Loss of indemnity for breach of non-compete: a penalty clause

The clause depriving a general insurance agent of their end-of-mandate indemnity where they breach their non-compete undertaking is a penalty clause (clause pénale). The second civil chamber of the Cour de cassation (France's highest civil court) so holds: where the parties agree in advance to sanction non-performance by the loss of a right, the stipulation amounts to a penalty clause and falls within the scope of the court's power to reduce.

Key points

• A stipulation that sanctions the breach of a non-compete undertaking by the loss of the end-of-mandate indemnity constitutes a penalty clause.
• The test is a single one: the parties fixed in advance the sanction for non-performance of the contract. The form of that sanction, deprivation of a right rather than payment of a sum, is irrelevant.
• That classification gives the court the power to reduce the penalty where it is manifestly excessive.
• The classification does not erase the breach: the agent who has breached their obligation remains sanctioned, but the extent of the sanction can be argued before the court.
• The solution is given on the basis of Articles 1134 and 1152 of the French Civil Code, in their wording prior to the Ordinance of 10 February 2016.

Which clause does the decision reclassify as a penalty clause?

Forfeiture of the end-of-mandate indemnity, stipulated in the event of a breach of a non-re-establishment or non-compete obligation, is a penalty clause. The second civil chamber so holds and quashes the decision to the contrary (Civ. 2e, 12 March 2026, No. 24-13.954). A general insurance agent had been allowed to claim their retirement pension rights, and their portfolio had been taken over by another general agent. The insurance company brought proceedings against them for unfair competition; they sought, by way of counterclaim, their end-of-mandate indemnity and damages.

The appointment agreement prohibited the agent ceasing their duties, for three years, from presenting insurance transactions in their former commercial area and from having their former policyholders take out contracts. That period was reduced to six months, save in cases of private-treaty transfer, if the agent waived that indemnity. The agreement sanctioned these undertakings by forfeiture of the right to the end-of-assignment indemnity.

The decision under appeal (CA Nancy, 26 February 2024, No. 23/00663), given on remittal after quashing (Civ. 2e, 9 March 2023, No. 21-10.737), had rejected the classification as a penalty clause and found the agent to have forfeited the indemnity. The second civil chamber quashes that decision in part (free translation): the sanction agreed in advance amounts to a penalty clause. The quashing leaves standing the dismissal of the agent's claim for damages, and the Court remits the case to the Metz court of appeal.

In so ruling, when it had found that the parties had agreed in advance that non-performance by the general agent of their non-re-establishment and non-compete obligations was sanctioned by the loss of their right to the end-of-assignment indemnity, from which it followed that this stipulation amounted to a penalty clause, the court of appeal breached the aforementioned provisions.

Loss of the indemnity: what power does the court have?

Once reclassified as a penalty clause, the loss of the indemnity ceases to be an automatic effect of the contract and becomes a penalty whose amount can be argued. Article 1152 of the French Civil Code, in its wording prior to the Ordinance of 10 February 2016, allows the court to reduce a manifestly excessive contractual penalty. By rejecting the classification, the court of appeal had deprived itself of that examination. The reclassification reopens the debate on the proportion between the breach alleged and the sanction imposed.

The mechanism described by the decision is simple. Two parties agree, when the contract is concluded, on what non-performance of a given obligation will cost. It matters little whether that cost takes the form of a payment, a withholding or the deprivation of an acquired right. The loss of an indemnity for which the contract otherwise provides amounts to a lump-sum, anticipated assessment of the damage caused by non-performance.

The classification does not prejudge the outcome. The court seised retains the power to maintain the sanction in full if it sees no manifest excess in it. The agent who has disregarded their undertaking therefore does not automatically recover their indemnity: they obtain only that the sanction be examined, rather than applied as of right by the mere operation of the letter of the contract.

Which forfeiture stipulations are affected?

Any stipulation that makes the loss of a contractual right depend on the non-performance of an obligation is exposed to the same classification. The decision reasons from a functional test, not from the terminology used. A clause headed forfeiture, loss of right or contractual sanction falls within the penalty clause category where it quantifies in advance the consequences of a breach. Drafters cannot therefore remove a penalty from the court's review by the mere choice of words.

What remains open concerns the assessment of excess. The decision does not state that forfeiture of the end-of-assignment indemnity is, in itself, manifestly excessive. The Metz court of appeal will assess the seriousness of the breach, the extent of the undertaking given and the scale of the financial loss. The solution is, moreover, given under the provisions in force prior to the Ordinance of 10 February 2016.

Drafting and invoking an indemnity forfeiture clause

A non-compete clause coupled with forfeiture of an indemnity must be designed as a penalty capable of being reduced. For the party drafting it, the proportion between the obligation imposed and the sanction incurred becomes a drafting issue. A calibrated sanction, adjusted to the seriousness or the duration of the breach, withstands scrutiny better than a total and undifferentiated forfeiture. The duration of the prohibition and its geographical scope form part of that overall assessment.

For the party suffering the forfeiture, classification as a penalty clause is the precondition for any discussion of the amount. It requires demonstrating that the parties had agreed in advance on the sanction for non-performance. The evidence enabling the disproportion to be measured – the value of the indemnity lost, the reality and duration of the breach, the damage actually suffered by the creditor – then supports the application for reduction.

Checks before applying an indemnity forfeiture

• Re-read the clause at issue to identify whether it fixes in advance the consequence of a non-performance: it is that test, and not its heading, which governs classification as a penalty clause.
• Check which version of the French Civil Code applies to the contract, the solution discussed being given on the basis of Articles 1134 and 1152 in their wording prior to the Ordinance of 10 February 2016.
• Document the reality and extent of the breach alleged, as well as the amount of the right lost, these matters serving to assess whether the penalty is manifestly excessive.
• Do not treat the forfeiture as acquired as of right: its application in full is a matter for the assessment of the court seised of the dispute.