The Judge’s Intervention in the Contract and the Reduction of the Excessive Penalty Clause

Liberal legal systems, and thus the Turkish Code of Obligations, are based on the principle of freedom of contract. However, in order to address the potential injustices that this principle may lead to, it also includes provisions of a social nature. These provisions allow for the modification of the terms of a validly concluded contract through subsequent judicial intervention. One of the goals of the principle of freedom of contract is to ensure that the parties to the contract can shape its content as they wish, acting on equal terms. This refers to formal equality. Differences in the weaknesses between the parties, arising from various reasons, are of no importance. However, formal equality may not always be sufficient to ensure substantive justice in the contract. Therefore, the possibility of modifying the contract terms at a later stage arises. However, this introduces the principle of adherence to the contract. Indeed, legal certainty requires that the parties remain bound by the contract they have validly concluded. Article 182/III of the Turkish Code of Obligations (TBK) regulates the reduction of the excessive penal clause. The judge has the authority to reduce the penalty clause without a request. For this reason, this provision constitutes an exception to the principles of freedom of contract and pacta sunt servanda. Therefore, the provision must be interpreted narrowly, and its scope of application should not be broadened. The law does not regulate the conditions for determining or reducing the excessiveness of a penalty clause. It is stated that the judge must take into account the specific circumstances of the case. These issues need to be clarified through doctrine and judicial decisions. One of the factors the judge must consider is the actual damage suffered by the creditor. In order to decide that a penalty clause is excessive, there must be a significant disproportion between the agreed-upon penalty and the actual damage. There are differing opinions on which time frame should be considered when assessing the excessiveness of the penalty clauses. Some argue that the moment the contract is concluded, the moment the penalty clause's due date arrives, or the moment the judge makes a decision should be the reference point. In our view, the moment of the judge’s decision should be taken into account; however, in cases where justice demands it, issues related to the due date of the penalty clause should not be overlooked. In line with this framework, the study first focuses on the concepts of freedom of contract, contract justice, and the judge's intervention in the contract. After these conceptual evaluations, the conditions for the reduction of the excessive penalty clause are discussed.