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. 1 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.

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.” 3

Comparison of Contractual Penalty – Lump Sum Compensation Liquidated Damage

Subject Of EvaluationContractual PenaltyLump Sum Compensation

Liquited Damage

AimTo 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 conditionshall 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.
ReductionJudge 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.
DemonstrationIt 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 RequestIt 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 DamageThe 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.” 3