1. Introduction
In legal transactions, the
failure of parties to perform their obligations properly and timely often
renders the continuation of the legal relationship unbearable. In such cases,
as a general rule, the sanctions provided under Articles 112 and et seq.
of the Turkish Code of Obligations are applied.
The failure of parties to
fully and properly perform their contractual obligations often leads the
creditor to seek termination of the contract. In particular, in cases that
undermine the very basis of the contract, such as a breach of the obligation to
pay the price, the issue of which claims the creditor may pursue following
termination becomes practically significant.
At this point, although
the debtor is generally obliged to compensate the creditor for any resulting
loss in the event of non-performance or defective performance, if a penalty has
been stipulated for such non-performance or defective performance, the creditor’s
right to claim the penalty also arises under Articles 179–182 of the Turkish
Code of Obligations.
However, particularly with
respect to cumulative penalty clauses, the question of whether the right to
claim such a penalty continues in the event of contract termination remains a
controversial issue both in doctrine and in the decisions of the Court of
Cassation. On the one hand, the penalty is regarded as a sanction for
non-performance; on the other hand, the termination of the contract results in
the extinguishment of the primary obligation to perform, which renders the
claimability of a performance-linked penalty debatable. For this reason, the
legal nature of the penalty must be assessed together with the effects of
termination on the contractual relationship.
2. The Concept of Penalty
Clause
A penalty clause refers to
the obligation that the debtor undertakes in advance to perform toward the
creditor in the event that the principal obligation is not performed, either
partially or fully, or not performed properly in the future. Accordingly, a
penalty clause is an ancillary obligation dependent on the principal obligation
and arises only upon the breach of that obligation. Once the debtor has
undertaken to pay the penalty, the creditor can obtain compensation without
having to claim that any loss occurred or prove the extent of such loss. The
nature of the principal obligation is not relevant for the stipulation of a
penalty clause; a penalty may be agreed upon for obligations to deliver, to do,
or not to do. [1]
The type of the principal
obligation is not determinative for the stipulation of a penalty clause; a
penalty may be provided for obligations to give, to do, or not to do. However,
the existence and enforceability of a penalty clause generally depend on the
presence of an explicit provision to that effect in the contract.
Under Article 179 of the
Turkish Code of Obligations, penalty clauses are set out in three different
types: optional penalty clauses, cumulative penalty clauses, and penalties in
lieu of performance (termination/ rescission penalties). This
distinction is significant in determining the circumstances and scope in which
a penalty clause may be claimed.
Article 179 of the Turkish
Code of Obligations reads as follows:
“If a penalty has been
stipulated for the non-performance or defective performance of a contract, the
creditor may demand either the performance of the obligation or the penalty,
unless the contract indicates otherwise.
If the penalty has been
stipulated for failure to perform the obligation at the agreed time or place,
the creditor may demand the performance of the penalty together with the
principal obligation, unless they have expressly waived their right or accepted
performance without reservation.
The debtor retains the
right to prove that, by fulfilling the stipulated penalty, they are authorized
to terminate the contract by termination or rescission.”
The first paragraph of the
article sets out the optional penalty clauses.
With respect to optional
penalty clauses, the General Assembly of Civil Chambers of the Court of
Cassation rendered as follows under its decision dated 12.10.2021, and bearing
the Basis number 2017/2736 and the Decision number 2021/1218:
“If a penalty has been promised to be
paid in the event of non-performance or defective performance of the contract,
and the contract does not provide otherwise, the creditor may demand either the
performance of the contract or the payment of the penalty. In the optional
penalty clause, the creditor holds a discretionary right. Accordingly, upon the
occurrence of the stipulated condition—that is, the debtor’s failure to perform
the principal obligation fully or properly—the creditor may either demand the
performance of the principal obligation or waive it and claim payment of the
penalty. Under the optional penalty clause, the creditor may not demand both
the performance of the principal obligation and the payment of the penalty
simultaneously. For example, if it has been stipulated that the buyer may
claim a penalty of TRY 100,000.- in the event that the seller fails to deliver
the goods, the buyer may either demand the delivery of the goods or claim the
penalty. As can be seen, a discretionary right is involved here: the creditor
may demand either the performance of the principal obligation or the payment of
the penalty, but, as a general rule, may not demand both simultaneously. It
should be noted, however, that if subsequent impossibility renders the
performance of the principal obligation impossible, this discretionary right
granted to the creditor becomes meaningless. When the performance of the
principal obligation is impossible, the creditor is entitled only to claim
compensation, if applicable. Accordingly, the creditor may demand either
compensation for the loss suffered or the payment of the penalty.”
Accordingly, an optional
penalty clause is a type of penalty agreed upon to apply in the event of
non-performance or defective performance of the obligation, granting the
creditor the opportunity to choose between the performance of the principal
obligation and the payment of the penalty. Pursuant to Article 179(1) of the
Turkish Code of Obligations, unless the contract provides otherwise, the
creditor may demand either the performance of the obligation or the payment of
the penalty.
In this type of penalty
clause, the creditor may not demand both the performance of the principal
obligation and the payment of the penalty simultaneously. The right of choice
in this context belongs to the creditor, not the debtor. The debtor does not have
the right to be released from the obligation merely by paying the penalty in
the event of non-performance; the creditor may continue to demand the
performance of the principal obligation.
The second paragraph of
the article sets out the cumulative penalty clauses.
The decision, dated 07.07.2021
and bearing the Basis number 2017/3169 and the Decision number 2021/948, of the
General Assembly of Civil Chambers of the Court of Cessation reads as follows: “If
the penalty has been stipulated for failure to perform the obligation at the
agreed time or place, the creditor may, unless they have expressly waived their
right or accepted performance without reservation, demand the payment of the
penalty together with the principal obligation. In this way, a cumulative penalty
clause is established. This type of penalty is also referred to as a delay
penalty.
According to
the aforementioned provision, in the event of the debtor’s non-performance, the
creditor may demand both specific performance and the payment of the stipulated
penalty. Accordingly, it is possible for the penalty to be claimed in addition
to performance, i.e., on a cumulative basis.
If the claim that the
creditor demands in addition to performance in the event of the debtor’s
non-performance constitutes a penalty claim, no actual damage is required. The
creditor may claim the stipulated penalty even if they have not suffered any
loss as a result of the debtor’s non-performance.
In order to claim a
cumulative penalty clause, it must be explicitly stipulated under the contract
that delayed performance is not to be accepted without reservation. Otherwise,
the right to claim the penalty is lost. If, prior to the delayed performance, a
notice reserving the right to claim a delay penalty has been issued, or the
contract provides that no reservation is required to claim the penalty, or the
creditor has engaged in conduct indicating that they are preserving this right,
then the right to claim the penalty is not lost even if the subsequent
performance is accepted without reservation; the penalty may still be demanded.”
Accordingly, a cumulative
penalty clause is a type of penalty agreed upon for circumstances such as the
failure to perform the obligation at the agreed time or place, granting the
creditor the right to claim the penalty in addition to the principal obligation.
Pursuant to Article 179(2) of the Turkish Code of Obligations, the creditor may
demand the payment of the penalty together with the principal obligation,
unless they have expressly waived their right or accepted performance without
reservation.
In this type of penalty
clause, the penalty may be claimed in addition to performance (on a cumulative
basis). It is not necessary for the creditor to have suffered any loss in order
to claim the penalty. Delayed or defective performance of the obligation is
sufficient for the penalty to be enforceable.
The third paragraph of the
article sets out the penalty in lieu of performance (termination/ rescission
penalty).
The decision, dated 29.06.2021
and bearing the Basis number 2017/2245 and the Decision number 2021/880, of the
General Assembly of Civil Chambers of the Court of Cessation reads as follows: “The
penalty that prevents performance, also referred to as the rescission
(termination) penalty, is set out under paragraph 3 of the article. Here, the
debtor retains the authority to prove that they are entitled to unilaterally
rescind the contract by paying the penalty. Accordingly, the debtor may agree
with the creditor that they will rescind the contract and pay only the
stipulated penalty. In this type of penalty clause, the debtor may rescind the
contract by paying the penalty, while the creditor may claim only the payment
of the penalty. In such a case, the creditor can no longer demand the
performance of the principal obligation from the debtor.
While optional and
cumulative penalty clauses provide the creditor with a right to claim in
response to the debtor’s breach, the rescission penalty allows the debtor to
terminate the contract by paying a specified amount, regardless of whether the
obligation has been breached. The debtor may extinguish the contract by
paying the penalty even in the absence of non-performance. Here, the
performance of the principal obligation is replaced by the rescission penalty.
Therefore, it can be said that the rescission penalty does not serve to secure
the performance of the principal obligation in favor of the creditor; on the
contrary, it functions to weaken it.”
Accordingly, the penalty
in lieu of performance is a type of penalty clause that grants the debtor the
right to unilaterally terminate the contract by paying the stipulated penalty.
Pursuant to Article 179(3) of the Turkish Code of Obligations, the debtor is
entitled to rescind or terminate the contract by paying the agreed penalty.
In this type of penalty
clause, the penalty replaces the performance of the principal obligation. The
debtor may exit the contractual relationship by paying the penalty even without
having committed a breach. Therefore, unlike cumulative or optional penalty
clauses, the rescission (termination) penalty does not serve to secure the
performance of the principal obligation.
Within this framework, a
penalty clause appears in the system of the Turkish Code of Obligations as a
contractual sanction linked to the non-performance or defective performance of
an obligation; however, its relationship with the principal obligation varies
depending on the type. In an optional penalty clause, the creditor is granted
the discretion to choose between the principal obligation and the penalty,
whereas in a cumulative penalty clause, it is possible to claim both the
performance of the principal obligation and the penalty simultaneously. In a
penalty in lieu of performance, the penalty replaces the performance of the
principal obligation. This distinction is significant not only for determining
the circumstances and scope in which a penalty may be claimed but also for
ascertaining the fate of the penalty in the event of contract termination.
Indeed, particularly in the case of a cumulative penalty clause, whether the
right to claim the penalty persists after termination requires a joint consideration
of the legal nature of the penalty and the consequences of rescission.
3. Cumulative Penalty Clause
in Case of Contract Termination
The cumulative penalty
clause constitutes a sanction envisaged for circumstances such as the failure
to perform the obligation at the agreed time or place, granting the creditor
the right to claim the penalty in addition to the principal obligation. In this
respect, the cumulative penalty clause primarily applies in situations where
the performance relationship continues and the obligation is fulfilled, albeit
late or partially. However, the termination of the contract necessitates a
different legal assessment regarding the enforceability of the cumulative
penalty clause.
Termination of a contract
is a right that brings about a novation, terminating the contract prospectively
and, as a general rule, releasing the parties from the obligation to perform
the principal obligation. Consequently, upon termination, not only can the
performance of the principal obligation no longer be demanded, but the fate of
rights that could be claimed alongside performance also becomes a matter of
debate. In this context, the question of whether a cumulative penalty clause
may be claimed after termination should be considered within the framework of
the balance between the accessory nature of the penalty, which is closely tied
to the principal obligation, and its function as a sanction for
non-performance.
According to the
predominant view in doctrine, a cumulative penalty clause cannot be claimed
following the termination of the contract. From this perspective, since the
obligation to perform ceases upon termination, the legal basis for a penalty
that could be claimed alongside performance also disappears. Therefore,
claiming a cumulative penalty clause after termination would be inconsistent
with the function of the penalty and the systematics of Article 179(2) of the
Turkish Code of Obligations.
The case law of the Court
of Cassation essentially supports this approach. The decision, dated 26.2.2016 and
bearing the Basis number 2014/524 and the Decision number 2016/192, of the
General Assembly of Civil Chambers of the Court of Cessation reads as follows: “If
a penalty is stipulated to be paid in the event of a breach of contract, that
is, when the contract is either not performed at all or only partially
performed, it constitutes an optional penalty (Article 158/1 of the former Code
of Obligations Nr. 818; Article 179/1 of the Turkish Code of Obligations Nr.
6098). The enforceability of an optional penalty depends on the maturity of the
principal obligation. If the debtor has not performed or has only partially
performed the principal obligation, the creditor who does not terminate the
contract may, unless otherwise agreed, demand either the performance of the
contract or the payment of the optional penalty. However, the contract may
stipulate that both performance and the penalty may be claimed together.
The penalty, as set out in Article 158/2 of the former Code of Obligations Nr. 818 (Article 179/2 of the Turkish Code of Obligations Nr. 6098), constitutes a cumulative penalty clause. Here, the penalty is stipulated in the event that the principal obligation is not performed at the specified time or place. The creditor accepts the debtor’s performance despite the delay or fault but acquires the right to claim the penalty stipulated in the contract due to non-performance at the agreed time or place. The cumulative penalty clause is particularly applied in cases of late performance and represents the most commonly encountered type of penalty clause in practice.
In order for
the penalty, as set out in Articles 158/1 and 158/2 of the former Code of
Obligations Nr. 818 (Articles 179/1-2 of the Turkish Code of Obligations Nr.
6098), to be enforceable, the contract pertaining to the principal obligation
must not have been rescinded or terminated. In other words, the contract must
still be in force. A party that has rescinded or terminated the contract cannot
claim a penalty based on provisions of a contract that has ceased to have legal
effect.”
In line with the foregoing
decision, it is clearly established that the enforceability of a cumulative
penalty clause depends on the contract remaining in force and the continuation
of the performance process of the principal obligation. Indeed, a cumulative
penalty clause is envisaged as a sanction for non-performance arising from
delay or partial performance, even when the creditor accepts the debtor’s
performance. In this respect, this type of penalty clause ceases to serve its
function once a novatory right that terminates the contract, such as
rescission, is exercised.
However, if the contract
contains a clear and unequivocal provision stipulating that the penalty shall
also apply in the event of termination, the legal nature of the penalty must be
reassessed. In such a case, a sanction initially designated as a cumulative
penalty clause, by the parties’ intention, becomes enforceable even after
termination. Consequently, the penalty can no longer be regarded as a
cumulative penalty clause but should instead be considered, by its nature, as a
penalty linked to termination—a rescission or termination penalty. In this
situation, the enforceability of the penalty should be assessed not under the
rules governing cumulative penalty clauses, but as an independent sanction
connected to the termination of the contract.
Indeed, in some of its
decisions, the Court of Cassation has held that, regardless of whether the
obligation has become due prior to termination, a penalty stipulated in the
contract cannot be claimed upon termination. However, it has also emphasized
that the parties may agree otherwise. (The decision, dated 13.11.2017, and
bearing the Basis number 2016/1632 and the Decision number 2017/3919, of the 15th
Civil Chamber of the Court of Cessation)
Accordingly, it cannot be
universally asserted that the enforceability of a cumulative penalty clause
completely ceases upon the termination of the contract. Termination is a legal
act that ends the contract prospectively, and the contract continues to produce
effects and consequences up to the moment of termination. Therefore, with
respect to breaches occurring prior to the termination date, if the penalty
stipulated in the contract has already arisen, the creditor’s right to claim it
should be considered as continuing to be protected.
The decision, dated 04.04.2011
and bearing the Basis number 2010/7438 and the Decision number 2011/2040, of
the 15th Civil Chamber of the Court of Cessation reads as follows: “According
to the established case law and practice of our Chamber, while it is generally
not possible to claim a cumulative delay penalty or delay damages within the
scope of positive damages under Article 158/II of the former Code of
Obligations in the event of termination, if the penalty stipulated in the
contract is expressly linked to a period during which the contract cannot be
terminated due to delay, the contractor cannot be considered in default until
the expiration of that period. In such cases, even if the plaintiff, the
landowner, subsequently exercises the right of termination, they may only claim
the delay penalty or damages limited to the period during which termination was
not permissible.”
Accordingly, the decisive
factor for the enforceability of a cumulative penalty clause is the period to
which the penalty relates and whether the breach occurred before or after the
termination of the contract. Since a contract continues to produce effects and
consequences up to the moment of termination, a penalty may be claimed for
breaches that occur prior to the termination date.
Therefore, there is no
absolute prohibition on claiming a cumulative penalty clause upon the
termination of a contract. It is necessary to distinguish whether the penalty
relates to a period before or after termination. Since the contract remains in
force up to the moment of termination, penalties arising from defaults or
breaches occurring during that period are considered to have accrued and remain
enforceable. Conversely, for the period following termination, as the
obligation to perform ceases, it is not possible to claim a cumulative penalty.
Within this framework, in
determining the legal fate of a cumulative penalty clause upon the termination
of a contract, factors such as the type of termination, the function of the
penalty within the contract, the period to which the penalty relates, and the
timing of the breach should be evaluated together.
From this point, it is
also necessary to examine which compensation claims the creditor may pursue
beyond the cumulative penalty clause upon the termination of the contract, and
to what extent post-termination damages can be claimed. Indeed, in cases where
the penalty cannot be claimed or can only be claimed to a limited extent due to
termination, the provisions on compensation become particularly important for
remedying the losses suffered by the creditor.
4. Assessment of Cumulative Penalty
Clauses in Terms of Post-Termination Compensation Claims
In the context of the
Court of Cassation’s established jurisprudence, the general rule that a
cumulative penalty clause cannot be claimed upon the termination of a contract
does not mean that the creditor is left entirely unprotected in post-termination
period. Since a penalty clause constitutes a contractual sanction for
non-performance, its inapplicability after termination cannot be interpreted as
leaving the debtor’s unlawful conduct without consequence.
Indeed, the inability to
claim a cumulative penalty clause arises solely from the fact that this
sanction is specific to the contract and contingent upon performance. In such
cases, the creditor may still seek compensation for the losses suffered due to the
debtor’s breach under general legal provisions. In other words, within the
framework of the Court of Cassation’s established jurisprudence, even if a
cumulative penalty clause becomes inapplicable upon termination, the legal
consequences of the breach do not completely cease to exist.
Within this framework,
following the termination of the contract, the legal basis for the claims the
creditor may pursue is no longer the provisions on the penalty clause, but the
general liability for damages arising from the breach. However, unlike with a
penalty clause, in this case the creditor will need to prove both the damage
suffered and the causal link between the breach and the loss.
Accordingly, in the
post-termination period, it is not possible to speak of an automatic sanction
replacing the cumulative penalty clause. The creditor’s protection can only be
ensured through claims for damages brought under general provisions. This situation
illustrates that the relationship between a cumulative penalty clause and
contract termination is a natural consequence of the ancillary and
performance-dependent character of the penalty clause.
In this context, within
the framework of the Court of Cassation’s established jurisprudence, the
principle that a cumulative penalty clause cannot be claimed upon contract
termination does not nullify the consequences of the breach; it merely ends the
applicability of the specific contractual sanction agreed upon by the parties.
5. Conclusion
In contracts, a penalty
clause serves as an important safeguard for the creditor, functioning as a
contractual sanction linked to the non-performance or defective performance of
the obligation. However, the relationship between the penalty clause and the
principal obligation varies depending on the type of clause, which is
particularly significant for determining the legal fate of the penalty clause
in the event of contract termination.
The cumulative penalty
clause, as set out under Article 179 of the Turkish Code of Obligations, is, by
its nature, an ancillary and performance-linked sanction that can be claimed
alongside the principal obligation. Therefore, as a general rule, it cannot be
claimed in the event of contract termination. This is because termination
extinguishes the obligation to perform the principal duty, and the penalty
clause, being linked to performance, consequently loses its legal basis.
However, since contract
termination produces prospective effects, the contract continues to have legal
force and effect up to the moment of termination. Therefore, with respect to
breaches occurring prior to the termination date, if the penalty clause has
already arisen, its enforceability should be maintained. Indeed, the case law
of the Court of Cassation also indicates that an assessment must consider the
period to which the penalty clause applies and the timing of the breach.
On the other hand, if the
contract contains a clear provision stipulating that the penalty clause applies
even upon termination, this remedy should no longer be regarded as a cumulative
penalty clause, but rather as an independent penalty tied to the termination in
nature. In such a case, the enforceability of the penalty clause should not be
assessed under the rules governing cumulative penalty clauses, but rather
within the framework of a termination penalty determined by the parties’
agreement.
Finally, in cases where
the cumulative penalty clause cannot be claimed or can only be claimed to a
limited extent due to termination, it should be accepted that the creditor may
pursue compensation for the damages suffered as a result of the debtor’s breach
of contract under the general provisions. This demonstrates that the
inapplicability of the penalty clause does not completely eliminate the legal
consequences of the breach, but merely ends the scope of the special remedy
provided by the contract.
Consequently, the claimability of a cumulative penalty clause upon termination of the contract should be determined by considering collectively the nature of the penalty, the period to which it applies, and whether the breach occurred before or after the termination.
Please note that this article,
originally written in Turkish, has been translated with the support of AI-based
tools and then reviewed and edited by human editors.
Att. Ezgi Karpınar
References:
1. Akman
S./Burcuoğlu H./Altop A./ Tekinay, S.S.: Borçlar Hukuku Genel Hükümler (General
Provisions of the Code of Obligations), ... 1993, p. 358-359
