News

CE, November 24, 2025, No. 497438

The legal framework surrounding contractual penalties has gained clarity with this ruling by the Council of State, which settles a legal debate that had raised significant questions for practitioners: must challenges to contractual penalties comply with the dispute resolution rules of the General Terms and Conditions for Public Contracts (CCAG)?

1) The Facts

In this case, the French National Institute of Industrial Property (INPI) had entered into a public contract with Engie ES for the maintenance of its headquarters. Because certain services were performed late, the INPI, by a decision dated June 16, 2017, imposed contractual penalties on its contracting party amounting to nearly €300,000, which was contested by a letter dated July 7, 2017. This letter was not followed by a formal claim, as required by Article 37 of the CCAG FCS (2009 version) or Article 46 of the CCAG (2021 version).

2) The Buyer’s Argument

After the Versailles Administrative Court of Appeal upheld the company’s request for relief from the penalties, the INPI appealed to the Council of State, arguing that the contractor was time-barred from requesting relief from the penalties because it had failed to file a formal claim within the two-month period stipulated in the CCAG. According to this article, when a dispute arises between the contractor and the buyer during the performance of a contract (that is, a written, explicit, and unequivocal statement from the buyer expressing disagreement with their contracting partner), the contractor must, under penalty of inadmissibility of bringing the matter before the contract judge, submit a claim within two months.

In this particular case, the buyer argued that challenging the penalties could not escape the application of the dispute resolution procedure established by the CCAG (General Terms and Conditions for Public Contracts), namely:

• Step 1: A dispute arises concurrently with the application of penalties
• Step 2: A claim must be filed within two months, failing which the claim will be barred
• Step 3: The matter is referred to the administrative court

It was therefore up to the Council of State to determine whether the application of contractual penalties by the public buyer falls within the scope of Article 37 of the CCAG FCS, which in many cases allows public buyers to benefit from time-bound and procedural protections to limit disputes.

3) The Council of State’s Position

Disputes over penalties do not fall within the scope of the CCAG dispute resolution mechanism. Without revisiting its case law regarding the emergence of a dispute, the Council of State has ruled not only that a contractual penalty does not constitute a dispute in itself, but also that the provisions of Article 37 concerning the emergence of a dispute and the time limit for filing a claim do not apply when the contracting authority intends to impose penalties on the contractor during the performance of the contract.

This case law will likely be applied more frequently to contracts for standard supplies and services than to works contracts. Indeed, in the case of fixed-price works contracts, penalties only become final during the process of establishing the final account, allowing the parties the opportunity to negotiate the amount of the penalties until the end of the contract’s performance.

4) How can such a position be justified?

Three reasons can explain the position adopted by the Council of State:

Reason #1: The difficulty of determining the date on which the dispute arose

Bringing penalties within the scope of Article 37 of the 2009 CCAG (Article 41 of the 2021 CCAG) created another difficulty: which date should be chosen for the emergence of a dispute? The date on which the buyer announced the impending application of penalties by means of a formal notice? The date on which the penalties became effective from an accounting perspective? The date on which the successful bidder sent a letter contesting the application of the penalties? It is difficult to determine, uniformly and for all contracts, the emergence of a dispute in this area, as practice reveals a myriad of specific situations.

Reason #2: The application of penalties does not necessarily constitute the emergence of a dispute

Article 37 of the CCAG-FCS (General Terms and Conditions for Public Works Contracts) refers to “contractual disputes,” implying disputes related to the interpretation of the contract stipulations or the performance of services. However, the decision to impose a penalty does not constitute a disagreement on the interpretation or performance of the contract, but rather on the application of a sanction mechanism, which lies within the buyer’s unilateral power.

Furthermore, this position seems logical: the mere fact that the buyer’s unilateral decision is unfavorable to the contractor does not mean that the contractor will not accept it, and therefore that a dispute will arise. The contractor may very well consent to the penalty or at least not intend to contest it. The simple application of contractual penalties is therefore not, in itself, sufficient to give rise to a dispute.

Reason #3: The existence of specific rules for penalties

This decision finally appears to be justified by the existence of specific rules for penalties. Indeed, the six 2021 General Terms and Conditions for Public Contracts (CCAG) provide, by default, for a specific adversarial procedure prior to the application of penalties, and this without providing for a statute of limitations.

5) In summary

Before:

• Uncertainty regarding the date the dispute with the buyer arose
• Uncertainty regarding the need to submit a formal claim
• Requirement to repeat the objection each time penalties were applied

Now:

• Penalties are no longer covered by the article on dispute resolution
• The contractor simply needs to send a letter to contest the penalties
• No time limit for sending this letter of objection
• The matter must be brought before a judge within 2 months of the express refusal or implied decision

6) Our practical advice for the contractor

Procedural advice: To contest these penalties before a judge, the contractor must follow the standard legal procedures for administrative litigation:

• Obtain a preliminary decision from the buyer by sending them a letter
• Following an express or tacit rejection decision, the contracting authority must appeal to the court within two months, provided that the appeal procedures and deadlines have been correctly specified

Increased vigilance of contractors regarding the CCAP (General Terms and Conditions of Contract): It is possible that some contracting authorities, in light of this case law, will regulate the legal framework for contesting penalties. Contractors must therefore be particularly vigilant regarding the drafting of these clauses.