Contract Termination Penalty Clauses 2026

Contract Termination Penalty Clauses 2026. In the systematics of the Turkish Law of Obligations, the “Penalty Clause” (Penal Condition), regulated between Articles 179 and 182 of the Turkish Code of Obligations (TCO) No. 6098, is one of the most significant manifestations of the principle of freedom of contract. It serves as a vital instrument securing the creditor in both commercial and individual debt relationships. However, the most controversial dimension of this institution, which poses the greatest threat to legal certainty, is the question of the fate of the penalty clause in the event that the contract ends prematurely—namely, in cases of termination (fesih) or rescission (dönme).

This report comprehensively addresses the application of penalty clauses in the event of contract termination; covering doctrinal foundations, legal regulations, current decisions of the Assembly of Civil Chambers of the Court of Cassation (HGK), and the necessities of commercial life, aiming for a depth of approximately 15,000 words. The report details the impact of the legal consequences of “rescission” and “termination” concepts on the penalty clause, the conditions for claiming a penalty added to performance, the limits of penalty reduction for merchants, and deviations in specific situations such as construction contracts.

The basis of the analysis is the dialectical relationship between the “ancillary” (dependency) principle of the penalty clause and the contract’s termination regimes (retroactive vs. forward-looking). In light of the most recent 2024 decisions of the Court of Cassation, it is demonstrated through detailed case law analysis that, as a rule, the penalty clause falls in case of rescission from the contract, with the exception of the penalty in lieu of performance (wandelpön); whereas in forward-looking terminations, accrued penalties remain claimable.

SECTION I: LEGAL NATURE, FUNCTIONS, AND TYPES OF THE PENALTY CLAUSE

To understand the fate of the penalty clause upon contract termination, it is first necessary to deeply analyze the legal genetics and types of this institution. The penalty clause is not merely a lump-sum estimation of damages, but also a pressure tool forcing the debtor to perform.

1.1. Definition and Purpose of the Penalty Clause

A penalty clause is an ancillary obligation, usually agreed upon as a monetary debt but potentially another act with economic value, which the debtor undertakes to pay in case of non-performance or improper performance of the debt. This institution, regulated under TCO Art. 179 et seq., has two primary purposes:

Pressure Function (Coercion): The debtor is more inclined to perform the debt as they are under the threat of paying a penalty in addition to the main debt.
Lump-Sum Damage Determination (Compensation) Function: The creditor can demand this predetermined amount without having to prove the damage in case of breach of debt. This provides a significant procedural advantage to the creditor by reversing the burden of proof.

1.2. The Principle of Ancillarity (Dependency) and Legal Consequences

The fundamental principle determining the status of the penalty clause in contract termination is the principle of “ancillarity.” The penalty clause is a debt dependent (ancillary) on the main debt. If the main debt is valid, the penalty clause is valid; if the main debt is invalid or has ended, the penalty clause, as a rule, also ends.

1.2.1. Dependence on the Fate of the Main Debt

According to the TCO and established Court of Cassation precedents, the invalidity of the main debt (e.g., due to form, incapacity, impossibility of subject matter) automatically renders the penalty clause invalid.

Example: If a promise to sell real estate contract, which must be made officially, is made in simple written form, the penalty clause article in this contract is also invalid. The Court of Cassation rules that the penalty clause cannot be claimed in contracts invalid due to lack of form.

1.2.2. Liability of the Guarantor

Another manifestation of the ancillarity principle is in the law of surety. Pursuant to TCO Art. 589/IV, agreements stating that the guarantor shall be liable for the damage caused by the invalidity of the main debt relationship and for the penalty condition are absolutely null and void. In other words, the guarantor cannot be held liable for the penalty clause that the principal debtor must pay, even if there is a special provision regarding this.

1.2.3. Assignability Issue

The assignment (transfer) of the penalty clause receivable is also subject to this ancillarity principle:

Unaccrued Penalty Clause: A potential penalty clause receivable that has not yet arisen cannot be assigned independently of the main receivable. Whoever acquires the main receivable also acquires the right to claim the penalty clause.
Accrued Penalty Clause: If the breach of debt has occurred and the debt to pay the penalty has arisen, this receivable acquires an independent (principal) existence from the main debt. At this stage, only the accumulated penalty clause receivable can be assigned to a third party, even if the main receivable is not transferred.

1.3. Types of Penalty Clauses in the Systematics of the Turkish Code of Obligations

The type of penalty clause is the most critical factor determining whether it can be claimed if the contract ends. TCO Art. 179 envisages three different types.

Penalty Clause Type	Legal Basis	Definition	Feature in Termination
Alternative Penalty Clause	TCO Art. 179/I	The creditor asks for either performance or the penalty.	Usually claimable in termination, but performance is deemed waived.
Penalty Added to Performance	TCO Art. 179/II	The creditor asks for both performance and the penalty (Delay penalty).	The most debated type. Falls in case of rescission, claimable conditionally in termination.
Penalty in Lieu of Performance	TCO Art. 179/III	“Rescission Penalty” or “Wandelpön”. The debtor pays the penalty and withdraws.	The only type claimable when the contract ends.

1.3.1. Alternative Penalty Clause

According to TCO Art. 179/I, if “the penalty is agreed upon for the non-performance of the debt at the determined time or place” (general rule), the creditor must choose either performance or the penalty. They cannot ask for both. This type is generally structured as “pay X TL if you do not perform.” When the contract is terminated, the creditor is deemed to have waived performance, so they can claim the penalty, but in this case, they waive claims related to performance (positive damage).

1.3.2. Penalty Added to Performance (Cumulative Penalty)

It is the most common type in practice, especially in construction and supply contracts (TCO Art. 179/II). Clauses like “X TL shall be paid for each day of delay” fall under this scope. Here, the creditor demands the penalty in addition to demanding the performance of the main debt.

Critical Point: For this penalty to be claimable, the performance of the main debt must be possible and requested. If the contract is eliminated (rescission), since the performance debt is also eliminated, the penalty “added to performance” cannot find a main debt to be added to and falls into a legal void.

1.3.3. Penalty in Lieu of Performance (Rescission Penalty / Wandelpön)

This type, regulated by TCO Art. 179/III, is in the nature of a “withdrawal fee” granting the parties the right to unilaterally withdraw from the contract. It is agreed in the contract as “if one of the parties withdraws from/terminates the contract, they will pay X TL.” The reason for the existence of this type of penalty clause is the termination of the contract itself. Therefore, in the event of termination or rescission of the contract, this penalty does not fall; on the contrary, it becomes due at that very moment.

SECTION II: CONTRACT TERMINATION REGIMES AND LEGAL EFFECTS

To determine the fate of the penalty clause, it is essential to determine how the contract ended (Rescission or Termination?). In Turkish law, the consequences of these two concepts are diametrically opposed.

2.1. Rescission of Contract (Retroactive Termination / Ex Tunc)

Rescission is the elimination of the contract from the moment it was established in instantaneous performance contracts (like sales) or continuous performance contracts where performance has not yet begun.

Legal Consequence: It is as if the contract was never established. The parties demand the return of what they have given to each other according to the provisions of unjust enrichment.
Effect on Penalty Clause: The principle “if there is no main debt, there is no penalty clause” applies most strictly here. When the contract is eliminated retroactively, the penalty clause provision, being a clause of the contract (unless arranged as an independent rescission penalty), is also eliminated. The established precedent of the Court of Cassation HGK is in this direction: “In case of rescission, a penalty clause cannot be claimed by relying on the contract provision again.”

2.2. Termination of Contract (Forward-Looking Termination / Ex Nunc)

Termination is the ending of the contract with future effect in continuous performance contracts (lease, service, construction).

Legal Consequence: The contract maintains its existence as a valid legal transaction from the date of establishment until the date of termination. Rights and debts born during this period are valid. Debts end for the period after the moment of termination.
Effect on Penalty Clause: Penalty clause receivables that were born and became due due to violations (e.g., default) that occurred up to the termination date preserve their existence. Because these receivables were born during the period when the contract was “alive” and are not retroactively erased by termination.

SECTION III: PENALTY CLAUSE APPLICATION IN CASES OF RESCISSION AND TERMINATION: ANALYSIS OF COURT OF CASSATION PRECEDENTS

This section constitutes the most critical part of the report. How theoretical distinctions are reflected in courtrooms and Court of Cassation decisions will be detailed through concrete cases and precedent numbers.

3.1. Fate of Penalty Clause in Case of Rescission: “Legal Non-Existence” Theory

The Decision No. 2024/465 (Basis No: 2023/3-751) of the Assembly of Civil Chambers of the Court of Cassation, dated 25.09.2024, is a precedent decision that puts an end to discussions on this issue.

3.1.1. Analysis of the Decision

In the dispute in question, the contract between the parties was terminated retroactively (by way of rescission). The creditor party claimed a penalty clause relying on the contract.

Court’s Determination: Rescinding the contract invalidates the contract from the beginning. This is a “destructive formative right.”
Court of Cassation’s Reasoning: “If the creditor has rescinded the contract, they cannot claim a penalty clause by relying on the contract again; they can only ensure the return of the performances they previously fulfilled and the compensation of their negative damage.”
Conclusion: After the will to rescind is exercised, the penalty clause added to performance (delay compensation) can no longer be requested. Because the penalty added to performance depends on the existence of performance. When the performance debt is eliminated, the penalty attached to it also falls.

3.1.2. Negative Damage vs. Penalty Clause Distinction

The compensation the creditor can claim in case of rescission is “Negative Damage.” Negative damage is the damage suffered due to the frustration of the trust that the contract would be established or remain valid (notary expenses, missed opportunities, etc.). The penalty clause, however, generally covers “Positive Damage” (loss of profit due to non-performance, etc.) or compels performance. Since the right to claim positive damage is eliminated with rescission, the penalty clause, which is its lump-sum form, cannot be claimed either.

3.2. Penalty Clause in Case of Termination: “Acquired Right” Theory

In cases where the contract is terminated with forward effect, the status of penalty clauses accruing up to the moment of termination is different.

3.2.1. Claim for the Pre-Termination Period

If the debtor fell into default while the contract was in force, for example, if the delivery date was 01.01.2023 and the contract was terminated on 01.06.2023, can the penalty clause added to performance (delay penalty) agreed for the intervening 5 months be claimed?

General Rule: Yes, it can be claimed. Because the contract was valid during those 5 months and the penalty had become due. In the Court of Cassation practice, since termination produces forward-looking results, it does not eliminate retroactive rights.
However: The creditor must reserve this right in the termination notice or at least not create an impression that they have waived this right.

3.2.2. Requirement of Reservation (Critical Obstacle)

If the late performance was accepted without terminating the contract, a “reservation of rights” would be mandatory pursuant to TCO Art. 179/II. Is this necessary in case of termination?

According to Court of Cassation decisions, for the penalty added to performance to be claimable, the creditor must not have accepted the performance without reservation or explicitly waived their right. In case of termination, since performance does not occur, “reservation at delivery” is technically not possible. However, stating “we terminate reserving our rights regarding delay penalties” in the termination notice provides ease of proof.

In decisions of the 15th Civil Chamber of the Court of Cassation; the principle “For the penalty condition added to performance to be claimed, as a rule, the delayed performance must not be accepted without reservation”also applies to partial performances received in the pre-termination period.

3.3. Special Regime in Work (Construction) Contracts: 90% Completion Criterion

The most complex penalty clause disputes in Turkish law occur in “Construction Agreements in Return for Land Share.” The Court of Cassation has developed a special precedent to prevent the devastating results caused by “Rescission” in these contracts.

3.3.1. Distinction between Retroactive Termination (Rescission) and Forward-Looking Termination

Normally, if the contract is broken before construction is finished, this is “rescission.” However, if a large part of the construction is finished, a rescission decision would be “economic destruction” for the contractor (since they would have to return the title deeds, and the building they built would remain with the land owner).

Court of Cassation Criterion: If the completion rate of the construction is 90% or above, retroactive termination (rescission) of the contract is considered contrary to the rule of good faith (TMK Art. 2). In this case, the court interprets the termination as “Forward-Looking Termination.”

3.3.2. Reflection on Penalty Clause

This distinction determines the fate of the penalty clause:

Under 90% (50%, 70%, etc.): Rescission provisions apply. The Court of Cassation rejects delay penalty claims in the contract, stating “Penalty clause added to performance cannot be requested in case of rescission.” The land owner can only claim negative damage.
Over 90%: Forward-looking termination applies. Since the contract is deemed valid in the past, the penalty clause added to performance (delay compensation) agreed for the delayed period can be claimed.
- Exception: Unless there is an expression in the contract requiring a contrary interpretation like “no penalty shall be paid if construction is not finished,” the delay penalty runs in forward-looking termination. However, the Court of Cassation sometimes states that since performance is waived with termination, general compensation provisions should apply instead of the penalty clause for the period after the termination date.

SECTION IV: PENALTY CLAUSE IN COMMERCIAL LIFE: LIABILITY AND LIMITS OF MERCHANTS

In the application of penalty clauses, the status of the debtor (Merchant or Consumer/Citizen) directly affects the judge’s intervention power and the validity of the penalty clause.

4.1. Prohibition of Penalty Reduction for Merchants (TCC Art. 22)

TCO Art. 182/last paragraph gives the judge the duty to “automatically reduce the penalty clause they deem excessive.” This is a social provision protecting the weak. However, if the debtor is a Merchant, the Turkish Commercial Code (TCC) comes into play.

Pursuant to TCC Art. 22 (Former TCC Art. 24):

“A debtor having the capacity of a merchant cannot request from the court the reduction of the fee or contract penalty with the claim that the fee or penalty agreed upon is excessive, in cases written in the second paragraph of Article 121 and the third paragraph of Article 182 of the Turkish Code of Obligations.”

This provision is a result of the merchant’s obligation to “act like a prudent business person” (TCC Art. 18/2). The merchant must foresee the risk they will undertake in the contract they sign. Therefore, the defense “the penalty is too high, I cannot pay” is generally not heard.

4.2. Exception to the Exception: “Economic Ruin” Theory

The Court of Cassation has softened the rigidity of TCC Art. 22 with the “Economic Ruin” criterion to establish justice. The rule that a merchant cannot request a reduction is not absolute; if the penalty amount is of a magnitude that will completely end the merchant’s commercial life (drive them to bankruptcy), this situation is considered contrary to morality and public order, and a reduction or cancellation may be resorted to.

4.2.1. Court of Cassation Criteria and Proof

The claim of economic ruin is not accepted with an abstract statement. The concrete criteria sought by the Assembly of Civil Chambers of the Court of Cassation (HGK 2021/984) and the chambers are:

Equity Ratio: What is the ratio of the penalty clause amount to the company’s equity (assets minus liabilities)? The Court of Cassation considers the situation where the penalty exceeds equity or consumes a very large part of it as an indicator of “ruin.”
Balance Sheet Examination: The court examines the merchant’s commercial books, balance sheets, and financial statements through an expert. The company’s liquidity status, debt payment power, and how the penalty will disrupt this balance are analyzed.
Equity: The disproportion between the damage suffered by the creditor and the requested penalty. If the creditor suffered 1 unit of damage but asks for 100 units of penalty and this 100 units will bankrupt the debtor, the judge intervenes.

Court of Cassation Decision Example (HGK 2021/984): “If the penalty clause will cause the economic ruin of the merchant, it is possible to decide on the complete or partial cancellation of the penalty clause.” In this decision, the local court’s resistance decision was overturned, and it was emphasized that an economic status investigation should be conducted in favor of the merchant.

4.3. Points to Consider in Contracts Between Merchants

Independent Penalty Condition: If merchants want the penalty to be valid even in case of rescission, they should arrange this as an “Independent Penalty Condition” (Principal Debt). According to the decision of the 19th Civil Chamber of the Court of Cassation, when the debtor acts contrary to the debt, the penalty becomes due and gains the quality of a principal receivable, not ancillary anymore.
Non-Liability Agreements: The penalty condition between merchants may sometimes function like a non-liability agreement. However, pursuant to TCO Art. 115 and 116, non-liability agreements are invalid in cases of gross negligence and intent.

SECTION V: PROCEDURAL LAW AND PRACTICE ISSUES

The procedural processes in the collection phase (interest, proof, statute of limitations) are as important as the substantive law dimension of the penalty clause.

5.1. The Issue of Applying Interest to Penalty Clause

When and what type of interest will be applied to the penalty clause receivable is a subject frequently prone to error.

Default Interest: If the penalty clause is determined as a fixed amount (e.g., 100,000 TL), default interest accrues upon non-payment of this amount on the due date.
Prohibition of Interest on Interest (Compound Interest): If the penalty clause in the contract is determined proportionally like “5% monthly delay penalty,” the Court of Cassation views this as “default interest.” Since interest cannot be applied again to default interest in our law (CO Art. 121/3), interest cannot be requested separately from the date of the lawsuit for this calculated penalty amount.

Current Court of Cassation Decision (3rd Civil Chamber, 2024/1543):

“The penalty clause in the contract is in the nature of a delay hike, and interest cannot be applied to this penalty clause.”

This decision clarified the legal nature of penalty clauses referred to as “delay hike” or “interest” in the contract. While conducting enforcement proceedings for such receivables, they should be claimed as interest accruing on the main receivable, and should not be separately subject to interest under the item “penalty clause receivable.”

5.2. Reservation of Rights and Burden of Proof

The “reservation of rights” (TCO Art. 179/II) required for the penalty clause added to performance (delay compensation) not to fall is a proof issue in procedural law.

Timing: The reservation must be put forward at the moment of acceptance of performance or before. A notice sent after delivery is invalid.
Form: There is no special form requirement in the law, it can be oral, but proof is difficult (witness proof limit CCP Art. 200). Between merchants, pursuant to TCC Art. 18/3, default notices must be made via notary, registered letter, or KEP (Registered Electronic Mail).
Presumption: If there is a phrase “received completely and without defects” in the delivery minutes and no annotation is made regarding the penalty clause, the creditor is assumed to have waived this right (Court of Cassation 15th Civil Chamber).

5.3. Competent Court

The penalty clause lawsuit is filed in the court having jurisdiction according to the nature of the main contract.

Commercial sale contracts: Commercial Court of First Instance.
Housing sale (Consumer transaction): Consumer Court.
Work contract (Non-merchant): Civil Court of First Instance.

SECTION VI: COMPARATIVE TABLES AND DATA ANALYSIS

The following tables are prepared to summarize and concretize the complex legal distinctions explained in the text part of the report.

Table 1: Fate of Penalty Clause According to Contract Termination Type

Contract Termination Type	Legal Effect (Time)	Penalty Added to Performance (Delay)	Penalty in Lieu of Performance (Wandelpön)	Legal Basis
Rescission (Retroactive)	Ex Tunc(Retroactive)	FALLS (Cannot be claimed)	CLAIMABLE (If exists)	Court of Cassation HGK 2024/465; TCO Art. 179
Termination (Forward)	Ex Nunc(Forward)	CLAIMABLE(Conditional*)	CLAIMABLE	Court of Cassation 15th Chamber Precedents
Construction (%90+ Completion)	Ex Nunc(Court acceptance)	CLAIMABLE	CLAIMABLE	Court of Cassation %90 Completion Criterion
Construction (%90- Completion)	Ex Tunc(Rescission)	FALLS	CLAIMABLE	Court of Cassation 23rd & 15th Chambers

*Condition: Must have accrued by the moment of termination and must not have been waived.

Table 2: Penalty Reduction According to Debtor Status

Debtor Status	Right to Request Reduction	Legal Basis	Judge’s Discretionary Power	Exception
Consumer / Ordinary Debtor	EXISTS	TCO Art. 182/last	Judge Reduces Ex Officio	None
Merchant	NONE (As a rule)	TCC Art. 22	Cannot Reduce	Economic Ruin

CONCLUSION AND STRATEGIC RECOMMENDATIONS

The application of penalty clauses in case of contract termination is shaped in the delicate balance between “pacta sunt servanda” (adherence to contract) and “equity.” Recent decisions of the Court of Cassation have confirmed and reinforced the “classical view” that the institution of rescission (retroactive termination) eliminates the penalty clause.

The main conclusions to be drawn from our report and strategic recommendations for the parties are:

Contract Drafting Strategy:
- If creditors want to protect their rights against the possibility of contract termination or rescission, they should not settle for standard “delay penalty” clauses. A “Wandelpön” (Rescission Penalty) clause, independent of the main debt and performance, should be added to the contract in the form of “In case the contract is terminated or rescinded for any reason whatsoever, the debtor shall also pay an independent penalty clause in the amount of X.”
- Arranging this clause as a separate article from “Penalty added to performance” prevents the court from interpreting it as a delay penalty.
Termination Process Management:
- The party ending the contract must clarify whether the right used is “Rescission” or “Termination” at the notice stage.
- If the aim is to collect accumulated delay penalties, “Rescission” declaration should be avoided; if possible, the contract should be kept alive and performance + penalty should be claimed, or the will for “Forward-Looking Termination” (especially in continuous performance works) should be explicitly put forward. It should not be forgotten that the moment a rescission declaration is used, past penalty clauses are “shot in the foot.”
Risk Management for Merchants:
- It is a major commercial risk for merchants to act with the thought “the court will reduce it anyway” when entering into a penalty clause. The strict application of TCC Art. 22 and the difficulty of proving “economic ruin” (proving that the company has come to the point of bankruptcy is also risky for commercial reputation) should force merchants to negotiate at the contract stage.
Specific to Construction Sector:
- Land owners should include the provision “penalty clause shall be paid in case of rescission regardless of completion rate” in contracts made with contractors. Otherwise, even if the construction remains at 50% level and the contract is rescinded, they will not be able to receive delay penalties pursuant to Court of Cassation precedents.

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