Exorbitant Penalties and Discount Criteria

1. Definition, Legal Basis, and Purpose of Penalty Clauses

A penalty clause is an ancillary obligation that stipulates the payment of a predetermined monetary penalty if the debtor fails to perform their obligation at all or properly. It is regulated in Articles 179 to 182 of the Turkish Code of Obligations. According to Article 179 of the Turkish Code of Obligations, "A penalty clause is an obligation that the debtor undertakes to pay in case of non-performance or improper performance of the debt."

The legal basis for a penalty clause is to secure the performance of the debt and to alleviate the burden of proof for the damage suffered by the creditor. Within the framework of freedom of contract, the parties can also stipulate a penalty clause alongside the principal debt. A penalty clause serves both a deterrent and a compensatory function; it compels the debtor to abide by the contract and allows the creditor to obtain a certain amount without having to prove their damage. In this respect, a penalty clause is a form of guarantee of performance in private law .

Types of penalty clauses are grouped under three headings:

1. Penalty for non-performance: Paid in case of non-performance of a debt.

2. Late payment penalty: This applies if the debt is not paid on time.

3. Optional (reversal) penalty: This gives the creditor the right to demand either performance or a penalty.

2. Excessive Penalty Clauses Arising from Public Order

While penalty clauses are a reflection of freedom of contract, excessive penalty clauses . According to the third paragraph of Article 182 of the Turkish Code of Obligations, "The judge shall reduce the penalty he/she deems excessive on his/her own initiative." This provision is mandatory; the parties cannot circumvent the judge's power to reduce the penalty through contract.

The reason why excessive penalty clauses are based on public order is the necessity of protecting the principles of justice and fairness, even in private law. An imbalance of economic power between the parties or excessively deterrent provisions can eliminate the debtor's economic freedom. Therefore, the judge ensures contractual justice by controlling excessiveness, even against the will of the parties .

In this context, if the penalty clause is excessive, the judge even if the debtor does not request it . This is because the law leaves the power to reduce the penalty to the judge's discretion, and this power stems from public order. However, it should be noted that the judge cannot completely eliminate the penalty clause; he can only to a fair extent . Completely eliminating the penalty clause is not legally possible as it would impair freedom of contract.

3. Reduction of Exorbitant Penalties Among Traders

In practice, the most controversial issue is whether a judge can reduce an excessive penalty clause in contracts between merchants. According to the Turkish Commercial Code No. 6102, merchants are obliged to act prudently in their business. However, this obligation does not completely deprive them of the protection afforded by Article 182/last paragraph of the Turkish Code of Obligations.

4. Terms of Use and Discount Criteria

Whether or not a penalty clause in contracts between merchants should be reduced is evaluated based on the following criteria:

1. Ratio of penalty to the original performance cost: A penalty is considered excessive if it is disproportionately high when compared to the original performance cost.

2. Degree of fault: The reduction rate increases if the violation resulted from slightly negligent conduct rather than intentional behavior.

3. Severity and duration of the breach: Partial performance, temporary disruption, or short delays are mitigating factors.

4. Cumulative sanctions: If repeated sanctions such as interest, exchange rate differences, or penalties are stipulated for the same violation, the reasonableness of the total burden is reviewed.

5. The economic strength of the parties: If one party is clearly stronger and the other is weaker, this will affect the judge's discretion in determining a reduction in sentence.

6. Nature of the contract and commercial practice: Rates in similar contracts in the market also serve as a benchmark for comparison.

In the practice of the Supreme Court, exceeding 10-20% are generally considered excessive; however, it is accepted that this percentage is not an absolute rule and may vary depending on the specifics of the case.

5. Conclusion

In conclusion, while penalty clauses are a guarantee agreed upon by the free will of the parties, the criteria for determining excessive penalties and their reduction are closely related to public order. If the judge determines that the penalty clause is disproportionate, he or she may reduce it even if the debtor does not request it; however, the judge does not have the authority to completely waive the penalty. This principle applies even to contracts between merchants; however, in assessing excessiveness, the requirements of commercial life, the principle of prudent business practices, and the balance of the contract are considered together.

In this respect, the institution of penalty clauses serves the fundamental aim of private law— the realization of justice in the specific case — by striking a delicate balance between freedom of contract and the principle of equity