Penalty clauses in Turkish Law are stipulated under the Turkish Code of Obligations numbered 6098 and dated 04.02.2011 (“TCO”). Penalty clauses can be summarized as a provision between the parties to ensure the fulfillment of obligations defined under a contract. Generally, such clauses are stipulated as a contract clause but they may also be stipulated through addendums as well.

The purpose of the penalty clauses is to protect an obligee from non-performance or improper performance of the obligator. Penalty clauses used as an element of oppression for the obligator, the aim of such clauses is to ensure that obligator duly perform its obligations in compliance with the contract. Obligee as the injured party may also claim damages from the obligator in accordance with the provisions of TCO without the existence of a penalty clause. However the injured party should have to prove the existence of such injuries. Existence of a penalty clause on the other hand does not require such proof and the obligator has to perform its contractual obligations related with the penalty clause. Such obligations may be paying a sum, performing an act (or non-performing for that matter).

Characteristics of Penalty Clauses

  • Penalty defined in the penalty clause is a secondary obligation. If the main obligation is not valid for any reason, penalty clause is also invalid. Such invalidity may arise from incapacity and lack of compliance with the contract forms.
  • The form of the penalty clause should be in the same form of the contract as required by TCO and the relevant legislation. This is especially substantial for penalty clauses stipulated through addendums. If the relevant legislation prescribes specific contracts to be in writing, penalty clause addendums should be in writing as well.
  • Obligator shall pay the penalty regardless of its fault. However, obligator is not responsible for performing its obligations under the penalty clause if the main obligation becomes impossible to perform. Such impossibility generally arises as a result of the force majeure conditions. Nevertheless, parties may agree to amend such rule through the contract.
  • If the injuries suffered by the obligator as the injured party exceeds the penalty amount stipulated contract, the injured party may claim for damages for the exceeding amount. The injured party, unlike the penalty clause, has to prove the existence of such injury and the fault of the obligator.[1] Nevertheless, parties may agree to amend such rule through the contract.
  • For penalties prescribed for non-performing or improper performing, obligee has to claim for specific performance or the penalty; both of them cannot be claimed concurrently. As for the penalties prescribed for the time of performance and place of performance, obligee may claim both.
  • Existence of an injury due to non-performance or improper performance is not a pre-condition for claiming penalty in accordance with the TCO.
  • The court may decrease the exorbitant penalty amounts for the disputes related with the penalty amounts. This does not apply for merchants. However, penalty amounts may be decreased if such amounts are against public policy.

Differences with Liquidated Damages

Unlike penalty clauses, liquidated damages are not stipulated under Turkish legislation. However in practice such clauses exist in contracts. As penalty clauses are prohibited in Common Law[2], liquidated damages are commonly used in contracts in Common Law countries. In liquidated damages a pre-determined damages amount is stipulated with regards to non-performance or improper performance of the contract.

Unlike, under Turkish Law, liquidated damages may only be claimed if:

  • There is an existence of an injury arise from obligator’s non-performance or improper performance of the contracts.
  • Obligator should be at fault.

In addition, the obligee should have to prove the injuries suffered due to the actions of the obligator. Obligator may be refrained from paying compensation pertaining to liquidated damages clause by providing proof regarding non-faultiness.

There are two types of liquidated damages that can be observed in contracts governed by Turkish law[3]: (I) absolute liquidated damages; and (ii) proportional liquidated damages. The main difference here is the limit of the compensation. In absolute liquidated damages, the injured party may not claim damages for the injuries exceeds the amount stipulated under the liquidated damages clause. As for the proportional liquidated damages, the compensation amount would vary depending on the injuries suffered by the injured party.

Penalty clauses offer a powerful tool to the obligee with regards to non-performance and improper performance. For that reason, parties should diligently draft such clauses. Liquidated damages, on the contrary, is not as powerful as penalty clauses as it requires the existence of injuries and proof thereof by the obligator is mandatory.