Penalty Clauses in Contracts

Penalty Clauses in Contracts – Lawyer in Izmir

What is a contract?

When we hear the word "contract," most of us probably imagine written documents with wet signatures. However, in many cases, there is no such formal requirement for a contract to be legally valid. A text written on a wall, or even matters agreed upon verbally, can be considered a contract.

The contract is legally a "“agreement”For a contract to be considered valid, it must be established between at least two people, and it is sufficient for the parties to express their intention to enter into a contract mutually and in accordance with each other. Of course, aside from the exceptions, the advantages of establishing a written contract in terms of ease of proof are undeniable.

Penalties

In our daily lives, we enter into many contracts, consciously or unconsciously. Some of these are with large companies or are pre-prepared agreements. These often contain potentially frightening penalty clauses. So, what are these penalty clauses, and what should you pay attention to? Let's briefly discuss them.

A penalty clause is an arrangement whereby a debtor (this doesn't necessarily mean a monetary debt; it could also be an obligation to perform a service) must pay a certain amount of money to the creditor if they fail to fulfill their obligations, or fail to fulfill them properly.

I want to have my cake and eat it too.

Unless otherwise stipulated in the contracts Turkish Code of Obligations Within this framework, the creditor may demand either the fulfillment of the contractual obligations or the payment of a penalty fee. They must make a choice here. For example, either complete the construction or pay me the agreed-upon penalty amount.

However, since it is not a mandatory provision, the opposite can be agreed upon. The contract may specify that both the construction must be completed and a specified penalty amount must be paid.

Reduction of Penalty Clause

While freedom of contract is a fundamental principle, disproportionately stipulated penalty clauses can be automatically reduced by a court order. Therefore, it should be remembered that when specifying a penalty clause in a contract, it must be proportionate to the work performed. However, due to penalty clauses applied to merchants, a merchant cannot request a reduction from the court unless they are in an extraordinary situation. This right is granted to individuals other than merchants.

Penalties for Consumers

During the drafting of contracts, certain legal protections are also established, particularly for those in a more vulnerable position, such as workers and consumers. For example, a consumer has the right to terminate an indefinite-term or fixed-term subscription contract (longer than one year) at any time without giving any reason and without paying any penalty.

In addition, in many cases such as online sales or installment sales, consumers can withdraw from the contract within certain periods (14 days for online sales, 7 days for installment sales) without paying any penalty. We have discussed these exceptions in our previous articles.

Penalties for Workers

Article 420 of the Turkish Code of Obligations:“Service contracts Only A penalty clause imposed against the worker is invalid.”The law stipulates that penalty clauses imposed against the worker are invalid, while penalty clauses imposed in favor of the worker should be considered valid.         

The requirement that penalty clauses be bilateral and apply to both the employee and the employer means that the penalty clause agreed upon against the employee cannot exceed that agreed upon against the employer. In other words, it is inconceivable that the penalty clause determined against the employee, in terms of its conditions and amount, could exceed the employer's responsibility. In a bilateral penalty clause where there is an inequality against the employee, while the penalty clause is not entirely invalid, the employee's liability cannot exceed the amount and circumstances for which the employer is liable. 

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