When it comes to the execution of a contract, default provisions come into play if the debtor does not fulfill his obligation on time. The parties' prior agreement on penalty clauses provides an effective way to combat default. In this article, the debtor's default and the institution of penal clauses within the scope of the TCO are discussed together.
Debtor's Default (TBK article 117)
The debtor of an overdue debt falls into default upon the notice of the creditor. However, there is no need for a warning in the following cases (TBK article 117/2):
- If the day on which the debt will be fulfilled is determined by one of the parties by duly notification, based on a right determined jointly or reserved by the contract
- In case the debtor clearly states that he will not fulfill his debt
- In case it is important for the performance to be made on a certain date due to the nature of the contract
Default Interest (TBK article 120)
In monetary debts, the debtor is obliged to pay default interest starting from the date of default. Unless a contrary rate is specified in the contract, legal interest rate is applied. The legal interest rate is determined by the Law No. 3095 on Legal Interest and Default Interest and is variable.
Default Interest in Commercial Transactions
In commercial transactions, the interest rate applied by the CBRT to short-term advances is applied as default interest (Article 2 of Law No. 3095). This rate is generally higher than the statutory interest.
Consequences of Debtor's Default (TBK article 118)
In case of default of the debtor, the creditor:
Default in Mutual Debt Contracts (TBK art.123-125)
In these contracts, the creditor chooses one of three ways by giving the debtor a suitable period of time:
The condition of granting time is not required in some cases: express refusal of the debtor, impossibility of performance, contracts requiring immediate performance (e.g. seasonal goods).
Penal Clause (TBK art.179-182)
Penal clause is the money or other performance that the debtor undertakes to pay to the creditor if he does not fulfill his debt at all or as required. It is a collateral tool that facilitates the performance of the main debt and eases the burden of proving the creditor's damage.
Types of Penal Conditions
1) Optional Penal Clause (TBK article 179/1)
Creditor; may request either fulfillment of the debt or penalty clause. You cannot want both. Once the creditor makes his choice, he is deemed to have given up on the other.
2) Penalty Clause Added to Performance (TBK art.179/2)
If the debt is not performed within the agreed period or in the agreed place or manner, the creditor may request both exact performance and a penal clause. This type of penalty is usually decided to compensate for delay damages (e.g. daily late penalty).
3) Penalty for Returning (TBK Article 179/3)
The debtor is given the right to withdraw from the contract by paying the agreed penalty. In this case, the debtor can terminate the contract at any time by paying the penalty. It is usually seen in deposit payments.
Invalidity of Penal Clause (TBK article 182)
If the original debt is invalid or becomes impossible later due to reasons that cannot be attributed to the debtor, a penal clause cannot be requested. The invalidity of the penal clause does not affect the main debt.
The Judge's Discount Authority (TBK art.182/3)
The judge automatically reduces the penalty that he finds excessive. This authority is used even if it is a commercial transaction (the prohibition of requesting a discount to the merchant in Article 22 of the Turkish Commercial Code does not cover only the "power of attorney" but also the penalty). Criteria taken into account in the discount:
- Economic situation of the parties
- Ratio of debt amount and penalty
- Degree of debtor's fault
- Actual damage suffered by the creditor
- Maintaining the balance in the contract
Penal Clause and Positive Damage Competition (TBK article 180)
The creditor may request additional compensation for the excess amount, provided that he proves that he has suffered a loss exceeding the penalty amount. In this case, the creditor:
Practical Advice When Preparing a Contract
Supreme Court Approach
The 15th and 23rd Supreme Court of Appeals have established consistent jurisprudence in penal clause cases arising from work contracts and real estate sales promise agreements. General principle:The excessively high penalty is reduced by the judge; However, in commercial contracts, the discount should be more limited and justified.
Jurisdictional and Competent Court
- Officer: Civil or Commercial Court of First Instance (depending on the contract type).
- Authority: The place of execution of the contract (TCC Art. 10), the defendant's place of residence (HMK Art.6) or, if there is a jurisdiction requirement in the contract, the court of the place specified there.
The penal clause, when designed correctly, is an effective tool that strengthens the creditor's hand. Preparing the contract with professional legal support during the contract phase largely prevents disputes that may arise later.