Settlement agreement (Article 2044 of the French Civil Code): securing the agreement so that it really ends the dispute

A manager who signs a settlement agreement (protocole transactionnel) believes he is buying the end of a dispute. In a significant number of cases, he buys only a pause. The claimant resumes the proceedings on a neighbouring legal basis that the waiver did not cover, the debtor stops paying after the second instalment and the creditor discovers that he must start fresh proceedings to have the agreement performed, or the promised consideration is annulled for want of a genuine concession. A settlement is a contract, not a judgment: its strength depends entirely on its drafting. This guide details the checkpoints to require before signature, from the reality of the reciprocal concessions to the exact scope of the waiver, and on to the mechanisms that give the agreement enforceable force.

A settlement is a contract, not a court decision

Article 2044 of the French Civil Code, in the wording resulting from Law No. 2016-1547 of 18 November 2016 on the modernisation of 21st-century justice, defines a settlement (transaction) as the contract by which the parties, by reciprocal concessions, bring to an end a dispute that has arisen or prevent a dispute from arising. The second paragraph adds that this contract must be drawn up in writing. This requirement of writing is mostly analysed as a rule of evidence, but the debate remains theoretical in business matters: no serious agreement is concluded other than by a signed instrument.

The structuring point concerns the effect of the settlement. Before 2016, Article 2052 gave it the authority of a final judgment (res judicata). The Law of 18 November 2016 abandoned that formula in favour of a more technical wording.

“A settlement bars the bringing or continuation, between the parties, of a legal action having the same object.” (Article 2052 of the Civil Code)

The change is not cosmetic. A settlement is not equivalent to a judgment: it gives rise to a plea of inadmissibility (fin de non-recevoir) within the meaning of Article 122 of the French Code of Civil Procedure, which the opposing party must raise, at any stage of the proceedings (Article 123 of the Code of Civil Procedure). Two operational consequences. First, the judge does not raise it of his own motion: the agreement must be produced, which presupposes having provided for an exception to the confidentiality clause. Second, the bar is confined to actions having the same object, a notion narrower than what the parties imagine at the time of signature. Res judicata authority, in the procedural sense, remains the privilege of a judgment or an arbitral award.

Even as reformed, a settlement retains a strong extinguishing effect. Article 384 of the Code of Civil Procedure provides that proceedings are extinguished as an accessory to the claim by the effect of the settlement, the extinction being recorded by a decision of divestment (dessaisissement). That recording must still be requested: an agreement signed and not followed by an application to the judge leaves active proceedings in place, with their pre-trial management hearings (mise en état) and their risks of removal from the list or lapse.

Reciprocal concessions: the most attacked condition of validity

Without reciprocal concessions, there is no settlement but a unilateral waiver, open to requalification and annulment. This is the first ground of attack for a party who regrets having signed.

The case law checks the existence of the concessions, not their economic equivalence. An imbalance, even a marked one, is not enough to bring about nullity: a settlement is precisely an act of compromise, and the judge has no need to redo the parties' commercial trade-off. On the other hand, a purely illusory or derisory concession is equivalent to an absence of concession. Three configurations particularly expose the agreement.

• Payment of a sum that the debtor already acknowledged owing, without any reduction, without any additional time and without waiver of interest or penalties.
• An undertaking not to bring an action that is manifestly time-barred or devoid of any basis, presented as a concession by the claimant.
• Waiver of a claim that the party was not making and could not make, inserted to create artificially an appearance of reciprocity.

The drafting must therefore spell out the concessions, and not be content to assume them. A technical preamble describing the respective claims, their amount, their basis and each party's position makes it possible to measure the concession made. Where the defendant pays a sum lower than the claim, the claimant's concession is quantifiable. Where the defendant agrees to pay although he disputed any principle of liability, the concession lies in the abandonment of the dispute, which presupposes having documented it beforehand. The standard clause without admission of liability remains compatible with the existence of concessions, provided the agreement identifies what each party gives up.

One point deserves the attention of finance departments: the 2016 law repealed former Articles 2053 to 2058 of the Civil Code, which strictly governed rescission of a settlement, in particular by excluding error of law. Disputes over validity now fall under the general law of defects of consent resulting from Ordinance No. 2016-131 of 10 February 2016, Article 2053 maintaining rescission for error as to the person or as to the object of the dispute, fraud and duress. The exposure to the risk of annulment has increased, in particular where a party negotiated under the pressure of a cash-flow difficulty or on the basis of incomplete information supplied by its counterparty.

The scope of the waiver: drafting against strict interpretation

This is where the real effectiveness of the agreement is decided. Articles 2048 and 2049 of the Civil Code require a restrictive reading.

“Settlements are confined to their object: the waiver made in them of all rights, actions and claims extends only to what relates to the dispute that gave rise to them.” (Article 2048 of the Civil Code)

Article 2049 adds that settlements settle only the disputes that are included in them, whether the parties have manifested their intention by special or general expressions. A catch-all clause of the type the parties waive any action against each other therefore covers only the dispute described in the agreement. It does not prevent an action arising from another fact, another contract or another period.

The method consists in defining the scope along four cumulative axes.

• The facts: describe the dispute by the events giving rise to it, and not solely by the legal characterisation adopted in the writ of summons. A waiver worded by reference to contractual liability leaves in place the action for warranty against latent defects or a tort action against a third party to the contract.
• The period: fix a crystallisation date, distinguishing prior known facts, prior facts not yet revealed and the future effects of a prior situation.
• The contracts and the proceedings: refer to the agreements concerned by their date and subject matter, and to pending proceedings by their docket number, including summary proceedings (référés), expert appraisals and appeals.
• The persons: identify the beneficiaries of the waiver beyond the signatories alone.

This last axis is the one most often neglected. Article 2051 of the Civil Code provides that a settlement made by one of the interested parties does not bind the other interested parties and cannot be relied on by them. A project owner (maître d'ouvrage) who settles with the main contractor without including its subcontractors, its design and supervision engineer (maître d'œuvre) and the insurers keeps its remedies, but is also exposed to third-party claims that will bring the dispute back before the judge. A seller who settles with the buyer over an earn-out without extending the waiver to the managers, to the subsidiaries of the acquiring group and to the warrantors of liabilities has settled only a fraction of its exposure.

The question of defects not yet revealed deserves specific treatment in construction files. A project owner who settles on reservations made at handover and then discovers a defect affecting the structural soundness of the works keeps, unless there is an explicit stipulation to the contrary, its action under the ten-year liability (garantie décennale). On the builder's side, security requires a waiver expressly extended to the consequences, not yet apparent, of the same defects, together with a precise technical description. On the project owner's side, security requires the opposite: an express reservation of the actions under the statutory guarantees.

Powers, capacity and authorisations: who really binds the company

An agreement signed by a person without authority is a fragile agreement. Three checks are needed before any signature.

Article 1988 of the Civil Code recalls that a mandate conceived in general terms covers only acts of administration and that acts of disposition require an express mandate. To settle is an act of disposition. A general counsel, a regional director or a lawyer must therefore hold a special power, referring to the dispute, the parties and, where appropriate, the financial ceiling of the negotiation. Article 2045 of the Civil Code adds that, in order to settle, one must have the capacity to dispose of the things included in the settlement.

In companies, it is necessary to check the articles of association clauses limiting the manager's powers, the thresholds subject to prior authorisation by the board of directors, the supervisory board or the strategic committee, and the guarantee commitments which, in public limited companies (sociétés anonymes), require authorisation of the board of directors under Article L. 225-35 of the French Commercial Code. A settlement that includes a suretyship or an autonomous guarantee in favour of the creditor must be documented accordingly.

The situation of a debtor in difficulty calls for particular vigilance. In safeguard or reorganisation proceedings (sauvegarde, redressement judiciaire), Article L. 622-7, II of the Commercial Code subjects to the authorisation of the supervising judge (juge-commissaire) the debtor's ability to enter into arbitration or to settle. In compulsory liquidation (liquidation judiciaire), Article L. 642-24 of the same code subjects a settlement concluded by the liquidator to the authorisation of the supervising judge, with approval by the court where the subject matter is of indeterminate value or exceeds its jurisdiction at final instance. A creditor who signs an agreement with a debtor in insolvency proceedings without this authorisation holds an instrument that is unenforceable against the proceedings.

Giving the agreement enforceable force

A settlement is not an enforceable title (titre exécutoire). Signed alone, it permits neither attachment of debts, nor attachment and sale of goods, nor registration of a final judicial mortgage. The unpaid creditor must then sue for performance of the agreement, that is start the proceedings he thought he had avoided. Three routes make it possible to avoid this detour.

Judicial approval

Article 1567 of the Code of Civil Procedure makes applicable to a settlement the rules on approval (homologation) of amicable agreements provided for in Articles 1565 and 1566, the application being capable of being made by all the parties or by the most diligent of them. The judge rules on a non-contentious basis, without a hearing unless he considers it necessary to hear the parties. His review is limited: he checks the lawfulness of the agreement and its conformity with public policy, but cannot modify its terms.

Two limits must be known. Approval confers enforceable force, not immunity: it does not cure defects of consent and does not bar a later action for nullity of the settlement. In addition, the decision granting the application is not open to appeal, unlike a refusal of approval, which makes the preparation of the application less trivial than it appears.

The lawyer's deed with the enforcement formula

Law No. 2019-222 of 23 March 2019 on programming for 2018-2022 and reform for justice supplemented Article L. 111-3 of the French Code of Civil Enforcement Procedures. Settlements and instruments recording an agreement resulting from mediation, conciliation or a participatory procedure constitute enforceable titles where they are countersigned by the lawyers of each of the parties and bear the enforcement formula (formule exécutoire) applied by the registry of the competent court. This is the quickest route where each party is assisted. It presupposes a deed countersigned within the meaning of Article 1374 of the Civil Code, and therefore the effective involvement of both counsel, and not the mere signature of a document prepared unilaterally.

Deposit among the notary's records

Execution of the agreement in notarial form, or its deposit among a notary's records with acknowledgement of handwriting and signature, confers an enforceable title within the meaning of Article L. 111-3, 4° of the Code of Civil Enforcement Procedures. This route is required where the agreement entails the creation or release of security interests over real property, a transfer of ownership of a building or a long-term commitment justifying a certain date and custody by the public officer.

The choice between these three routes is not neutral for the timetable. Approval depends on the workload of the registry seised. The lawyer's deed is quicker but presupposes agreement on the wording down to the last comma. The notarial deed costs more but secures real estate transactions.

Securing payment: instalment schedule, security and risk of default

A well-drafted agreement anticipates its own non-performance. The minimum reflex is to stipulate an acceleration clause in the event of default on a single instalment, after a formal notice that has remained without effect for a short period, with immediate payability of the balance, contractual default interest and allocation of the payments already received.

The strategic question remains: what becomes of the initial dispute in the event of non-performance? Two architectures stand opposed. In the first, the waiver is firm and the creditor has only the action for performance of the agreement, which deprives him of the amount originally claimed but gives him a liquid and certain claim. In the second, the waiver is stipulated subject to a condition subsequent of full payment: failing this, the agreement is terminated by operation of law and the parties return to their initial claims, the sums paid being allocated to the original claim. The second architecture is more protective of the creditor, but it must be drafted without ambiguity, failing which the judge seised will stay with the extinguishing effect of Article 2052.

The repeal of former Article 2047 of the Civil Code, which expressly authorised stipulating a penalty against the party failing to perform, did not remove that option: the penalty clause (clause pénale) now falls under the general law of Article 1231-5 of the Civil Code, subject to the judge's power of moderation where the amount is manifestly excessive or derisory. The conditions of validity of the penalty clause, its implementation and its judicial revision are detailed in our guide on the penalty clause in contracts.

Where the debtor shows financial fragility, the instalment schedule alone is not enough. The security that can be mobilised is well known: personal suretyship of the manager, autonomous first-demand guarantee (garantie autonome à première demande), pledge of a bank account or of shares, escrow in the hands of a third party, security trust (fiducie-sûreté), conventional mortgage. Each must be created in the deed or simultaneously, not promised for later. On the choice between these two personal security interests and the drafting of a guarantee that withstands a call, see our analysis of the autonomous first-demand guarantee compared with suretyship.

One risk is systematically underestimated on the creditor's side: that of nullity in the suspect period (période suspecte). If the debtor is later declared to have ceased payments and the date of cessation of payments is set back to before the signature of the agreement, the payments and security granted may be challenged on the basis of Articles L. 632-1 and L. 632-2 of the Commercial Code, in particular where the creditor knew of the state of cessation of payments. Collecting is therefore not always keeping. In a file where the debtor has already applied for an ad hoc mandate or a conciliation, the analysis of the risk of restitution must precede the negotiation of the amount.

The clauses that make a settlement fail

Beyond the conditions of validity, the failure of an agreement most often stems from drafting omissions. The following checkpoints must appear in any review before signature.

• The fate of the pending proceedings: the agreement must specify whether it entails discontinuance of proceedings (désistement d'instance) or discontinuance of the action (désistement d'action), arrange for the application to the judge to record the divestment, and settle costs and the fate of claims based on Article 700 of the Code of Civil Procedure.
• The fate of an investigative measure: where an expert appraisal ordered on the basis of Article 145 of the Code of Civil Procedure is under way, the agreement must deal with the end of the assignment, the fate of the deposit and the allocation of costs already incurred.
• Restitutions: where a decision carrying provisional enforcement has already given rise to payment, the agreement must say expressly whether the sums paid are kept, allocated or returned.
• Confidentiality and its exceptions: an unqualified confidentiality clause prevents the agreement from being produced to raise the plea of inadmissibility or to justify accounting and tax treatment. The exceptions must cover legal obligations, requests from the tax authorities, statutory auditors and production in court for enforcement purposes.
• Non-disparagement and communication: in files with a reputational stake, a joint press release annexed to the agreement is better than a general duty of discretion, which is impossible to monitor.
• The tax characterisation of the sums: the breakdown between principal, interest, penalties and compensation for damage determines the value added tax treatment. A sum that is the consideration for a service or an additional price falls within the scope of the tax, unlike compensation for damage. Silence in the agreement transfers the risk to the party collecting.
• Indivisibility: where the agreement contains several linked undertakings, an indivisibility clause prevents a party from performing only what suits it.
• The governing law and the competent court for the agreement itself: an international dispute without a jurisdiction clause turns performance of the agreement into a second dispute.
• The interplay with criminal proceedings: a settlement can relate only to civil interests, as provided by Article 2046 of the Civil Code. An undertaking to withdraw a complaint does not bind the public prosecutor, who retains discretion to prosecute. To promise the extinction of the public prosecution in an agreement is to promise what one does not have at one's disposal.

Conclusion

A settlement agreement is not an act of administrative closure: it is the last strategic act of the file, and often the most decisive. Our position is clear. A settlement is judged by three questions, asked before signature and not after. Are the reciprocal concessions identifiable and documented in the preamble, so that no party can later maintain that it gave up its rights without consideration? Does the scope of the waiver cover all the facts, all the periods, all the contracts and all the persons capable of bringing the dispute back before a judge, given the restrictive interpretation imposed by Articles 2048 and 2049 of the Civil Code? Does the creditor have an immediately enforceable title, or will he have to plead again to obtain what he negotiated?

A settlement that answers yes to all three questions ends the dispute. A settlement that leaves one of them open merely shifts the exposure to risk in time.

Before signing, require two things of your adviser: a written note identifying precisely the actions that survive the waiver as it is drafted, and a reasoned choice of the mechanism conferring enforceable force, judicial approval, countersigned lawyer's deed or notarial deed, with its implementation timetable. These two documents cost little compared with the cost of a second dispute on the same file.

Frequently asked questions

Does a settlement still have res judicata authority since the 2016 reform? No, not in the strict sense. Law No. 2016-1547 of 18 November 2016 removed the reference to the authority of a final judgment (res judicata) that appeared in former Article 2052 of the Civil Code. The current text provides that a settlement bars the bringing or continuation, between the parties, of an action having the same object. In practical terms, it founds a plea of inadmissibility within the meaning of Article 122 of the Code of Civil Procedure, which must be raised by the party relying on it, the judge not raising it of his own motion.

Does a settlement agreement allow a bank account to be attached directly in the event of non-payment? No, unless it has been made enforceable. Three routes exist: judicial approval under Articles 1565 to 1567 of the Code of Civil Procedure, application of the enforcement formula by the registry on a deed countersigned by the lawyers of each party pursuant to Article L. 111-3 of the Code of Civil Enforcement Procedures in the wording resulting from Law No. 2019-222 of 23 March 2019, or execution of the deed by a notary. Failing that, the creditor must sue for performance of the agreement.

Can an unbalanced settlement be annulled for insufficient concessions? The review concerns the existence of reciprocal concessions, not their equivalence. An economic imbalance is not enough to entail nullity, a settlement by nature presupposing an unequal sacrifice. On the other hand, a derisory or illusory concession is treated as an absence of concession and deprives the instrument of its characterisation, with a risk of annulment. Drafting a preamble that quantifies the initial claims and identifies what each party gives up is the best protection.

Is a special power needed to settle on behalf of a company? Yes. To settle is an act of disposition, and Article 1988 of the Civil Code requires an express mandate for this type of act. The power must refer to the dispute, the parties and, in practice, the financial ceiling of the negotiation. The limits in the articles of association on the manager's powers must also be checked and, in public limited companies, the authorisation of the board of directors where the agreement includes a surety, an aval or a guarantee within the meaning of Article L. 225-35 of the Commercial Code.

Can one settle with a company placed in reorganisation proceedings? Yes, but subject to authorisation. Article L. 622-7, II of the Commercial Code, applicable to reorganisation proceedings, subjects to the authorisation of the supervising judge the debtor's ability to enter into arbitration or to settle. In compulsory liquidation, Article L. 642-24 subjects a settlement concluded by the liquidator to the authorisation of the supervising judge, with approval by the court where the subject matter is of indeterminate value or exceeds its jurisdiction at final instance. An agreement signed without these authorisations is unenforceable against the proceedings.

Does approval of a settlement prevent a later action for nullity? No. Approval is a non-contentious decision that confers enforceable force after a review limited to the lawfulness of the agreement and its conformity with public policy. The judge cannot modify the terms of the agreement and does not verify the quality of the parties' consent. An action for nullity based on fraud, duress or error as to the object of the dispute remains available on the basis of Article 2053 of the Civil Code and the general law of defects of consent.

What should be provided for if the debtor stops paying the instalment schedule set out in the agreement? Three stipulations are indispensable: an acceleration clause after formal notice, making the balance immediately payable with contractual default interest; a clause specifying whether the waiver is firm or stipulated subject to a condition subsequent of full payment, in which case the parties return to their initial claims; and, depending on the debtor's financial profile, security created in the deed itself, suretyship, pledge, escrow or conventional mortgage.