A penalty clause is an agreement that, if one of the parties fails to perform, or fails to properly perform, an obligation arising from the contract, a predetermined amount will be paid to the other party (Turkish Code of Obligations Art. 179 et seq.).
The Benefit of a Penalty Clause
Under normal circumstances, a party harmed by a breach of contract must prove the loss they have suffered - this is a long and costly process, particularly for losses that are indirect or difficult to calculate concretely. If a penalty clause has been agreed, it becomes possible for the creditor to claim the agreed amount without needing to separately prove their loss (TCO Art. 180).
Types of Penalty Clause
- Penalty added to performance - If the obligation has not been performed, both the principal performance and the penalty may be claimed together (unless otherwise agreed in the contract).
- Optional/withdrawal penalty - The creditor may claim either the principal performance or the penalty clause.
- Delay penalty - A penalty that accrues for late performance of the obligation, generally determined at daily/weekly rates.
The Judge's Power to Reduce the Penalty Clause
Under TCO Art. 182, final paragraph, the judge may reduce, on their own initiative (even without a request), a penalty clause they consider excessive. This power of reduction is frequently applied in practice, particularly in consumer contracts and contracts formed between parties with unequal bargaining power.
Points to Consider When Drafting a Penalty Clause
- It should be clearly stated for which breach (delay, complete non-performance, breach of confidentiality, etc.) the penalty will apply.
- It should be clearly written whether the penalty will be a fixed amount or proportional/daily.
- It should be stated whether the penalty clause will also cover any additional loss that occurs (i.e., whether the right to additional compensation is reserved).
Conclusion
A penalty clause is a powerful tool that increases the deterrent effect of a contract and eases the burden of proof; however, because excessively high penalties may be reduced by the judge, it is advisable to structure them at a reasonable and justifiable rate.
All templates in Lawyer Services' Create Contract tool come with a consistent, ready-made penalty clause/force majeure structure.