€1
A manifestly excessive penalty clause can be cut to a nominal sum: French courts apply Article 1231-5 of the Civil Code to reduce a royalties-to-term penalty to almost nothing.
Art. 1231-5
The Civil Code lets the judge reduce a penalty that is manifestly excessive and raise one that is derisory. The parties cannot contract this power of revision away.
New entrant
After termination the franchisor re-lets the territory for a fresh entry fee and new royalties, and performs none of its own obligations, so it never loses the full royalty stream.

What a penalty clause in a French franchise actually is?

A penalty clause (clause pénale) is a stipulation by which the parties fix in advance the sum payable by a defaulting party for its breach. Its purpose is twofold: to spare the innocent party the burden of proving its loss item by item, and to deter breach by naming a figure large enough to concentrate the mind. 

In franchising, the franchisor is nearly always the party that inserts a penalty clause and the franchisee the party against whom it is invoked.

Generally, the franchise contract provides that, on termination for the franchisee's fault, the franchisee must pay the royalties it would have owed had the agreement run its full course. On a five-year contract terminated in year two, that is three years of royalties, capitalised and demanded in a single sum. Presented to a franchisee already in difficulty, it reads as a threat of ruin. Presented to a French judge, it reads as a figure with almost no relationship to any loss the franchisor will genuinely bear.

That is why a penalty clause which imposes an excessive burden on a franchisee and is disconnected from damage that is genuinely suffered by the franchisor may be reduced by the judge as manifestly excessive.

Why the obligation frequently imposed on a franchisee to pay the royalties until the term of the franchise contract may be excessive?

The short answer is that the franchisor loses nothing close to the full royalty stream, so a clause demanding that stream in full is manifestly excessive. 

French courts assess a penalty against the loss the beneficiary can genuinely suffer, and on termination for the franchisee's fault that loss can be modest for two reasons.

First, the franchisor can re-let the territory without delay. Once the defaulting franchisee is out, the franchisor is free to install a new franchisee on the same territory, from whom it will collect a fresh entry fee, training fees, and a new stream of royalties, on top of what it earns from selling the opening stock and equipment. A franchisor that claims the whole of the lost royalties from the outgoing franchisee, while earning a new entry fee and royalties from the incoming one, is asking to be paid twice for the same commercial slot.

Second, and just as important, the franchisor no longer performs its own side of the bargain. Royalties are the price of continuing performance: transmission and updating of the know-how (savoir-faire), ongoing assistance through a field representative, and the licence of the brand. Once the contract is terminated, the franchisor is relieved of all of it. It provides no assistance, updates no know-how, and licenses no mark to the former franchisee. A demand for the royalties that would have paid for those services, when none of them will be rendered, can be seen as a demand for pure profit stripped of its cause.

The clause is worth almost nothing

A franchise penalty clause that fixes the franchisee's liability at the full royalties to the end of the term is almost always manifestly excessive. The franchisor re-lets the territory for a new entry fee and new royalties and stops performing its own obligations, so it does not lose the full stream. A franchisor that budgets on collecting this sum is budgeting on a number a court will not enforce.

Article 1231-5 of the French Civil Code and the judge's power over a franchise penalty clause

The legal lever that may empty the royalties-to-term clause is Article 1231-5 of the Civil Code. It provides that where a contract stipulates that the party who fails to perform will pay a fixed sum by way of damages, that sum may be awarded neither higher nor lower. But the same article gives the judge a power of correction that overrides the parties' figure: the judge may, even of the court's own motion, reduce a penalty that is manifestly excessive, and increase one that is manifestly derisory. In the franchise setting, the power of reduction is decisive. A penalty pitched at the entire remaining royalty stream is the paradigm of a manifestly excessive penalty, and the judge may reduce it to its simplest expression, sometimes to a nominal sum of one euro.

Three features of the article matter to anyone drafting or contesting a penalty clause in a French franchise. The power runs in both directions: just as a manifestly excessive penalty may be cut, a derisory one may be raised, so a franchisee cannot rely on the clause as a low ceiling if the franchisor's real loss turns out to be far greater. It is exercised by reference to the actual position of the parties, not the label the contract puts on the sum. And it cannot be excluded by agreement: a clause purporting to bar the judge from revising the penalty is itself without effect. The parties fix the figure; the judge keeps the last word on whether it bears any relation to reality.

The rule to remember

Under Article 1231-5 of the Civil Code the judge may reduce a manifestly excessive penalty clause and increase a derisory one, of the court's own motion, and the parties cannot deprive the judge of that power. A royalties-to-term figure is the textbook case for reduction.

Before the penalty clause bites: terminating a French franchise for fault

The penalty clause only comes into play if the termination was justified in the first place, so the threshold question is whether the franchisee's breach was serious enough to end the contract. 

Not every failing qualifies. French courts require a breach that is sufficiently serious (suffisamment grave) before a party may treat the contract as at an end at the other's fault, and they apply that threshold with a sense of proportion.

 French courts have held that non-payment of royalties by a franchisee whose turnover was very low was not a sufficiently serious breach to support termination at the franchisee's fault, a solution that reflects the demand for proportion between the breach and its consequence. On the other side of the line, breach of an exclusive-supply obligation, persistent failure to pay royalties, and refusal to comply with the network's standards have each been held serious enough to justify termination against the franchisee. 

Symmetrically, a franchisor's invasion of the franchisee's exclusive territory can justify termination against the franchisor.

This matters to the penalty clause in two ways. If the breach was not serious enough, there is no valid termination for fault and no trigger for the clause at all. The franchisor that terminated has itself broken the contract and is exposed to damages. If the breach was serious enough, the termination stands, but the clause that follows it is still subject to reduction under Article 1231-5 of the French Civil Code.

The termination clause and the penalty clause in a French franchise

To avoid leaving the seriousness of the breach to a judge, franchisors combine the penalty clause with a termination clause (clause résolutoire) that lists the defaults entitling the franchisor to terminate out of court and sets the procedure for doing so. 

It should be noted however that a termination clause only avoids judicial appreciation if it identifies with sufficient precision the breaches that permit termination. A vague clause is simply pushed back before the judge, who will decide whether the alleged default fell within it. 

Also, a termination clause must be invoked in good faith: French courts have held that a termination clause is without effect where it is relied upon in bad faith, and that principle applies with full force to a franchisor invoking one against its franchisee. 

There is a further limit specific to one-sided drafting. A French court of appeal has held that a termination clause stipulated for the franchisor alone, allowing it to sanction breaches that do not even fall within the franchise contract, creates a significant imbalance (déséquilibre significatif) between the rights and obligations of the parties and must be deemed unwritten, an application of Article L 442-1, I of the Commercial Code. A franchisor that over-arms itself on termination can find both clauses lost.

Unilateral termination at the franchisor's risk and the penalty clause

Even without a termination clause, a franchisor can end the contract by unilateral notice where the franchisee commits a sufficiently serious breach, but it does so at its own risk. 

Article 1226 of the French Civil Code states that a party may terminate by notification at its own risk and peril; save in an emergency it must first put the defaulting party on notice to perform within a reasonable time, warn that failure will lead to termination, and then notify termination with reasons. The defaulting party may at any time bring the matter before a judge, and the terminating party must then prove the seriousness of the breach.

Unilateral termination is a formidable weapon when the breach is genuine, because it lets a franchisor rid itself of a bad partner without waiting for a court decision. The danger runs the other way when the breach is not made out. If the judge, reviewing the termination after the event, finds it abusive because no sufficiently serious default was established, the franchisor that wrongly took back its freedom will be ordered to pay damages for the loss suffered by the franchisee. 

In that scenario, if the frachisor has applied a penalty clause, that penalty clause will not be merely reduced; it will be deemed to have never operated, because the very breach it is supposed to sanction will not have been committed. The franchisor that reaches for a royalties-to-term penalty on a thin record can end up paying the franchisee rather than being paid.

KEEP IN MIND

The penalty clause only comes into play after a valid termination for breach, which turns on whether the breach was serious enough and whether the notice requirements were met. Where a long-standing relationship is simply ended without adequate notice, that may also qualify as abrupt termination, and expose the terminating party to damages.

The penalty clause versus abrupt-termination liability in a French franchise

A franchisor exposed to a penalty-clause claim should not confuse two distinct heads of liability, because the framework that governs a fault-based termination is not the framework that governs an abrupt one. The penalty clause presupposes a termination for the franchisee's fault. Abrupt termination liability, by contrast, is triggered when a party breaks off an established commercial relationship without written notice that takes account of the relationship's duration.

Article L 442-1, II of the Commercial Code makes the author of an abrupt termination liable to repair the loss where it ends an established commercial relationship, even partially, without written notice reflecting the duration of the relationship and the usages of the trade. It caps exposure at the top end: a party who has given eighteen months' notice cannot be held liable for insufficient notice however long the relationship. And it preserves the right to terminate without notice where the other party fails to perform its obligations or in the event of force majeure.

The distinction is practical. Where a franchisor terminates for genuine and serious fault, abrupt-termination liability is not engaged, because the statute preserves termination without notice for non-performance; the battleground is the penalty clause and its reduction under Article 1231-5. Where a franchisor simply ends a long relationship because it no longer suits it, the penalty clause has no role and the exposure is measured by the notice it failed to give under Article L 442-1, II.

Drafting a valid penalty clause in a French franchise

The drafting lesson follows from the rule: tie any liquidated sum to the franchisor's real, provable loss over a realistic period, not to the whole remaining royalty stream. A penalty that reflects a plausible loss survives; one that reflects a fantasy of uninterrupted royalties collapses under Article 1231-5. The following sequence produces a clause a court is willing to enforce.

Step 1
Identify the loss the franchisor genuinely bears
Start from the position after termination, not before it. The franchisor will re-let the territory and will stop performing its obligations. The real loss is the gap between the royalties it would have earned and what it recovers from the new franchisee, over the time it actually takes to re-let, less the costs it no longer incurs.
Step 2
Fix a realistic re-letting period
Do not assume the territory stays empty to the end of the term. Estimate how long a new franchisee genuinely takes to install, and pitch the liquidated sum at the royalties lost over that limited window, not over the entire unexpired term.
Step 3
Deduct what the franchisor no longer spends and re-earns
Net off the cost of the assistance, know-how updates, and brand support the franchisor will not provide after termination, and account for the fresh entry fee and royalties the replacement franchisee will pay. What remains is a defensible figure.
Step 4
State the basis in the clause and keep it two-sided
Record the reasoning behind the figure so the sum reads as a genuine pre-estimate, and avoid a penalty and termination architecture that arms only the franchisor, which risks being struck as a significant imbalance and deemed unwritten.
Step 5
Accept that the judge keeps the last word
No drafting excludes the power of revision under Article 1231-5. A clause anchored to provable loss simply gives the court less to reduce; a clause anchored to the full royalty stream invites reduction to a nominal sum.
The drafting lesson

Anchor any liquidated sum to the franchisor's real, provable loss over a realistic re-letting period, net of the replacement franchisee's entry fee and royalties and of the costs the franchisor no longer incurs. A number built this way survives; the full unexpired royalty stream does not.

A franchisor that follows this discipline trades a large unenforceable number for a smaller enforceable one. The purpose of the clause is to recover a real loss without litigating its every component, not to intimidate; only a figure the court respects does that job.

The franchisee's defence against a franchise penalty clause claim

A franchisee facing a royalties-to-term demand has a strong and structured answer, made in this order. The first line is that the penalty is manifestly excessive and must be reduced under Article 1231-5 of the Civil Code, because the franchisor re-lets the territory for a new entry fee and royalties and no longer performs its obligations of assistance, know-how, and brand, so it suffers no loss of the full royalty stream. This is not a plea for mercy; it is a statutory power the court exercises even of its own motion, and it commonly reduces such a clause to a nominal sum.

The second line attacks the trigger. If the franchisee's breach was not sufficiently serious, there was no valid termination for fault, the clause never engaged, and the franchisor that terminated is itself in breach and liable in damages. Non-payment of royalties by a franchisee whose turnover was very low has been held insufficient; the franchisee should force the franchisor to prove that the default crossed the seriousness threshold.

The third line targets the termination clause, where one was used: was it precise enough to cover the alleged default, was it invoked in good faith, and was it one-sided to the point of creating a significant imbalance that renders it unwritten? Each can defeat the termination on which the penalty depends. Taken together, the three lines mean that the intimidating figure at the foot of the demand is rarely the figure the franchisee will pay.

Facing or drafting a franchise penalty clause

Our French lawyers assess royalties-to-term penalty clauses on both sides of a termination: reducing manifestly excessive claims under Article 1231-5, and drafting liquidated-damages provisions that recover a franchisor's real loss without collapsing in court. We also handle the termination itself, from the seriousness threshold to the notice mechanics.

Discuss your matter

Frequently asked questions about penalty clauses in a French franchise

What is a penalty clause in a French franchise?

It is a clause (clause pénale) fixing in advance the sum a defaulting party must pay for its breach, so the innocent party need not prove its loss item by item. In franchising it is nearly always inserted by the franchisor and invoked against the franchisee, most often as a requirement to pay the royalties that would have run to the end of the term.

Is a royalties-to-term franchise penalty clause enforceable in France?

Rarely in full. Such a clause is almost always manifestly excessive, because after termination the franchisor re-lets the territory for a new entry fee and royalties and stops performing its own obligations, so it does not lose the whole royalty stream. Under Article 1231-5 of the Civil Code the judge may reduce it, sometimes to a nominal sum of one euro.

Can a French judge reduce a franchise penalty clause?

Yes. Article 1231-5 of the Civil Code empowers the judge to reduce a penalty that is manifestly excessive, even of the court's own motion. A penalty pitched at the entire remaining royalty stream is the classic case for reduction.

Can the parties stop a judge from revising the penalty clause?

No. The power of revision under Article 1231-5 cannot be excluded by agreement. A clause purporting to bar the judge from reducing an excessive penalty or increasing a derisory one is itself without effect.

Can a penalty clause in a French franchise ever be increased?

Yes. The same article that allows reduction of a manifestly excessive penalty allows the judge to increase one that is manifestly derisory. A franchisee cannot treat a low figure as a guaranteed ceiling if the franchisor's real loss is far greater.

Does the penalty clause apply if the franchisee's breach was minor?

No. The clause presupposes a valid termination for the franchisee's fault, which requires a sufficiently serious breach. Non-payment of royalties by a franchisee with very low turnover has been held insufficient. If the breach was not serious, there was no valid termination and the clause never engages.

How should a franchisor draft an enforceable penalty clause?

Tie the sum to the franchisor's real, provable loss over a realistic re-letting period, net of the entry fee and royalties from the replacement franchisee and of the costs the franchisor no longer incurs. A figure anchored to genuine loss survives; a figure anchored to the full unexpired royalty stream invites reduction.

How does a franchise penalty clause differ from abrupt-termination liability?

The penalty clause presupposes termination for the franchisee's fault. Abrupt-termination liability under Article L 442-1, II of the Commercial Code arises when an established commercial relationship is broken without adequate written notice, and preserves termination without notice for non-performance. They are separate frameworks and should not be confused.

Key takeaways on penalty clauses in a French franchise

In brief
A penalty clause fixes a defaulting franchisee's liability in advance; the common franchise version demands the royalties that would have run to the end of the term.
That version is almost always manifestly excessive: the franchisor re-lets the territory for a new entry fee and royalties and stops performing, so it does not lose the full stream.
Article 1231-5 of the Civil Code lets the judge reduce a manifestly excessive penalty to a nominal sum, sometimes one euro, even of the court's own motion.
The same article allows a derisory penalty to be increased, and the parties cannot exclude the judge's power of revision.
The clause only engages after a valid termination for a sufficiently serious breach; a one-sided termination clause can be struck as a significant imbalance and deemed unwritten.
To draft an enforceable clause, anchor the sum to the franchisor's real, provable loss over a realistic re-letting period.

How our French lawyers can help with penalty clauses in a French franchise

We act for franchisors and franchisees on both faces of the same problem. For franchisors, we draft penalty and termination clauses that recover a genuine loss and survive judicial scrutiny, rather than headline figures that a court reduces to a nominal sum; and we run the termination itself, from establishing the seriousness of the breach to the notice steps required by Article 1226 of the Civil Code. For franchisees, we defend royalties-to-term demands by invoking the reduction power of Article 1231-5, attacking the trigger where the breach was not serious enough, and challenging one-sided termination clauses as creating a significant imbalance.

Because the penalty clause sits at the intersection of contract termination, the seriousness threshold, and abrupt-termination liability under Article L 442-1, II of the Commercial Code, we advise on the whole architecture rather than a single clause.

This article is for general information only. It does not constitute legal advice on penalty clauses, franchise termination, or the reduction of liquidated damages under French law. The enforceability of any penalty clause depends on the specific terms and the loss actually suffered. Contact our French lawyers for qualified advice before drafting, invoking, or resisting a penalty clause in a French franchise agreement.