Our article addresses the debtor's default, withdrawal from the contract and termination under Turkish law, explaining the notice requirement, fixed maturity, the additional period, the creditor's three elective rights, the immediate notification requirement and the divide between expectation and reliance loss.
A supplier delivers late, a contractor fails to complete on time, or a buyer does not pay. At that point the creditor has more than one route open to it, and which route is chosen determines fundamentally both the outcome of any action and the scope of the damages that may be claimed. The most frequent error in practice is that this choice is made unawares; the creditor waits quietly through the delay, then declares that it withdraws from the contract, and claims the profit it has lost. Under the system established by the Turkish Code of Obligations those two positions are incompatible; the head of loss recoverable on withdrawal differs from that recoverable on renouncing performance. Moreover, some elective rights may be exercised only after an additional period has been granted, and others only if the creditor gives immediate notification; skipping these procedural steps can leave even the most deserving creditor empty-handed. This article examines the debtor's default under Turkish law, its conditions, the question of notice and fixed maturity, the obligation to grant an additional period and its exceptions, the elective rights, the immediate notification requirement, the difference between withdrawal and termination, and the divide between expectation and reliance loss.
1. The Conditions of Default
Before the debtor can be said to be in default, certain conditions must be satisfied. The first is that the obligation has fallen due; no default arises in respect of an obligation not yet matured. The second is that performance remains possible; where performance has become impossible, the provisions on impossibility apply rather than those on default. The third is that the obligation has not been performed. The fourth, and in practice the most critical, is notice. Under the law the debtor of a matured obligation falls into default upon the creditor's notice. The meaning of this provision is that, even though the obligation has matured and has not been performed, the debtor does not as a rule fall into default until the creditor serves notice, and the consequences attaching to default do not arise. The first step when a delay occurs is therefore to serve a proper notice. In judicial practice the commencement of an action is accepted as taking the place of notice; but since no default arises for the period up to the date of the action, the calculation of interest and delay damages begins from that date. This shows the monetary value of serving notice early.
2. Where No Notice Is Required: Fixed Maturity
There is an important exception to the notice rule, and it carries great value in commercial contracts. Under the law, where the day on which the obligation is to be performed has been jointly determined, or has been determined by one of the parties giving due notification in reliance on a right reserved in the contract, the debtor falls into default upon the passing of that day without any need for notice. This is known in practice as fixed maturity. A delivery date determined definitively in a contract relieves the creditor of the burden of serving notice and produces the consequences of default from the first day of delay. Writing maturity dates definitively and unambiguously in commercial contracts is therefore a concrete advantage for the creditor. By contrast, approximate wording, the statement of an estimated rather than a maximum period, or a delivery date made conditional, may destroy the character of fixed maturity and restore the requirement of notice. In non-contractual obligations such as tort and unjust enrichment, default arises without any need for notice on the date the act was committed or the enrichment occurred.
3. The General Consequences of Default
Once the debtor is in default, certain general consequences arise before any question of elective rights. The first is delay damages; the creditor may claim compensation for the loss arising from late performance. In monetary obligations this takes the form of default interest, and the creditor need not separately prove that it has suffered loss in order to claim it. Where the creditor has suffered loss exceeding the default interest, it may also claim that excess loss unless the debtor proves absence of fault. The second general consequence is liability for fortuitous events; a debtor in default becomes liable even for loss arising from causes not attributable to it. This is one of the gravest consequences of default and represents the shifting of risk onto the debtor. The debtor can escape this liability only by proving that it was not at fault in falling into default, or that the loss would have arisen even had it performed in time. These consequences arise upon default itself, independently of the elective rights.
4. The Obligation to Grant an Additional Period
In contracts imposing reciprocal obligations, a further procedural step is required before the creditor may exercise certain elective rights. Under the law, where one of the parties to a contract imposing reciprocal obligations falls into default, the other may grant an appropriate period for performance of the obligation, or may request the judge to grant an appropriate period. This period is not simply any period the creditor chooses to allow; it is a final period, the last opportunity afforded to the debtor to perform. The period must be appropriate, and appropriateness is determined by the nature of the performance, the scope of the work and the concrete circumstances; a period unreasonably short may not be valid in law. During this period the creditor must accept late performance if the debtor tenders it. The importance of the additional period lies here; where the creditor will claim only performance in kind and delay damages, no additional period is needed, but where it wishes to renounce performance and claim expectation loss, or to withdraw from the contract, it must grant one. Skipping this step renders the exercise of the elective right procedurally defective.
5. Where No Additional Period Is Required
The law provides three exceptions to the obligation to grant an additional period, and these are of great importance in practice. The first is where it is apparent from the debtor's situation or conduct that granting a period would be ineffective; where the debtor has expressly declared that it will not perform, or has made this plain by its conduct, granting a further period becomes a meaningless formality. The second is where, as a result of the debtor's default, performance of the obligation has become useless to the creditor; where late performance no longer serves the creditor's purpose, there is no point in waiting. The third is where it appears from the contract that, upon performance failing to occur at a specified time or within a specified period, performance will no longer be accepted; this covers fixed-maturity transactions. Where these situations exist the creditor may exercise its elective right directly without granting an additional period. But relying on these exceptions is risky; if it is concluded that the conditions of the exception were not satisfied, the elective right exercised without an additional period may be held defective. Where there is doubt, granting a period is always the safer course.
6. First Elective Right: Performance in Kind and Delay Damages
Where the debtor in default has not performed within the period granted, or where a situation exists not requiring a period, three routes open before the creditor. The first is the right to claim performance of the obligation in kind together with damages for delay. This is the route of the creditor that prefers to keep the contract alive; it requires the principal performance from the debtor and, in addition, claims compensation for the loss arising from the delay. The most important feature of this route is that it is the default position. Where the creditor makes no declaration of choice, it is in law regarded as having remained on this line. This is exceedingly important in practice; a creditor who stays silent has, without realising it, chosen the route of performance in kind, and its subsequent assertion that it withdrew from the contract becomes contestable. This route is preferred where the performance still has value for the creditor, where substitute procurement is difficult, or where there is an interest in the continuation of the contract. It is also the most sensible option where the commercial relationship is to be preserved.
7. Second Elective Right: Renouncing Performance and Claiming Expectation Loss
The second route is for the creditor, by immediately notifying that it renounces performance of the obligation and its right to claim delay damages, to claim compensation for the loss arising from non-performance. On this route the contract remains in being, but damages take the place of the principal performance. The loss claimed is the expectation loss; the loss that places the creditor in the position it would have been in had the contract been duly performed. Typically this covers the market value of the performance, the excess price paid for substitute procurement, lost profit and other losses arising from non-performance. In judicial practice it is accepted that expectation loss may be calculated on the basis of the market value of the performance that should have been delivered. The typical situations in which this route is chosen are those where the performance can be obtained from another source but at greater cost. The exercise of this route depends on two procedural conditions; that an additional period has as a rule first been granted, and that the creditor notifies its choice immediately. This second condition is addressed separately below.
8. Third Elective Right: Withdrawal from the Contract
The third route is withdrawal from the contract. The right of withdrawal likewise depends on immediate notification that performance and delay damages are renounced. The consequences of withdrawal differ fundamentally from the other two routes. Under the law, on withdrawal the parties are reciprocally released from their obligations to perform and may reclaim the performances they have already rendered. Withdrawal therefore operates retrospectively; a regime of unwinding applies as though the contract had never been concluded, and what has been received is returned. At this point the recoverable loss changes too; on withdrawal, unless the debtor proves that it was not at fault in falling into default, the creditor may also claim compensation for the loss it has suffered by reason of the contract ceasing to have effect. That loss is the reliance loss. Withdrawal is chosen where the performance no longer has any value for the creditor, where unwinding the relationship is preferred, or where the creditor wishes to recover the price it has paid. But this route carries an important cost; the creditor can no longer claim the profit it would have earned had the contract been performed.
9. The Immediate Notification Requirement
The procedural point causing most lost rights in the exercise of elective rights is the requirement of immediate notification. For the creditor to choose the second or third route, the law requires it to notify immediately that it renounces performance of the obligation and its right to claim delay damages. The rationale is practical; the debtor must be able to determine its position knowing which route the creditor has chosen, and the date on which the loss is to be calculated must be settled. Judicial practice has likewise emphasised that, in order to claim termination and damages, the creditor must immediately notify the other party that it renounces performance of the contract and its claim for loss arising from delay, the reason being that the price difference arising from non-performance must be calculated according to market values at the date of termination. Where this notification is delayed or never given, the creditor is regarded as having remained on the line of performance in kind, and its later move to the other routes becomes contestable. Once the additional period has expired without result, the choice must therefore be notified without delay and in writing.
10. Expectation Loss and Reliance Loss
The real reason the elective rights must be exercised correctly is that each route opens onto a different head of loss. Expectation loss is the difference between the position the creditor would have been in had the contract been duly performed and its actual position; it is the counterpart of the performance interest. It may cover lost profit, the price difference on substitute procurement, losses arising from a halt in production and sums for which the creditor is liable to its own customers. Reliance loss, by contrast, is the loss arising from the disappointment of the creditor's confidence that the contract would be validly concluded and performed; it is the counterpart of the reliance interest. It covers expenses incurred for the contract, notarial and advisory costs, preparatory expenditure and an alternative opportunity forgone in order to conclude the contract. The difference is very large in practice; lost profit is a head of expectation loss and cannot be claimed upon withdrawal. The question the creditor must therefore ask when making its choice is this; what did I expect from this transaction, the profit or the return of what I paid?
11. Termination in Continuing Contracts
The regime of withdrawal described above is built for contracts of instantaneous performance. In continuing contracts the position differs and the law regulates it separately. In contracts where performance is spread over time, such as lease, service, maintenance, distributorship and subscription, a retrospective unwinding is often impossible or meaningless; a leased property used for months, or a service already rendered, cannot be given back. In these contracts, therefore, termination applies instead of withdrawal, and termination operates prospectively; the contract ends from the moment of termination, the performances rendered up to that point remain in place and their counterparts are paid. In continuing contracts too, an opportunity to perform must be afforded to the debtor by granting an additional period before the elective rights are exercised. A frequent error in practice is to serve a notice of withdrawal in a continuing contract and to demand restitution for the past; that demand cannot be met given the nature of the contract, and the notice is construed as a termination.
12. What the Parties May Agree
A significant part of the statutory regime on default is not mandatory, and the parties may make different arrangements by contract. The most widespread arrangements in practice are as follows. The first is the setting of a fixed maturity; this removes the requirement of notice and strengthens the creditor's position. The second is agreeing that a right of withdrawal or termination will arise without an additional period; the parties may provide for a direct right of termination in specified cases of breach. The third is listing which breaches are to be regarded as material and will give rise directly to termination. The fourth is regulating the procedure for termination; the form, addressee and period of the notice may be expressly determined. The fifth is structuring the penalty clause that will operate on default and its relationship with the elective rights. But the limits of this freedom must not be overlooked; the mandatory prohibition on excluding gross fault operates here too, and arrangements excessively displacing the consequences of default are, where they constitute general terms, additionally subject to content review.
13. Drafting the Notice
The whole of the default process often turns on the quality of a single document; the notice. A well-prepared notice must contain several elements. The first is a clear definition of the matured obligation; which contract it arises from, which performance and what sum is claimed. The second is the statement that performance has not occurred. The third is the grant of an additional period; the period must be stated expressly in days and must be appropriate to the nature of the performance. The fourth is advance notification of which elective right will be exercised at the end of the period; this largely forestalls the later argument about immediate notification. The fifth is the reservation of rights to delay damages and to any penalty. The sixth is that service be effected by a means capable of proof, through a notary or registered electronic mail. Use of registered electronic mail between commercial undertakings provides both speed and ease of proof. A notice lacking these elements may, even though it puts the debtor in default, prove inadequate at the stage of exercising the elective rights.
14. Mistakes Frequently Made in Practice
Certain mistakes are frequently repeated in default processes. The first is waiting without serving notice; since no default arises, interest and delay damages do not run and the time that passes works against the creditor. The second is serving a notice of withdrawal directly without granting an additional period; where the conditions of an exception are not satisfied the notice is procedurally defective. The third is failing to notify the choice of elective right immediately; the creditor is then regarded as having remained on the line of performance in kind. The fourth and most costly is serving a notice of withdrawal and claiming lost profit; withdrawal opens onto reliance loss, and lost profit is a head of expectation loss and cannot be claimed. The fifth is serving a notice of withdrawal in a continuing contract and seeking restitution for the past. The sixth is leaving the additional period uncertain in the notice, or making it unreasonably short. The seventh is effecting service by a means that cannot be proved. The eighth is the creditor waiting to serve notice unnecessarily although the contract contains a fixed maturity, and thereby losing time.
15. Conclusion and Practical Recommendations
The debtor's default is one of the most technical fields of contract law and the one requiring the most procedural steps. The basic considerations may be summarised as follows. Default arises as a rule upon notice; where the contract contains a fixed maturity no notice is needed, and writing maturity dates definitively in commercial contracts is therefore a concrete advantage for the creditor. In contracts imposing reciprocal obligations, an additional period must as a rule be granted before exercising any elective right other than performance in kind; the exceptions should be construed narrowly and, where there is doubt, a period should be granted. The creditor has three options and they open onto different heads of loss; performance in kind with delay damages is the default line, renouncing performance opens onto expectation loss, and withdrawal onto reliance loss. To move to the second or third route the choice must be notified immediately and in writing; omitting this step is the most frequent cause of lost rights. In continuing contracts, prospective termination applies rather than withdrawal. Finally, the quality of the entire process turns on the quality of the notice; the additional period, the declaration of choice and the rights reserved must all appear expressly in that document.
The debtor's default is closely connected with the other fields of contract law. Our article on penalty clauses under Turkish law, which operate upon default, and our analysis of exclusion and limitation of liability clauses under Turkish law, which addresses the limitation of recoverable loss, address the matters connected with default.
For advisory services on the management of default processes, the drafting of notices, withdrawal and termination declarations and the resolution of commercial receivables disputes under Turkish law, you may contact us at info@guzeloglu.legal.