Pursuant to Article 22 of the Turkish Commercial Code on commercial affairs; “The debtor, who has the title of merchant, may not ask the court to reduce the fee or agreement penalty on the allegation that an excessive fee or penalty has been agreed, in the cases specified in the 2nd paragraph of the 121st article, and the 3rd paragraph of the 182th article, the 525th article of the Law of Obligations.”. Pursuant to the aforementioned provision, if the debtor is a merchant, in principle, the debtor cannot request the reduction of the agreed penalty clause. However, if the penalty decided exceptionally is severe and high enough to cause the financial ruin of the debtor who is a merchant, it is possible to cancel it completely or partially, as it is considered against good customs and morals.

As stated in the decision numbered 23.03.2010, 2009/1814-2010/1643 of the 15th Civil Chamber of the Court of Appeal;

“The parties who are merchants may not demand reduction on the grounds that the penalty is exorbitant. In order to determine and indicate the violation of morality and customs, the economic status of the debtor at the date of acceptance of the penal clause is investigated. The trade registry files of the defendants, if any, are summoned and the total amount of capital is determined. If the aforementioned penalty clause is collected, it is necessary to have the expert committee examine whether it will be possible for the debtor to continue commercial life as before, and if it is not possible, whether this situation will cause financial ruin.”

In this article, we will discuss the elements to be taken into account in determining whether the penalty clause causes financial ruin.

1. In determining whether the penalty clause will cause financial ruin or not, the expert report based only on the tax records cannot be the basis of the judgment. In determining the aforementioned situation, all commercial books and records of the company must be examined.

As stated in the decision numbered 2020/1096 E., 2021/618 K. and dated 10.06.2021 of the 31st Civil Chamber of Ankara Regional Court of Justice;

“It is clear that the penalty clause determined solely on the basis of tax returns does not comply with the qualifications described. Whilst all commercial books and records and documents belonging to the plaintiff-counter defendant should be summoned, an expert examination should be made on the commercial books and records, balance sheet and other factors affecting the economic situation, and, as a result of the examination, if it is understood that the payment of the penalty clause to be determined in the contract causes the financial ruin of the plaintiff-counter defendant, the penalty clause should be reduced to a reasonable amount and a decision should be made according to the result; it has been erroneous to make a decision with incomplete examination.”

As stated in the decision numbered 2012/15284 E., 2013/13897 K. and dated 16.09.2013 of the 19th Civil Chamber of the Court of Appeal;

“…in the expert report taken as basis for the judgment, only the defendant’s tax records were examined and thereby an opinion was given. What should have been done is to make a decision by way of making a reduction according to the appropriate result to be reached by having the expert or expert committee conduct a sufficient examination on the commercial books of the defendant.”

As stated in the decision numbered 2018/809 E., 2020/195 K. and dated 13.02.2020 of the 12th Civil Chamber of the Istanbul Regional Court of Justice;

“It has not been appropriate for the court to decide on whether the penalty clause will lead to the financial ruin of the defendant or not, without examining the commercial books and documents of the parties through an expert or expert comitee (Y 19th H.D. dated 11/04/2019 and 2018/2661 E-2019/2508 K). The commercial books and records of the defendant company should be examined to determine whether the amounts requested will cause financial ruin or not.”

As stated in the decision numbered 2016/6257 E., 2017/6784 K. and dated 30.11.2017 of the 11th Civil Chamber of the Court of Appeal;

“It has been necessary to overturn the decision, which is based on incomplete examination, in favor of the plaintiff in order to ensure that the decision is made within the framework of the appropriate result to be reached by obtaining a detailed report, that is auditable by the Court of Cassation, on whether the above-mentioned reduction conditions exist or not, by having a committee consisting of experts specialized in the economic status of the plaintiff company examine the records such as the company’s commercial books and records, balance sheets, tax returns, enforcement proceedings files, company registry file, etc.”

As stated in the decision numbered 2014/3510 E., 2014/7239 K. and numbered 13.11.2014 of the 23rd Civil Chamber of the Court of Appeal;

“By way of evaluating the existing records of the defendant company, the documents that can be accessed by the court such as title deeds, traffic, bank, tax offices, chambers of industry and commerce, trade registry records, the information and documents to be submitted by the parties, the market values of the asset items through experts comitee, a report should be obtained on the capacity of the defendant company, its financial strength, whether the defendant will be able to continue its business as before in the event of the collection of the penalty in question, and if not, whether this situation will cause its financial ruin,”

As stated in the decision numbered 2013/4781 E., 2013/11859 K. and dated 25.06.2013 of the 19th Civil Chamber of the Court of Appeal;

“Whilst the court should take into account the economic status of the parties, the defendant debtor’s solvency, and examine the defendant’s books and records in this respect, obtain a detailed expert report based on tangible data, and render a decision on the penalty clause in accordance with the appropriate result by evaluating all the evidence together”

As stated in the decision numbered 2014/17880 E., 2015/457 K. and dated 19.01.2015 of the 19th Civil Chamber of the Court of Appeal;

“On the other hand, the defendant’s plea that the penalty clause which amounts to 50.000,00 USD will cause the financial ruin of the defendant should be considered and a report should be obtained by having the expert examine the commercial books of the defendant in this regard.”

As stated in the decision numbered 2017/5065 E., 2019/2094 K. and dated 14.03.2019 of the 3rd Civil Chamber of the Court of Appeal;

“The fact that the agreed penalty clause caused the defendant company’s ruin has not been determined by the expert report. In this case, pursuant to Article 182/3 of the TCO, whilst all commercial books and records and documents of the defendant should be summoned and an expert examination should be made on the commercial books and records, balance sheet and other factors affecting its economic status, and, as a result of the examination conducted, if it is found that the payment of the penalty clause determined in the contract has caused the financial ruin of the defendant, a decision should be rendered to reduce the penalty clause to a reasonable amount; it has not been deemed appropriate to render a decision in writing with incomplete examination.”

As stated in the decision numbered 2018/4714 E., 2019/3024 K. and dated 04.04.2019 of the 3rd Civil Chamber of the Court of Appeal;

“The plaintiff claiming that the penalty clause will cause the ruin of the party, in accordance with Article 182/3 of the TCO, whilst all commercial books and records and documents belonging to the plaintiff should be summoned, an expert examination should be conducted on the commercial books and records, balance sheet and other factors affecting the economic status of the plaintiff, and as a result of the examination carried out, if it is found that the payment of the penalty clause to be determined in the contract causes the financial ruin of the plaintiff, the penalty clause should be reduced to a reasonable amount and a decision should be made according to the result; it has been erroneous to render a decision with incomplete examination.”

As stated in the decision numbered 2014/13191 E., 2014/18697 K. and dated 24.12.2014 of the 19th Civil Chamber of the Court of Appeal;

“In this case, the court should take into account the economic status of the parties, the defendant debtor’s solvency, the defendant debtor’s fault in the termination of the contract, examine the defendant’s books and records and balance sheet in this respect, evaluate all the evidence together, and render a decision on the penalty clause in accordance with the appropriate result.”

As stated in the decision numbered 2014/13017 E., 2015/382 K. and dated 15.01.2015 of the 19th Civil Chamber of the Court of Appeal;

“In this respect, whilst the court should have an expert examine the commercial book records and balance sheets, taking into account the financial standing of the defendant as to whether the penalty clause claimed in this case will cause the financial ruin of defendants and a decision should be rendered in accordance with the appropriate result to be reached by evaluating the evidence together by obtaining a detailed report suitable for examination by the Court of Cassation; it has not been deemed appropriate to render a decision in written with incomplete examination.”

As stated in the decision numbered 2011/2422 E., 2011/12693 K. and dated 15.09.2011 of the 13th Civil Chamber of the Court of Appeal;

“The court summoning all commercial books, records and documents belonging to the defendant company, should examine the defendant’s movables and immovables, rights and receivables from third parties and therewith all the elements that constitute its assets, and if it is found that the payment of the penalty clause determined in the contract causes financial ruin of the defendant, it should be reduced to a reasonable amount, and the amount of the penalty clause should be determined by obtaining a report from an expert or expert committee that is auditable by the parties and the Court of Cassation, and a decision should be rendered according to the result.”

As stated in the decision numbered 2009/13890 E., 2010/5262 K. and 19.04.2010 of the 13th Civil Chamber of the Court of Appeal;

“The court summoning all commercial books, records and documents belonging to the defendant company, should examine the defendant’s movables and immovables, rights and receivables from third parties and therewith all the elements that constitute its assets, and if it is found that the payment of the penalty clause determined in the contract causes financial ruin of the defendant, it should be reduced to a reasonable amount, and the amount of the penalty clause should be determined by obtaining a report from an expert or expert committee that is auditable by the parties and the Court of Cassation, and a decision should be rendered according to the result.”

As stated in the decision numbered 2018/1479 E., 2020/505 K. and dated 10.06.2020 of the 1st Civil Chamber of Bursa Regional Court of Appeal;

“Whilst all commercial books and records and documents belonging to the plaintiff should be summoned, an expert examination should be conducted on the commercial books and records, balance sheet and other factors affecting the economic status of the plaintiff, and, as a result of the examination to be conducted, if it is found that the penalty clause claimed will cause the financial ruin of the plaintiff, a reasonable reduction should be made to the penalty clause and a decision should be rendered according to the result to be obtained; it has not been deemed appropriate to render a decision in writing with incomplete examination.”

2. It is contrary to the law to only obtain an expert report from a financial advisor expert in determining whether the penalty clause causes financial ruin or not.

Pursuant to the legal precedent of the Court of Cassation, it is against the procedure and the law to obtain a report only from a certified public accountant. It is necessary to conduct an examination eligible for the judgment through appointing experts who can determine the real value of the movables constituting the company’s equity.

As stated in the decision numbered 2017/6599 E., 2019/2531 K. and dated 25.03.2019 of the 3rd Civil Chamber of the Court of Appeal;

“In his defense, the defendant stated that the payment of the one-year rent as a penalty clause would cause his financial ruin, and stated that he evacuated the store due to financial troubles. In this case, it has not been deemed appropriate to render a decision to accept the case in writing, whilst it is necessary to render a decision according to the result by obtaining all the evidence on which the parties are based, examining the lease agreement and the defendant’s commercial books, determining the total amount of penalty clause that can be claimed, and receiving a report from an expert in the field of rent, an expert in the field of real estate and real estate valuation and a sworn-in certified public accountant on whether the determined penalty clause will cause the financial ruin of the defendant. It has been necessary to overturn the decision.”

As stated in the decision numbered 2018/3105 E., 2021/1016 K.  and 17.06.2021 of the 22nd Civil Chamber of Ankara Regional Court of Justice;

“Whether the amount of the penalty clause is severe enough to cause financial ruin may be understood by summoning all commercial books and records of the plaintiff company in terms of its economic integrity and size, by comparing the balance sheet records of the plaintiff for the previous years, the tax returns for the last five years, the total turnover, and by examining the movables, immovables, rights and receivables from third parties, thereby all the elements that constitute its assets. Considering that the plaintiff is a merchant, whilst, if it is found that payment of agreed penalty clause will cause the financial ruin of plaintiff, the amount of penalty clause that could be paid, by way of reducing it to an equitable amount, should be determined by obtaining an auditable report from the expert or expert committee composed of managers and certified public accountants, and a decision should be rendered within the framework of the appropriate result to be reached; the fact that the evidence that would amount to a proof has not been collected entails that it shall be deemed not to have been collected at all.”

3. In determining whether the penalty clause will cause financial ruin, in case the penalty clause is designated in foreign currency, the above-average and unpredictable increase of the relevant foreign currency against the Turkish Lira since the date of the lawsuit should be considered as a reason for the reduction in the amount of the penalty clause.

The extraordinary increase in the EUR/USD currency against the Turkish Lira is also a phenomenon that will cause financial ruin, and this should also be taken into account in determining whether the penalty clause causes financial ruin or not.

Indeed, as stated in the decision numbered 2020/137 E., 2021/324 K. and dated 14.04.2021 of the İzmir 5th Commercial Court of First Instance;

“As also acknowledged by the Court of Cassation, such a severe penalty clause which may cause the financial ruin of the merchant should be reduced. Furthermore, the depreciation of the TL currency in the current economic conditions against the overvalued USD currency makes this reduction necessary. For this reason, it has been ruled by our court, taking into account the financial status of defendant (the findings contained in the expert report), to award, out of 1,000,000 USD as agreed in the contract, the remaining amount of 50,000 USD claimed in the Izmir Civil Court for  Intellectual and Industrial Property Rights and 450,000 USD by making a reduction from the 950,000 USD claimed.”

4. If the penalty clause approximately amounts to 25% of the company’s equity, this amount will lead to the financial ruin of the company.

If the penalty clause nearly amounts to 25% of the company’s equity, the relevant penalty clause will lead to the financial ruin of the company.

Indeed, as stated in the decision numbered 2018/412 E., 2019/766 K. and dated 20.09.2019 of the İstanbul 2nd Commercial Court of First Instance;

“It has been reported that the partial penalty clause claimed corresponds to 11.5% of the company’s equity, 23% of the penalty clause in whole, and the plaintiff company’s counsel amended the pleading and increased it to 209.540,00 TL; and although the merchant has no right to request a reduction in the amount of the penalty clause by claiming that it is excessively agreed pursuant to Article 22 of the TCC, a discretionary reduction has been made by considering, as it is also recognized by the consistent case law of the Court of Cassation, the penalty clause at a level that will cause the financial ruin of the party would mean a provision against good customs and morals even if the claimant is merchant.”

In this decision, the penalty clause amounting to TL 209,540 has been reduced to TL 100,000 on the grounds that the full penalty clause corresponds to 23% of the company’s equity. The relevant part of the decision is as hereinbelow;

“The plaintiff company’s counsel has increased the demand to 209.540,00 TL by amendment of pleading …. Pursuant to Article 182 of the TCO and in accordance with the equity rules, it has been concluded that it would be more appropriate and fair to determine the amount of penalty clause as 100.000 TL by making a discretionary reduction, as it would befit with the financial statements of the company, and it will not weaken its discouragement function.”

5. In determining the penalty clause, the company’s profit or loss status over the years should be taken into consideration. If the company has suffered losses in the past years, it may be considered that the penalty clause will cause financial ruin.

In determining the penalty clause, the company’s profit or loss status over the years should have been taken into consideration and whether the penalty clause wiil cause financial ruin or not should have been examined.

Indeed, as stated in the decision numbered 2013/10912 E., 2013/14898 K. and dated 26.09.2013 of the 19th Civil Chamber of the Court of Appeal;

“In the report received as a result of the expert examination commissioned to determine the extent to which the defendant may be affected by the penalty clause, it has been seen that the defendant has been operating with losses in the years of 2007 and 2008, its annual profit was 19.805,00 TL in 2005 and 27.003,00 TL in 2006, and the court has concluded that the enforcement of a penalty clause amounting to 60.180,00 TL, which is equivalent to 50.000 US Dollars, will cause the financial ruin of the defendant.”

As can be clearly seen, in the decision hereinabove, the profit and loss status of the company for the years has been evaluated and the decision has been rendered accordingly.

As stated in the decision numbered 2016/241 E., 2019/447 K. and dated 10.05.2019 of the Istanbul 4th Commercial Court of First Instance;

“The annual tax returns and annexes of the shareholders of the defendant company submitted for examination by the defendant’s counsel and the data in the financial statements have been examined by the experts. The commercial books of the defendant company, the balance sheets of several years and the profit and loss status of the defendant company have been examined by the experts and …”

It is explicitly stated in the decision hereinabove that the profit and loss status of the company should also be examined.

As stated in the decision numbered 2017/3485 E., 2019/2739 K. and dated 11.12.2019 of the 16th Civil Chamber of Istanbul Regional Court of Justice;

“In the expert report available in the file, it is stated that there are not sufficient documents (such as annual balance sheet, profit and loss statements, notification intake (BA) declarations for income and corporate tax) in the file to determine whether the penalty clause will cause financial ruin, …. It has not been deemed appropriate to render a decision to dismiss the case without explaining how it was determined that the penalty clause would not cause the plaintiff’s financial ruin without obtaining an additional report from the expert after the subpoena of the missing documents, and it has been necessary to render a decision, as per the article 353/1-a-6 of the CCP,  to overturn the relevant decision upon the admission of the plaintiff’s counsel’s request for appeal in part.”

It is explicitly stated in the decision hereinabove that the profit and loss status of the company should also be examined.

Serkan Kolay
Partner | [email protected]