suspend calls for funds to the developer. Talk to your bank about a possible deferral of payment.
2. Can the seller claim late payment interest if I suspend my payments? Yes, if the contract so provides, but you can raise the defence of non-performance to justify the delay. The judge will assess proportionality.
3. What if the developer puts me on notice to pay under penalty of resolution of the contract? Respond immediately in writing invoking the defence of non-performance. Consult a lawyer specialising in property law.
4. Does this decision apply to residential leases? Yes, the principle is general. A tenant can suspend their rent if the landlord does not carry out urgent repairs, subject to proportionality.
5. Can I invoke the defence of non-performance several years after signing? Yes, as long as the non-performance persists. But beware of limitation: the action in court is time-barred after 5 years (general limitation period).

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 →