ABSTRACT
The terms “avoidance of the contract” and “termination” are used in our law for the ending of a contract by one of the parties unilaterally. In the following article, the scope and differences of these two terms will be analyzed and evaluated together with the conditions and consequences of right to avoid or terminate a contract.
I. INTRODUCTION
One of the most important concepts of the Turkish Civil Code and Turkish Code of Obligations is the principle of “freedom of contract” based on mutual agreement. Within the framework of this principle recognized in the Turkish law, parties may establish legal relationships of any subject with any person at any time and amend or revoke such legal relationship without government restrictions. At the same time, Parties may determine the content of a contract freely within the limits prescribed by law.
As a rule, once the contract has been established, the agreement can only be eliminated by parties’ bilateral agreement. This principle has been expressed with the statement pacta sunt servanda which means “contract must be kept” since Roman law, and the same concept in Turkish law has been recognized as that contracting parties should “conform to the contract” in any case. In other words, it is not possible for one of the parties to dissolve a contract unilaterally which was formed by the parties as per this principle. However, some exceptions are being proposed. It is possible to overcome this principle with the provisions regarding “avoidance of the contract” or “termination of the contract” provided by the law. Namely, the rights regarding avoidance and termination of contract can be reserved by the parties at the contract formation phase as well as these rights can also be stemmed from the law. The rights for avoidance of contract arising from law are negative innovation rights which grants parties an authority to unilaterally resolve the contract1 and the exercise of these rights are not against the above-mentioned principle of contract adherence.
II. THE CONCEPT OF AVOIDANCE AND TERMINATION OF CONTRACT
The first and fundamental function of right to avoid a contract is to maintain a balance between bilateral performances in synallagmatic contracts in which each party binds himself to the other. The legislator grants the party against which the balance of performances has shifted due to certain events of non-performance which may arise after the formation of the contract a right to avoid the contract. On the other hand, the function of the right to avoid a contract reserved by the parties is to provide an opportunity to withdraw from the contract in case that any negative circumstances arise in the future. In particular, there is a need to reserve the right of avoidance in order to be released from the binding terms of the contract against the risk of deterioration of the economic circumstances which are present during the formation of the contract2.
The consequences of a debtor defaulting within the scope of a synallagmatic contract are provided in articles 125 and 126 of Turkish Code of Obligations No. 6098 (“TCO”). Pursuant to article 125 of TCO, the creditor shall have optional rights where the debtor is in default. In this case, the creditor may claim performance and compensation for damages incurred because of the late performance or the creditor may claim compensation for the damages due to the nonperformance and avoid the contract by notifying the creditor that he waives his right to claim the performance and the compensation for the late performance. On the other hand, in the event of avoidance of the contract, both parties shall discharge from their obligations to perform reciprocally, and they may reclaim for the performances they fulfilled. In this case, unless the debtor proves that he does not have any fault to be in default, the creditor may demand the compensation for the (negative) damages caused by the invalidity of the contract.
In summary, the optional rights of the creditor under article 125 of TCO are as follows; (i) to claim the specific performance of the obligation together with compensation for the delay, (ii) to claim compensation for positive damages by waiving the right to claim performance. (iii) to claim compensation for negative damages by avoiding the contract.
Save for claiming the specific performance of the obligation together with compensation for delay and the exceptions provided by the article 124 of TCO, a time period must be granted to the debtor in order to exercise one of the other two optional rights. During this period, the creditor must accept the late performance. However, if the debtor does not perform his obligations within this period, the creditor will have the right to claim compensation for his positive damages by renouncing his right to claim the performance or to claim compensation for his negative damages by avoiding the contract. These rights can be used by notifying the debtor immediately at the end of the stated time period. There is no specific provision regarding the amount of time which will be provided to the debtor and when such time will be provided in the law. In the literature, there are opinions which argue that such time3 should be provided as soon as possible after the default of the debtor and there are opinions arguing that such time can be provided as long as the debts are not barred by prescription4.
Article 126 of TCO provides the termination option of the creditor in contracts with continuous obligation. As it will be explained in detail below, under this article, in contracts with continuous obligations in which parties have started to perform their obligations, the creditor can terminate the contract and claim compensation for damages incurred due to termination of the contract before its due time or can claim specific performance and compensation for delay.
III. THE DISTINCTION BETWEEN POSITIVE DAMAGE AND NEGATIVE DAMAGE
It can be seen that the rights of the creditor are included positive and negative damages under Turkish Code of Obligations in the event that the debtor defaults in synallagmatic contracts.
Positive damage is the damage incurred by the creditor due to non-performance or inadequate performance of contractual obligations of the debtor and the loss of benefits expected to be gained by such performance. In other words, the difference between the assets of the creditor after the default of the debtor and the expected total assets of the creditor in the event of adequate performance is the positive damages5.
Negative damages, on the other hand, are the damages which arise when a contract that is expected to be kept and performed becomes impossible to perform and consequently is not performed. In other words, negative damage is the damage which would not occur if the contract was not formed between the parties. Negative damages arise when the debtor violates the contract and causes the contract to be impossible. It is accepted that negative damage includes expenses related to the execution of the contract such as fees, postage expenses, notary expenses, etc6.
It should be noted that positive damage and negative damage cannot be claimed altogether in no case. Because the person who claims compensation for his positive damages would have suffered the damages within the scope of the negative damage if the obligation was duly performed. Moreover, if it is possible to claim compensation for negative damages, then the debt is regarded as void; and in such situation, a compensation for the damages regarding an invalid obligation cannot be claimed7.
IV. GRANTING TIME FOR THE USE OF OPTIONAL RIGHTS
Article 123 of the TCO states that “in bilateral contracts, if one of the parties is in default, the other party may grant a proper time to the other party for the performance of the obligation or may claim from the judge to order to grant a proper time.” Accordingly, the time given here is an additional time granted to the defaulting debtor by the creditor in order to enable the debtor to use his optional rights provided under the article 125 of the TCO in synallagmatic contracts, as it can be clearly seen. It is not possible to grant such time to the debtor before his default8.
The TCO provides that such time which will be given to the debtor should be “proper”. A proper time is a time which enables the debtor to perform his obligations in accordance with the “good faith principle” stated under the article 2 of Turkish Civil Code9. The law provides that the debtor should have an opportunity to prevent the termination of the contract and paying compensation instead of the performance. But this opportunity will be granted by taking into account the interests of both parties within the scope of good faith principle.
There is no specific form for such additional time condition stated in law. For this reason, such time can be given in written or oral form. Since the additional time given in oral form will cause difficulties in proving, it will be more appropriate to grant such time in written. Nevertheless, by virtue of article 18/III of Turkish Commercial Code numbered 6102 (“TCC”), notices or communications between the merchants regarding the additional time should be made via notary, by telegram, or by registered mail-return receipt. It is not compulsory for this additional time to be in the form of a calendar day or a number of days. Even if the given time is not so, if such time includes an intention which can be understood objectively, such as “pay your debt until the end of the month in which you received this notice.”, the creditor will have the right to use his optional rights after the time stated in the notice due. If the creditor claims performance within an uncertain time such as “immediately” or “as soon as possible”, since the additional time given is not certain, such time is not regarded as a “proper time” among legal scholars and is considered to be invalid10.
V. CLAIMING COMPENSATION FOR NEGATIVE DAMAGES BY RESOLVING THE CONTRACT
One of the alternative rights granted to the obligee under article 125/II of the TCO where it is not necessary to grant additional time according to the article 124 or against obligor who did not perform his obligations within the additional time given. Resolving a contract means that the obligee removes the contractual relationship between the obligor and the obligee retroactively (“ex tunc”). If the obligee states that he/she resolves the contract, the obligations end retroactively and therefore, in such case the parties are mutually free from their obligations and may claim they have already performed.
These consequences are not depending on the obligor’s fault. However, unless the obligor proves that he does not have any fault to be in default, the obligee may also claim compensation for damages due to the invalidity of the contract (negative damages). According to the article 125/3 of the TCO, to claim compensation for negative damages along with the damages incurred due to the invalidity of the contract is only possible where the obligor cannot prove that he is not in fault. Also Turkish Court of Cassation states that the oblige can claim compensation for his negative damages due to the invalidity of the contract.
There are three different theories in the doctrine regarding the effect of resolving the contract. These are listed as (i) classical resolution of the contract theory, (ii) legal contractual relationship theory and (iii) new resolution of the contract theory.
According to the classical resolving the contract theory, 11 the contractual relationship does not end when the contract is resolved. According to this theory, the parties cannot claim performance after resolving the contract and obligations performed prior to the notice of resolution will become unjust. Since the obligations performed have become unjust, the increase in the property of the other party will be regarded as “unjust enrichment” and these performed obligations can be claimed according to the unjust enrichment provisions (TCO article 77). In this case, the two-year statute of limitations regarding unjust enrichment will apply. However, there are two different opinions with regard to the classical resolving the contract theory. As it is supported by the majority opinions under the doctrine; although the earnings which are made according to the contract by an act of disposal, the transferred right does not return to its previous holder and the act of disposal does not affect from the resolving of the contract; therefore, such return should be made depending on an unjust enrichment claim. On the other hand, the others state that the act of disposal shall become invalid due to the resolution of the contract retroactively and the things which are given according to such act shall be returned depending on a right in rem12.
According to the legal obligation relationship theory, 13 the notice of resolution of contract only terminates the contract but it may not render the contract null and void from the beginning. In such case, obligations performed will claim according to article 125/3 of TCO. In this case, the statute of limitations for retail will be subjected to 10-year period which is the general time limit provided under article 146.
According to the new resolution of contract theory, 14 the notice of resolution does not cease the contractual relationship but with it, the parties enter into a winding up phase. According to this theory, there is no connection between the debt and unjust enrichment provisions. The obligations provided in the contract will become an obligation which requires the parties to continue. Namely, the practical (mostly financial concerns) result of resolving the termination of the contract as “ex tunc”.
VI. TERMINATION FOR CAUSE IN CONTINUOUS CONTRACTUAL RELATIONSHIP
Contracts with continuous obligations can be terminated with proactive effect. The obligations performed until the termination will remain with the parties, and the contractual relationship will cease after the termination of the contact. Mutual restitutions claims shall only be made if an obligation is performed after the termination.15
The obligee will be able to claim compensation for his positive damages from the obligor who defaults at his own fault. This positive damage is the loss of interest incurred by the oblige due to the termination of the contractual relationship before its agreed due time16. It is accepted by interpreting the articles 123-125 of TCO that; in case the obligor defaults, the obligee can claim compensation for his negative damages by resolving the contract17.
VII. CONCEPTUAL DIFFERENCE BETWEEN THE TERMS OF RESOLUTION AND TERMINATION
The terms of resolution and termination in Turkish law are perceived as synonymously and frequently misused18 due to the wrong translation of the original Swiss law text to our language.
According to the established view of Turkish doctrine regarding the terms termination and resolution have different meaning , the term termination is a negative formative right or a transaction which cease the contractual relationship with proactive effect (“ex nunc”)19. On the other hand, the term resolution has a retroactive effect20 21. Another definition of resolution of contract is the unilateral process aimed at restituting the conditions prior to the contract in contracts that does not involve continuous obligations22.
The term termination is divided into two categories as “ordinary” and “extraordinary” termination in Turkish doctrine. The contractual relationship shall cease after a certain period of time after the notice of termination has received by the other party, according to the ordinary termination of the contract. For this reason, the ordinary termination is also regarded as “termination with a time period”. A contract with continuous obligations will terminate immediately after the termination notice is received by the other party, according to the extraordinary termination of the contract. The term extraordinary termination is also regarded as “termination without a time period”23.
Ordinary termination is a termination which only depends on the subjective will of the individual. Extraordinary termination, on the other hand, is a type of termination which encompasses a just ground or an event rendering the performance impossible aside from the subjective will of the individual.
A contract can be terminated where the obligations provided in a contract with continuous obligations has been started to performed. Resolution of contracts with continuous obligations can only take place prior to the performance phase, effectively releasing the obligor from its obligations.
Termination occurs in contracts that lend to more than one person in a contract in which mutual debts are laid down, namely in all contractual relations. In turn, there is a genuine “synallagmatic” contract, which is mutual, which lends money to both sides24.
According to the great majority of Turkish literature, the termination of a contract which cease the contractual relationship with proactive effect (“ex nunc”) also allows compensation claim for damages due to the breach of the contract. However, resolution of a contract which ceases the contractual relationship with retroactive effect (“ex tunc”) does not allow such claim. After the resolution of the contract, only a compensation for negative damages due to invalidity of the contract can be claimed and a complete indemnification cannot be claimed25.
Although the right to terminate a contract can be used at any time during the continuation of the contract it is stated that the right to terminate the contract without an unjust reason shall be evaluated according to the good faith principle provided under article 2 of Turkish Civil Code in Turkish legal doctrine and also such termination will not cease the contractual relationship and the other party can claim performance in such case, as a result of good faith principle. However, Turkish Court of Cassation held against this opinion in the doctrine and agreed that the right to terminate the contract without an unjust reason cannot be prevented26.
VIII. CONCLUSION
The optional rights of the obligee where the obligor defaults are provided in article 125 of TCO. According to the article 123, the obligee shall grant a time period to the obligor. On the other hand, the article 124 articulates the exceptional situations where such a time period may not be granted. During such time period given to the obligor as a chance to perform his obligations, the obligee must accept the delayed performance. The precondition for granting a time period is that the debtor is to be in default. If the obligor does not perform his obligations within this time period, one of the optional rights of the obligee provided under the article 125 of TCO is the right to resolve the contract. Resolving a contract may be a right reserved by the parties of the contract or it may be a right derived from the law. If the right to resolve the contract is exercised, the contract will be terminated retroactively. In this case, all obligations of the parties shall cease and the parties may claim their performed obligations. It is also possible to resolve the contract in case of a hardship event as stipulated under TBK 138. Likewise, the resolution of the contract is articulated as an optional right under articles 227 and 475, article 480 grants the contractor the right to resolve the contract in cases the work cannot completed due to unforeseeable events. In such case, the contract shall be terminated retroactively, ex tunc.
The right to terminate a contract is different from the resolution of a contract in considering their consequences. The right to terminate a contract can be exercised where a contractual relationship with continuous obligations such as rent contracts and service contracts is present. To exercise the right to terminate the contract has proactive (“ex nunc”) effect, rather than retroactive (“ex tunc”) effect. In such cases, the parties may terminate the contract without any obligation to return the performed obligations.
BIBLIOGRAPHY
Rona Serozan, Sözleşmeden Dönme, 3rd Edition, Istanbul 2007 Rona Serozan, Borçlar Hukuku, 1st Edition, Istanbul 2018 Turgut Akıntürk,
Derya Ateş, Borçlar Hukuku/Genel Hükümler Özel Borç İlişkisi, Istanbul 2018
Kenan Tunçomağ, Borçlar Hukuku Genel Hükümler, C. 1, 5th Edition, Istanbul 1972 Fikret Eren, Türk Borçlar Hukuku Genel Hükümler, 14th Edition, Ankara 2012
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Kemal Oğuzman, Turgut Öz, Borçlar Hukukunun Genel Hükümleri, 8th Edition, İstanbul, 2010
Haluk Nomer, Borçlar Hukuku Genel Hükümler, 7th Edition, Istanbul, 2009
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Turgut Öz, İş Sahibinin Sözleşmeden Dönmesi, Istanbul, 1989
Ahmet M. Kılıçoğlu, Borçlar Hukuku Genel Hükümler, 21th Edition, Ankara 2017
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FOOTNOTE
1 Rona Serozan, Sözleşmeden Dönme (Dönme), 2nd Edition, Istanbul 2007, p. 3
2 Serozan, Dönme, p. 39
3 Kenan Tunçomağ. Borçlar Hukuku Genel Hükümler, C. 1, 5th Edition, İstanbul 1972
4 Fikret Eren, Türk Borçlar Hukuku Genel Hükümler (Genel Hükümler), 14th Edition, Ankara 2012, p. 1036
5 Selahattin Sulhi Tekinay/Sermet Akman/ Haluk Burcuoğlu/Atilla Altop, Borçlar Hukuku Genel Hükümler, 7th Edition, İstanbul, p.855
6 Turkish Court of Cassation Assembly of Civil Chambers, 2010/14-244 E., 2010/260 K., 12.05.2010
7 Kemal Oğuzman/Turgut Öz, Borçlar Hukuku Genel Hükümler (Borçlar Genel), 8th Edition, 2010, p. 342
8 Oğuzman/Öz, p.403
9 Tekinay/ Akman/ Burcuoğlu/ Altop, p. 947
10 Eren, Genel Hükümler, 2012, p. 1112
11 Court of Appeals for the 15th Circuit, 20.03.2006, 7960/1539 (YKD 2006/7, 1108)
12 Oğuzman/Öz, p. 413
13 Oğuzman/Öz, p.518, 519
14 Oğuzman/Öz, p. 414
15 Oğuzman/Öz, p. 415
16 Oğuzman/Öz, p. 419
17 Haluk Nomer, Borçlar Hukuku Genel Hükümler, 7th Edition, 2009, p. 185
18 Özer Seliçi, Sözleşmeden Doğan Sürekli Borç İlişkisinin Sona Ermesi, 1977, p. 223
19 “The Turkish writer who made his first impression on the mistake of dissolution instead of annulment has become Sungurbey.” Serozan, Dönme, p.115
20 Serozan, Dönme, p. 115
21 Oğuzman/Öz, p. 383
22 Selahattin Sulhi Tekinay, Borçlar Hukuku Genel Hükümler, Istanbul, p.638
23 Turgut Öz, İş Sahibinin Sözleşmeden Dönmesi, Istanbul, 1989, p.27
24 Turkish Court of Cassation Assembly of Civil Chambers, 2011/11-693 E., 2012/88 K., 22.02.2012 T.
25 Serozan, Dönme, p. 120
26 Serozan, Dönme, p.121
27 Turkish Court of Cassation Assembly of Civil Chambers, 2011 / 11-693 E., 2012/88 K., 22.02.2012 T
