Today, most contracts have liability and damages clauses stipulated for the purpose of protecting the injured party (generally the obligee). However, as a result of the substantial increase in the international trade, contracts with multinational characteristics become more prominent. Governing law may vary depending on the choices of the parties to the contract, and if Turkish law is chosen as the governing law of the contract, parties should consider the provisions (especially the mandatory provisions) of the Turkish Code of Obligations numbered 6098 and dated 04.02.2011 (“TCO”).
Requirements for Contractual Liability
As per the TCO, notwithstanding the provisions related with tortious acts, existence of the contractual liability depends on the following conditions:
Breach of Contract: The provisions of the contract must be breached in order for the contractual liability to arise for the breaching party. Breach of contract in Turkish law includes, default, impossibility of performance and improper performance.
Existence of damages: Due to the breach of contract, the injured party must suffer losses due to such breach. Such losses may be in form pecuniary and non-pecuniary damages. Pecuniary damages include positive and negative damages which would be explained in detail further below.
Existence of a causal link: There has to be a proper causal link between the breach of the contract and the incurred damage.
Existence of fault: Breaching party should be faulty. As per the Turkish law, fault covers willful misconduct and negligence. However, various provisions of the TCO stipulate strict liability, where existence of fault is not a requirement of contractual liability. Liability regarding the actions of the performance ancillary is an example of a strict liability under the Turkish law.
As per the TCO, the injured party has the right to claim damages for the non-performance and improper performance of the other party. Indemnification shall depend on the special provisions of the contract types such as sale and purchase contracts and contracts for works as they have special provisions for improper performance such as defects. Nonetheless, indemnification for all circumstances (except for torts) shall be based on positive and negative damages. It must be noted that before explaining positive and negative damages, parties may not draft a contract in a way that injured party is indemnified for both positive and negative damages as they serve different purposes.
Positive damages is a form of compensation for the losses suffered by the injured party during the term of the contract. Positive damage in this context is the damage incurred by the obligee in the event of obligator’s non-performance and improper performance as a party to a contract. Positive damages include the difference between the current financial condition and the possible financial condition of the injured party where the obligator has fulfilled its obligations in accordance with the contract. Positive damages includes loss of profit and also includes consequential damages. Positive damages may only be claimed if the contract is still in effect. However, as an exception injured party may only claim positive damages post-termination if the obligator has continuous obligations under a contract and has started performing such obligations.
Negative damages, on the other hand, is a form of compensation for the losses suffered by the injured party due to termination of the contract and not being able to form a contract as a result of the faulty actions of the other party. Negative damage refers to losses suffered by the injured party in relation to the reliance of the validity of the contract. Negative damages include expenses such as but not limited to: paid tax duties with regard to the contract, travel expenses and notary expenses.
Penalty Clauses and the Contractual Liability
The purpose of the penalty clauses is to protect an obligee from non-performance or improper performance of the obligator as with the contractual liability. In contractual liability, the injured party has to prove losses suffered. However, existence of a penalty clause does not require such proof. If the injuries suffered by the injured party exceeds the penalty amount stipulated in the contract, the injured party may claim for damages for the exceeding amount on the basis of contractual liability. The injured party, unlike the penalty clause, has to prove the existence of such injury and the fault of the obligator. Injured may not claim both penalty and negative damages as the contract is terminated or not valid.
Limitation of Contractual Liability
As per the TCO, limitation of liability of contractual liability is possible. However, it is only possible to limited liability for slight negligence. It is not possible to limit the liability arising existence of gross negligence and willful misconduct. If a contractual liability is considered as a tortious act, a limitation of liability for such act or acts is also valid for tortious act (except for willful misconduct and gross negligence) in as per the dominant opinion of the Turkish legal doctrine.
Tortious Acts and Contractual Liability
Breach of contract may also be in form of a tortious act. As a result, the injured party would have two options to pursue against the person who commits such tortious act/obligator. Injured party may claim damages in accordance with the tortious act provisions or contractual liability provisions of the TCO. Contractual liability provisions may be more advantageous for the injured party unlike the general rule has to prove its faultlessness.
TCO stipulated both mandatory and supplementary provisions regarding contractual liability. Parties should carefully consider them during the drafting process. Knowing what may be claimed or not be claimed regarding damages may help both parties for the dispute at hand before the litigation stage. Being familiar with contractual liability provisions would more likely result in equitable resolution for both parties to a contract.