In commercial contracts, the penalty payable for delay or non-performance is often the most expensive item in a dispute. Can a Turkish court reduce an excessive penalty, and what changes when the debtor is a merchant? This article starts from the Majalla’s rule that contracts are read for their purpose, then looks at the balance between Article 182 of the Turkish Code of Obligations and Article 22 of the Turkish Commercial Code, the English penalty rule, and arbitral awards that have reduced contractual penalties.
The Majalla: purpose, not wording
Article 3 of the Majalla states that in contracts what counts is the parties’ intention and meaning, not the words and forms used. The article’s own example makes the point: a sale with a right of repurchase (bay’ bi’l-wafa) looks like a sale, but because it functions as security it is governed by the rules on pledge.
Two general maxims on harm point the same way: “there is no harm and no answering harm with harm” (Article 19) and “harm is to be removed” (Article 20). The law repairs harm, but it does not allow harm to be repaid with harm. For that reason, classical Islamic legal writing long debated whether a fixed sum payable for late payment of a debt resembles interest (riba), without reaching a shared view.
Modern penalty law asks the same question: is the agreed sum a reasonable advance measure of loss, or a means of punishing the other side? Whether the contract calls it a “penalty” or “liquidated damages” does not settle the answer.
Turkish law: the judge reduces, the merchant cannot ask
- Types (TCO Art. 179): an alternative penalty (performance or penalty), a cumulative penalty for delay or for performance at the wrong time or place (claimed together with performance), and a withdrawal penalty. With a cumulative penalty, a creditor who accepts performance without reservation may lose the penalty, so a written reservation on acceptance matters a great deal in practice.
- No loss required (TCO Art. 180): the agreed penalty is payable even if the creditor has suffered no loss. Loss exceeding the penalty can be claimed in addition, subject to fault.
- Judicial reduction (TCO Art. 182, final paragraph): the judge reduces an excessive penalty of their own motion. The rule is treated as mandatory, so a clause saying “no reduction may be requested” does not remove it.
- The merchant exception (TCC Art. 22): a debtor who is a merchant cannot ask the court to reduce an excessive penalty under TCO Art. 182(3). The rationale is the merchant’s duty to act as a prudent businessperson.
- The economic ruin limit: in the practice of the Court of Cassation, where a penalty would ruin a merchant economically, it can be reviewed under the rules on contracts contrary to morals (TCO Art. 27) and good faith (Civil Code Art. 2), and reduced. The position at the date of the contract and the debtor’s financial strength are taken into account.
- Merchant status is not universal: for example, the Court of Cassation does not treat an employment contract between a merchant employer and an employee as a commercial transaction, so Art. 22 does not apply to penalty clauses in such contracts.
In practice, most disputes turn on three points: a daily delay penalty running without any cap, acceptance without reservation, and whether the debtor counts as a merchant. Putting an overall cap on daily penalties (for example a percentage of the contract price) is the most effective protection against both reduction and invalidity arguments. See also our article on rent adjustment and hardship.
The English perspective: the penalty rule
An English court does not reduce a penalty. A clause found to be a penalty is unenforceable in full, and the innocent party recovers only the loss it can prove. The question is therefore not “by how much should it be reduced” but “does the clause survive at all”.
- Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79: the House of Lords held that the essence of a penalty is a payment stipulated in terrorem, while liquidated damages are a genuine pre-estimate of loss. The label the parties use is not conclusive, and the question is judged at the time of contracting. The parallel with Majalla Article 3 is striking.
- Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67: the Supreme Court moved away from the “genuine pre-estimate” test. The question now is whether the clause imposes a detriment out of all proportion to the innocent party’s legitimate interest in performance of the primary obligation. Both clauses were upheld; in Cavendish, the parties’ equal bargaining strength, legal advice and long negotiation weighed heavily.
- Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29: liquidated damages for delay that accrued before termination remain recoverable after termination, with general damages applying for the period afterwards.
Comparison: Turkish law keeps the penalty but brings its amount into proportion; English law either enforces the clause as written or sets it aside entirely. For merchants the two systems come closer together: TCC Art. 22 restricts reduction, and Makdessi shows strong respect for clauses negotiated between commercial parties.
Examples from international arbitration
The CISG does not regulate penalty clauses; under Article 4 their validity is left to the applicable national law. Tribunals fill the gap either with national law or with Article 7.4.13 of the UNIDROIT Principles, which allows an agreed sum to be reduced to a reasonable amount where it is grossly excessive in relation to the harm suffered.
- International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC), Case No. 229/1996, 5 June 1997: a sale between a Bulgarian seller and a Russian buyer provided for a late-payment penalty of 0.5% of the price per day. The tribunal treated the CISG as silent on the point, applied Article 7.4.13(2) of the UNIDROIT Principles and reduced the penalty to a reasonable amount.
- ICAC, Case No. 88/2000, 25 January 2001: a penalty found grossly excessive in relation to the harm suffered was reduced under the same provision.
- ICC Case No. 9978 (1999): the contract provided for a penalty of 2% of the price for non-delivery. The tribunal assessed the validity of the clause under German law by virtue of CISG Article 4, and held that the penalty clause barred the buyer’s separate damages claim under CISG Article 74.
These awards show two things: an express choice of governing law decides the fate of a penalty clause, and whether damages can be claimed on top of the penalty becomes a dispute unless the contract says so. In a contract governed by Turkish law, a tribunal can be expected to apply TCO Art. 182 and TCC Art. 22 as well.
Frequently asked questions
I am a merchant. Can I never ask for an excessive penalty to be reduced? TCC Art. 22 generally closes the door to reduction. But if it can be shown that the penalty would ruin you economically, review under the rules on morals and good faith can be sought. That assessment depends on the actual financial position.
Should I write anything when accepting late delivery? If a delay penalty was agreed, it is advisable to state in writing, when accepting late goods or works, that you reserve the penalty. Otherwise acceptance without reservation may put the penalty claim in doubt.
What if the contract is governed by English law? Recording, in the negotiation correspondence and in the recitals, which legitimate commercial interest the clause protects improves its chances of surviving the Makdessi test.
For general information only; not legal advice. The validity and reduction of a penalty clause depend on the contract as a whole and the facts of the case. Sources: Majalla Arts. 3, 19, 20; Turkish Code of Obligations Arts. 27, 179, 180, 182; Turkish Commercial Code Art. 22; Turkish Civil Code Art. 2; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79; Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67; Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29; CISG Arts. 4, 74; UNIDROIT Principles Art. 7.4.13; ICAC 229/1996 (5.6.1997) and 88/2000 (25.1.2001); ICC Case No. 9978 (1999), as summarised in Unilex.