Penalty In Addition to Performance (Delay Penalty)

7/22/2022
The creditor has to prove its loss in order to indemnify the loss against the debtor who has not fulfill its debt or has performed its debt against the law. On the other hand, the parties may include a penalty clause in the agreement that is not subject to the burden of proof of damage with their mutual agreement. This appears as a “penalty clause” in Turkish law.
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Penalty clauses can be determined in 2 (two) ways: (i) optional penalty clause and (ii) penalty clause in addition to performance.

As per Article 179/1 of the Turkish Code of Obligations No. 6098 (“TCO”); “If a penalty is agreed for the non-performance of an agreement at all or as required, the creditor may request the performance of either the debt or the penalty, unless otherwise agreed in the agreement.” Therefore, the creditor may request either the performance of the debt or the performance of the penalty in all breaches of debt, except for the cases specified in second paragraph.

In this regard, to be able to request both performance and penalty due to the breach of debt is regulated in the second paragraph of Article 179 of the TCO as follows:

“If the penalty is agreed for non-performance of the debt at the specified time or place, the creditor may also request the performance of the penalty together with the principal debt, unless it explicitly waived its right or accepted the performance without reservation.”

The above-mentioned provision is not mandatory. However, the parties may decide to request both performance and penal clause in case of a breach of obligation. Construction agreements, non-competition agreements are the most common types in practice.

As understood from the aforementioned legal provision, if the creditor accepts the performance without any reservations, it will lose its right to request the penalty. In order to prevent this situation, the creditor must either request the penalty in addition to the performance before accepting the performance or at the latest during the performance, or declare that it reserves the right to request the penalty the amount while accepting the performance.

In addition, the Court of Cassation has ruled that a penalty clause in addition to the performance can be demanded, provided that there is a provision in the agreement stating that a penalty clause can be requested without the need for reservations. A recent case-law is as follows:

“The nature of the penalty clause agreed in the agreements executed between the parties is the penalty in addition to performance which is regulated under Article 179/2 of the Turkish Code of Obligations No. 6098. In order for this penalty to be claimed, the right to request the said penalty should be reserved when the work is delivered, or there should be a provision in the agreement stating that a penalty clause can be requested without the need for reservation. Otherwise, if the work is received without a reservation, the penalty will be waived. In this case, although the claimant party's receipt of the work is explained in the lawsuit petition and warning letter, since the claimant party has not proven and claimed that this right regarding the penalty clause is reserved, it was not correct to make a written decision while it was necessary to reject the case regarding the request of the penalty clause and the decision had to be reversed for this reason.” (Court of Cassation 15. CC F. 2016/5576 D. 2018/499 Date: 12.02.2018)

In the light of the above case-law, in order to request a penalty in addition to performance in all agreements, especially under construction agreements, the performance must be accepted with reservations or there should be a provision stating that “penalty can be requested without the need for a reservation”.  Otherwise, the creditor will lose the right to demand the penalty clause agreed in addition to the performance of the debt.