Brief Note on Liquidated Damages and Contractual Penalties Under Turkish Law
The concept of Liquidated Damages is not regulated specifically under Turkish Law, this is the reason why it is hard to determine the difference between liquidated damages and penalties.
The difference between these two concepts are explained by the Turkish Supreme Court in its decision dated 29.04.2010, based upon the existence of damage. Liquidated damages are the damages which might occur in future. However, in penalties, occurrence of a loss is not necessary.
In addition, it should be noted that since liquidated damage is a compensation in terms of the nature of its nature, it is not possible to apply the rules on the penalty condition to liquidated damage, even by comparison. In the event of any problem with liquidated damage, the rules on compensation law should be referred to. That being said, in the Turkish Law doctrine, it is accepted that the default interest provided for in Article 120 of the Turkish Code of Obligations (“TCO”) is a type of legal liquidated damage.
The transaction where terms and conditions for liquidated damages for future losses have been agreed upon may be considered a sui generis contract which may be a clause in another contract or a separate contract.
Comparison of Contractual Penalty – Lump Sum Compensation Liquidated Damage
| Subject of Evaluation | Contractual Penalty | Lump Sum Compensation Liquidated Damage |
|---|---|---|
| Aim | To ensure the fulfilment of the original debt by forcing the debtor to fulfil its performance and to facilitate the claim of the creditor for damages by identifying the damage arising from the non-fulfilment of the debt in advance and with certainty. | To determine the amount of the actual damage to be settled by the parties in advance or as a lump sum, thus to free the creditor from the burden of proof on the existence or amount of the damage and to determine the upper limit of the compensation to be paid. In lump sum compensation, there is no intention of forcing the debtor to perform by exercising psychological pressure on the debtor and thereby securing the performance of the original debt. |
| To Put Forward a Prerequisite for the Acceptance of the Performance | The creditor who has accepted the performance without reserving his right to the penalty condition shall be deemed to have waived the request for the penalty. | Even if the creditor did not reserve the right to compensation during the acceptance of the performance, he may claim lump sum compensation within the statute of limitations. |
| Reduction | Judge is obliged to reduce the high penalty, as required by law. | The law does not provide any duty for the judge to reduce the lump sum compensation. |
| Demonstration | It is sufficient that the provision of the penalty condition is included in the contract thus the creditor is not obliged to prove its existence. | The creditor does not have to prove the existence or amount of the damage. The burden of proving that there is no damage or less than lump sum compensation rests with the debtor. |
| Right to Request | It is sufficient to be included in the contract and it is not obligatory for the creditor to incur damages to demand the penalty. Even if the creditor does not suffer any damage, the debtor must pay the agreed penalty. | To claim lump sum compensation, the creditor must incur a damage and the obligation of compensation of the debtor must arise because of the damage. |
| Excessive Damage | The penalty may be greater than the creditor's loss. | Lump sum compensation cannot be more than the damage occurred. |
Court’s Approach
As per Turkish Supreme Court’s recent approach, the amount of liquidated damages shall be determined in accordance with the principles of good faith and equity: “One of the aims of the liquidated damage clause (delay compensation) included in the contract is to force the Contractor's performance to be performed in due course (usually considered satisfactory when making the contract). Even if the liquidated damage is never agreed in the contract, in case of delay in delivery, the land owner may demand at least the rent to be determined according to the market prices as liquidated damage, in this case, if the land owner will be in a better position, it cannot be mentioned that the condition has reached its purpose. It is not justified to bind the land owner without considering the period of delay, and that the Contractor's defense in this direction is incompatible with the principle of equity and the prohibition of the abuse of right, therefore such defense is not protected by law as stated in the Article 2 of the Turkish Commercial Code (“TCC”).
In this case, it has been concluded that binding the parties with the fixed liquidated damages even for long periods of delay would be contrary to the benefit expected from such clause in the contract, as well as to the principle of good faith and equity. Therefore, we conclude that our Civil Chamber shall change its approach with regards to the application of liquidated damages without any changes.”