Under Turkish law, a penalty clause (sometimes referred to as a “contractual penalty” or “penal clause”) is a provision included in a contract to encourage the debtor to fulfil their contractual obligations correctly and on time. Should the debtor fail to perform, or perform inadequately, the penalty clause entitles the creditor to claim a predetermined sum or other form of compensation. Crucially, this clause spares the creditor from having to prove the extent of their loss.We go through the legal basis, types and practical implications of penalty clauses under Turkish law.
From a Legal Basis and Validity Aspects
Penalty clauses are defined in Turkish law by Articles 179-182 of the Turkish Code of Obligations or Türk Borçlar Kanunu (TBK). Freedom of contract is the general principle under which the parties have liberty to determine the contents and the form of their agreement, provided that neither mandatory legal rules nor morality and public order are contravened.
A valid obligation must support the penalty clause in order for it to be enforceable. If the principal debt is void or unenforceable, or becomes impossible to perform without the debtor’s fault, the penalty clause cannot be invoked. Thus, the validity and enforceability of the penalty clause are intrinsically tied to the legality and existence of the main contractual obligation.
Purpose and Function of Penalty Clauses
The basic or primary function of a penalty clause is to compel the debtor to execute the contract completely and properly. The debtor is dissuaded from procrastinating or failing to perform by the fear of a pre-determined fine attached to failure or defect in performance. From the creditor’s perspective, the penalty clause offers a significant procedural advantage: it renders any need to prove actual loss unnecessary. Even if the creditor suffers no loss, the penalty remains payable.
No Need to Prove Damages
One of the most distinctive features of a penalty clause under Turkish law is that the creditor need not demonstrate actual harm to claim the penalty. Article 180(1) TBK clarifies that the creditor is entitled to the predetermined penalty sum regardless of whether any damage has occurred. The debtor may attempt to avoid liability by proving they were not at fault, but they cannot argue that the creditor’s lack of loss precludes enforcement of the penalty. Inclusion and Enforcement of Penalty Clauses in Turkish Contracts
Types of Penalty ClausesPenalty clauses under Turkish law generally fall into three categories:
Penalty in Lieu of Performance (Alternative Penalty Clause):In cases where the contract stipulates a penalty if the obligation is not performed at all or not performed properly, the creditor may, unless agreed otherwise, choose either to demand the debtor’s performance or to claim the penalty. The creditor cannot, by default, request both simultaneously.
Penalty in Addition to Performance (Supplementary Penalty Clause):If the penalty clause is contingent upon the time or place of performance, the creditor may claim both the performance of the principal obligation and the penalty—provided they have not explicitly waived their right to the penalty or unreservedly accepted late performance. This type of clause is particularly relevant where timing and location are critical.
Penalty in Lieu of Continued Contractual Relationship (Termination Penalty):Parties may agree that payment of a certain penalty sum entitles the debtor to terminate or withdraw from the contract. In this scenario, the penalty clause does not serve as security for proper performance, but rather as a means for the debtor to extricate themselves from the agreement. Here, the creditor cannot demand the principal performance—only the penalty.
Adjusting Excessive Penalty AmountsAlthough parties may freely determine the amount of the penalty, the TBK empowers the court to reduce an excessive penalty at its own discretion (Article 182(3)). If the court considers the agreed amount disproportionately high—potentially infringing notions of fairness and good faith—it may adjust the sum to a reasonable level. While the judge may lower the amount, they cannot remove the penalty clause entirely.
An exception to this principle arises in commercial transactions, where the Turkish Commercial Code (TCC) restricts a commercial debtor’s ability to seek a reduction in the penalty on the grounds of excessiveness. Nevertheless, courts may still balance fairness and proportion in very exceptional circumstances.
Causation, Fault, and Additional DamagesGenerally, to enforce a penalty clause, the creditor must establish that the debtor failed to perform as agreed. The debtor, on the other hand, may be released from paying the penalty if they prove that they were without fault. If the creditor’s actual loss exceeds the penalty amount, the creditor may seek the excess, but only if they can prove the debtor’s fault in causing that greater loss.
Penalty clauses are a practical and commonly used tool in Turkish contract law, affording both certainty and efficiency. By pre-determining the financial consequences of non-performance, they encourage diligence in fulfilling contractual obligations and simplify the creditor’s legal recourse should a breach occur. Although the parties enjoy broad contractual freedom, rules on fairness, fault, and judicial oversight help maintain a balanced, proportionate application of penalty clauses in Turkish contractual relationships.
If you would like more information on penalty clauses in Turkish contracts, or need tailored legal advice on contractual provisions, please feel free to contact us at CCS Law. Our team of experienced solicitors will be happy to assist.
Disclaimer: This article is intended for informational purposes only and does not constitute legal advice.