On paper, it looked like a flawless move.
A buyer missed the closing deadline.
A €50,000 penalty clause ready to be enforced.
A seller confident in having the upper hand.
The outcome?
The French Supreme Court ultimately confirmed that those same sellers had to pay €50,000 to the buyer.
The mistake was not contractual.
It was strategic.
They confused a negotiation leverage with a duty of contractual loyalty.
The case (French Supreme Court, 3rd Civil Chamber, October 23, 2025, No. 24-10.737)
The sellers formally demanded payment of the contractual penalty for failure to complete the sale.
What they already knew and could not ignore:
- One of the buildings was still occupied, despite a contractual obligation to deliver it vacant.
- The preliminary sale agreement had been signed by only two out of three co-owners, undermining its legal validity.
In short: the sellers were themselves responsible for the transaction’s failure.
The Court’s position was unequivocal
Enforcing a penalty clause while being the cause of the contract’s failure constitutes bad faith.
And bad faith neutralizes contractual rights.
⚖️ Key legal principles every executive should retain
Good Faith (Article 1104 of the French Civil Code)
Good faith is not a moral aspiration.
It is a binding legal requirement governing the performance and enforcement of contracts.
A lack of loyalty disables the very rights a party seeks to assert.
Abuse of Rights (Article 1240 of the French Civil Code)
Initiating legal proceedings to conceal one’s own contractual breaches amounts to a fault.
Litigation used as a tactical weapon can itself generate liability.
The Financial Risk of Penalty Clauses (Article 1231-5 of the French Civil Code)
A penalty clause is designed to protect against genuine default not to exert pressure.
When activated in bad faith, the expected gain can become the exact amount of damages owed.
Strategic takeaway for CEOs and CFOs
This is not a technical real estate dispute.
It is a textbook illustration of legal risk mismanagement.
How often are “tactical” decisions made without a full legal robustness assessment?
In this case, the legal department would not merely have reviewed the contract.
It would have prevented a losing lawsuit, preserved €50,000 in cash, avoided legal fees, and protected corporate reputation.
The legal function should not be perceived as an obstacle to business velocity, but as a profit-protecting filter converting commercial aggressiveness into financial security.
