In today’s commercial life, almost all companies conduct their business activities through contracts and seek to obtain the widest possible legal protection against potential disputes. Companies, striving to minimize the commercial risks inherent in contractual relations, frequently demand the inclusion of penalty clauses to ensure performance of contractual obligations or, in cases of non-performance, to mitigate potential financial losses. As a widely used method in modern practice, the penalty clause provides several layers of legal protection, yet at the same time gives rise to different types of disputes concerning its application. In this article, we examine the regulation of penalty clauses under Turkish Law.
– What legal protections does a penalty clause provide?
Although, in general terms, a penalty clause is regarded as a guarantee of contractual performance, it may serve various other functions depending on how it is drafted within the contract. A penalty clause may be stipulated for cases of complete non-performance, or in addition to delayed performance. Furthermore, in certain contracts, the payment of a penalty may be foreseen as a condition for the obligor to be released from contractual obligations. Statutory regulations allow the inclusion of penalty clauses in different forms, and various applications may arise depending on the parties’ agreement. In this regard, if a valid penalty clause exists in a contract, the creditor only needs to prove the breach of contract; they are relieved from the burden of proving the exact amount of loss suffered. Thus, the penalty clause provides a significant legal advantage by eliminating the requirement to prove damages.
– Circumstances eliminating the right to claim a penalty in addition to performance
As noted, where the agreed performance is not rendered at the specified time or place, the creditor may, in principle, demand a penalty in addition to performance. However, the legislator has imposed certain limitations, subjecting the creditor’s right to additional conditions. Accordingly, if the creditor accepts delayed or defective performance, they must expressly reserve their right to claim the penalty (by recording a reservation) or must not waive such right. In practice, this means that companies expecting to claim both performance and the penalty must declare, at the time of performance, that they accept performance subject to delay and therefore reserve the right to the penalty. In construction or manufacturing contracts, for instance, temporary or final acceptance protocols are commonly issued; in such cases, the creditor must record within these documents that performance was not properly fulfilled and that the penalty is claimed. Similarly, a merchant purchasing goods delivered late must expressly notify the counterparty that the penalty for delay is reserved, rather than making payment unconditionally. Otherwise, the creditor’s right to claim may be lost.
– The complementary or independent role of penalty clauses in relation to actual damages
As a rule, penalty clauses agreed upon between the parties are stipulated independently of any actual damage suffered. The creditor may claim the penalty without proving actual loss; the mere breach of contract suffices. Thus, even if no damage occurs, the creditor is entitled to the penalty if a breach has taken place.
While the penalty is, in principle, claimable irrespective of damages, claiming both damages and the penalty cumulatively requires an explicit contractual provision. In the absence of such a clause, the creditor may not demand both; they are limited to the penalty amount agreed upon. In other words, in such cases, the penalty functions as a pre-determined and liquidated compensation for potential loss, precluding further claims for damages. For this reason, expressly providing in the contract for the possibility of claiming both damages and the penalty is crucial to avoid loss of rights.
– Is there a limit to the amount of a penalty clause? May it be reduced?
Under statutory provisions, the amount of a penalty clause is not subject to any specific ceiling, and the parties are free to determine it. Although the legislator, through the Turkish Code of Obligations, grants the judge authority to reduce excessive penalties, this reduction mechanism does not apply in contracts concluded between merchants. The underlying rationale is that merchants are presumed to possess the necessary experience and foresight in commercial dealings, and that freedom of contract among merchants should be respected. Thus, in commercial matters, the only general limitation applicable to penalty clauses is the rule against immorality.
In addition, where the penalty would, if enforced, lead to severe financial hardship for the debtor-merchant—such as undermining their economic viability or threatening the continuation of their commercial activities—a reduction in the penalty amount may be requested. In such cases, the debtor may argue, by reference to their capital and assets stated in the main contract, that payment of the penalty would be economically destructive and therefore seek judicial reduction.
Conclusion
In conclusion, penalty clauses—frequently encountered in modern commercial contracts—constitute a legal risk management tool that varies from case to case and requires careful consideration both in drafting and application. While the presence of a penalty clause safeguards contractual rights, improper implementation may render it unenforceable. Therefore, the interpretation and enforcement of penalty clauses should be carried out with due diligence, taking into account the specific circumstances of each case.
Attorney At Law Hayri Küçüksarı