March 2009
REDUCTION OF EXCESSIVE PENAL CLAUSE
Nowadays it is possible to come across that almost all contracts contain penal clauses. The matter of penal clause has a critical importance especially if parties would like to cancel the contact as a result of the economic crises. Besides, the situation is often seen that usually parties have been agreed on excessive penal clauses. It has been always a current argument whether it is possible to reduce the penal clause and if it is which conditions should be acceptable? Recently, especially this topic become argumentative therefore it will be discussed in this newsletter.
The penal clause is included in contact by parties and it is an important pressure tool in favour of the creditor in order to fulfilment of the other party’s obligation as pursuant to agreed terms and conditions. According to provisions of Code of Obligations (it will be referred as to CO ) in case of non-performance of debtor, although the creditor has right to claim the specific performance and compensation, first of all he has to proof the incurred damage and the amount of it. On the other hand, the agreed penal clause in the contract provides to claim directly the agreed amount from the debtor without imposing any obligations. Yet the penal clause has been agreed beforehand in case the non-performance of contractual obligations as an absolute amount of compensation that provided the claim to the creditor. In addition to main obligation arising from the contract, penal clauses are qualified as an accessory obligation.
Freedom of contact is a fundamental principle in contract law and one aspects of freedom of contact is parties have freedom to determine the content of contact except the limitations that designated by laws. The amount of penal clause is explicitly determined by the parties. Nevertheless, should there any boundaries for it? Or can the parties determine amount of the penal clause in the contract as they wish? We will be rather underlined the answer of this question in this article.
First of all, we would like to emphasize that the excessive penal clause is different from the immoral penal clause. The excessive penal clause does not mean it is immoral. In order to determine a penal clause as an immoral, the agreed amount of penal clause should destroy or seriously strict the economic freedom of the debtor. As a consequent of the immoral penal clause, article 161/3 of CO would not be applicable. In the present case, articles 9, 20 and 20/2 of CO should be considered respectively where the general principles of validity of contract are regulated and where especially the penal clause usually is a condition in the contract.
The debtor has to pay the penal clause even though the creditor has not suffered any loss if the conditions are fulfilled. Also, having an excessive penal clause in the contract does not eliminate the said liability of debtor. However, it may be assessed as contrary to the justice if it is disproportional and as a result of this it can cause an unnecessary exchange of property holdings especially taking into consideration of the parties’ financial situation. The excessive penal clause may be paved the way for exploitation of the weak party. Therefore, the legislator empowered the judges to exercise of judicial discretion for reducing the excessive penal clause in order to prevent the said complications and protect the weak party in the contract.
The judge may decide to reduce the excessive penal clause if below conditions are fulfilled:
1. The penal clause debt is matured: It cannot be claimed to reduce the excessive penal clause before the penal clause debt is matured because the debt is not an autonomous debt in the contact. According to the doctrine, even it cannot be brought a lawsuit for a declaratory judgment.
2. The debt for penal clause should not be executed: The reduction of the penal clause is possible if the debt of penal clause has not been executed yet. In this context, the debtor cannot apply to the court for reduction of the penal clause if he has already paid it.
3. The existence of an excessive penal clause: It cannot be acceptable the arguments that all penal clauses are excessive. The judge gives his decision in pursuant of the principles of equity and justice whether or not the penal clause is excessive. The legislator was not provided some special measures to the judges in order to determine whether or not the penal clause is excessive. Nevermore, some measures are applied in the practice. For example, it can be mentioned an excessive penal clause if it is explicitly contrary to justice as a result of comparing the interests which were aimed to be protected by the penal clause. At the same time, the penal clause may be assumed as excessive if there is obvious disproportionate if it is compared to necessary considered interest of the creditor.
The substantial measures of determination of excessive penal clause are these:
a. Interest of creditor: First of all, in order to determine excessiveness the interests of creditor should be considered by judge. As a matter of fact, not only the excessiveness of the penal clause shall not aggrieve feelings of justice and equity but also at the same time, it should be considered that the prospective reduction in the penal clause should not be injustice for the creditor as well.
b. Seriousness of default of obligation: In addition, in order to determine the excessiveness of penal clause the other important factors are the level of conformity with the obligation by the debtor and especially seriousness of his default.
c. Seriousness of fault: Whether or not the debtor was in default has a crucial importance where the justice to be discussed. It is possible to prevent the penal clause become due if the debtor proves that he was fee from the fault. Put in other way, it is possible to be released from the obligation of to pay penal clause. Then, in case of existence of slight negligence, it is possible to the penal clause to be reduced.
d. Financial situation of parties: In order to determine the excessiveness, the parties’ financial situations and especially the debtor’s ability to pay should be considered. The performance of penal clause should not economically destroy the debtor.
In addition to the above explanations, we would like to briefly mention that the reduction of excessive penal clause cannot be claimed by merchants.
Accordingly article 20 of Code of Commerce (it will be referred as to CC), every merchant is liable to conduct his all business activity as a prudent businessman within the scope of his business. This provision has a characteristic of “heavy burden” on a merchant because he can be responsible for certain circumstances before not being engaging with any commitment or it may extend his liability in a broader sense. In this perspective, the merchant should not exercise the expected diligence according to his own capability and facilities in his business activity. The merchant is liable to perform the best diligence which is expected to be as same as the other cautious and farsighted merchants in the same business. As a result of this assessment within the scope of this article, merchants cannot enjoy the protective provisions of law on the reduction of penal clause. As same as the previous CC, article 24 of the new CC states that, the debtor who is qualified as merchant cannot apply to the court for claiming the penal clause should be reduced. The precedents of Court of Appeal are also in the same direction. The 15th Civil Chamber of Court of Appeal decided in a case numbered 1989/2984 E. 1990/685 K. where the merchant filed a suit for aiming to reduce the penal clause as “According to article 12 of Turkish Code of Commerce, the work done has the commercial character and also in aspect of defendant contractor the work has also the commercial nature. On the other hand, the merchant debtor cannot claim the penal clause to be reduced from the court on the legal ground of the penal clause was excessive.” And the Court of Appeal was explicitly made the decision that the merchant cannot claim to excessive penal clause to be reduced by the court.
Claiming the penal clause to be reduced on the ground of immorality:
As explained aforementioned, if the obligation to pay the penal clause was resulted from within the scope the business activity of merchant, the debtor merchant cannot claim the penal clause to be reduced by the court even though it was excessive. However, it should not be concluded that the merchant have to pay in every conditions and circumstances if he committed to pay penal clauses. Because the article of 24 of CC refers to article 161/3 of CO and article 161 of CO regulates that the penal clause will be invalid if is contrary to the personal rights, morals and customs.
Even though the parties are fee to determine the content of the contact and penal clauses, it was some restriction was introduced. Article 19/1 of CO states that content of contract can be designated by the parties within the boundaries of the law. In addition, articles 19/2 and 20/1 of CO determine the boundaries of this freedom and regulate sanctions if the boundaries are breached. One of limitations is that if the content of the contract is contrary to moral and it can be proved the existence of immorality then the provision of nullity will be applicable.
If the contact is restricted economic freedom of merchant, it will be one of the grounds to assume the contract as immoral. In this case, whether or not the contract is contrary to moral is determined considering the scope of the performance, its duration and/or content by the judge. The 19th Civil Chamber of Court of Appeal decided in a case that numbered 2006/10269 E. and 2007/3205 K. "According to article 24 of CC "In the situations which are determined by subparagraph 2 of article 104 and subparagraph 3 of article 161 and article 409 of Code of Obligation, the debtor qualified as merchant cannot claim to the excessive fee or penal to be reduced by the court." And this stipulation is existed. Nevertheless, even though the debtor is a merchant the penal clause should be partially or totally assumed as null and void if it is excessive and oppressive and as a result of this if it is sufficient to economically destroy the merchant.( YHGK-Assembly of Civil Chambers of Court of Appeal, decision dated 20.03.1974 and 1053/222 numbered decision)…In the present case, the defendant asserted the agreed penal clause in the contract would cause the economic ruin of him. Therefore, the decision was given by the court without considering and examining of this fact has been found inaccurate." By this decision, the Court of Appeal has delivered that if the penal clause is immoral because of excessiveness and oppressiveness, the amount of penal clause may be totally or partially invalidated even though the debtor is a merchant.
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1. Dirican, G, Penal Clause Arising from Default in Independent Contractor Agreement and Application of the Court of Appeal’s, p 185
2. Dirican, G. p 186
3. Dirican, G. p 186
4. Kocaaga, K. Penal Clause in Turkish Private Law, p 231
5. Kocaaga, K. p 234
6. Kocaaga, K. p 235
7. Kocaaga, K. p 236
8. Kocaaga, K. p 256
9. Kocaaga, K. p 261
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