Our article addresses exclusion and limitation of liability clauses under Turkish law, explaining why standard common law caps often fail here, the prohibition on excluding gross fault, the employment and licensed activity exceptions, and the asymmetry governing auxiliary persons.
Almost every commercial contract contains, towards the end of the text, a provision limiting liability; indirect losses are excluded, loss of profit cannot be claimed, and aggregate liability is capped at the contract price. In software, services and supply contracts these provisions are most often lifted from English-language precedents, and the parties assume the clause protects them fully. That assumption travels badly into Turkish law. Turkish law does allow parties considerable room to limit liability, but it draws the boundaries of that room with mandatory provisions and draws them sharply. A liability cap drafted without regard to those boundaries may turn out, at the moment of dispute, to be entirely inoperative; worse, because the clause looked sound on paper, the party may have neglected the other protections it should have taken. This article examines exclusion and limitation of liability under Turkish law with the international practitioner in mind; the prohibition on excluding gross fault, the employment relationship exception, the licensed activity exception, the strikingly different regime governing auxiliary persons, and how an effective liability clause is designed for a Turkish-law contract.
1. The Starting Rule: Liability for Every Degree of Fault
To locate exclusion clauses correctly one must begin with the rule. Under the article of the Turkish Code of Obligations governing the scope of liability and of the obligation to make good, a debtor whose liability arises from breach is, as a rule, liable for every degree of its fault. That is, without distinguishing between degrees of fault, the law holds the debtor liable for the whole of the loss arising from its intent, its gross negligence and its slight negligence alike. An exclusion agreement narrows this general rule by contract; the parties agree in advance that the debtor will not be liable for certain degrees of fault or for certain heads of loss. This narrowing is a manifestation of freedom of contract and is in principle permissible. But freedom of contract is not unlimited; the legislature has determined by mandatory provisions the cases in which exclusion agreements are absolutely void. The first question to ask when assessing a liability clause under Turkish law is therefore which of these mandatory limits the clause touches. For an exclusion to be valid it is further required that the limitation is not prohibited by a special statute.
2. Nature and Form of the Exclusion Agreement
An exclusion agreement is an agreement made before the loss arises which removes the debtor's liability wholly or in part. The words before the loss arises are decisive; a waiver by the creditor of its claim after the loss has occurred is not an exclusion agreement but a release, and is subject to a different regime. The exclusion may appear as a clause within the main contract or may be made as a separate agreement. As to legal nature it is a transaction concluded between debtor and creditor limiting the creditor's right; it therefore cannot be created by a unilateral declaration and requires a meeting of wills. This point is frequently violated in practice; an exclusion printed on the reverse of an invoice or on a delivery note produces no effect without the other party's acceptance. Limitation of liability arising from fault is conditional upon a written agreement being signed between the parties on the matter. Exclusion clauses must therefore be express, in writing and accepted by the other party; these are preconditions of validity, not refinements.
3. The Prohibition on Excluding Gross Fault
The first and most fundamental limit placed on exclusion agreements is the prohibition relating to gross fault. Under the law, an agreement made in advance that the debtor will not be liable for its gross fault is absolutely void. This provision is mandatory; the parties cannot agree otherwise and a clause contrary to it is void from the outset. The concept of gross fault covers both intent and gross negligence. Intent is the debtor bringing about the breach knowingly and willingly. Gross negligence is the failure to show even the minimum care that any reasonable person in the same situation would show, that is, a conspicuous breach of the required diligence. The rationale is plain; to allow a debtor to escape in advance the consequences of its most seriously culpable conduct would hollow out the obligation itself and would be incompatible with good faith. For international practitioners the most important consequence is this; even where the contract states that aggregate liability is capped at a given sum, that cap does not operate where the breach was committed with gross fault, and the debtor answers for the whole of the loss.
4. Excluding Slight Fault and Its Limit
Against the prohibition on gross fault, the exclusion of slight fault is in principle possible. The parties may validly agree that the debtor will not be liable for losses arising from its slight negligence. The part of a commercial liability clause that survives in law is essentially this area. But the law has introduced an important exception here as well. Where a service, profession or craft requiring expertise may only be carried on by permission given by statute or by the competent authorities, an agreement made in advance that the debtor will not be liable even for its slight fault is likewise absolutely void. The scope of this exception is broader in practice than is generally supposed; where the carrying on of the activity depends on a licence, permit or authorisation from a competent authority, liability arising from that activity cannot be limited even as regards slight fault. Professions such as healthcare, legal practice, accountancy, architecture and engineering, and sectors whose activity is subject to regulatory authorisation, may fall within this scope. A liability cap in the contract of a debtor carrying on a licensed activity may therefore be largely inoperative.
5. The Employment Relationship Exception
The second absolute prohibition concerns the employment relationship. Any agreement made in advance by the debtor that it will not be liable on account of any obligation arising from an employment contract with the creditor is absolutely void. The scope of this provision is notable; no distinction is drawn according to the degree of fault, and an exclusion relating to any degree of fault, from intent through gross negligence to slight negligence, is invalid. The purpose of the regulation is the protection of the weaker party in the employment relationship. In practice this means that exclusion documents signed at the time of recruitment produce no effect whatever; where a workplace accident or occupational disease occurs, an exclusion obtained on entry does not protect the employer. There is a doctrinal debate as to the wording of the provision; it has been argued that the regulation may produce results to the employee's detriment although its purpose is to protect the employee, and that the provision should therefore be read down teleologically so that exclusion agreements relating to the employee's slight fault may be regarded as valid.
6. Liability for the Acts of Auxiliary Persons
The second limb of the regime concerns the acts of auxiliary persons, and this is where Turkish law departs most sharply from what an international practitioner may expect. Under the law the debtor is obliged to make good the loss caused to the other party by its auxiliaries while carrying on the work, even where it has lawfully left the performance of the obligation, or the exercise of a right arising from an obligational relationship, to auxiliaries such as persons living with it or persons working for it. The logic is that a debtor who extends its field of activity by using auxiliary persons must also bear the risk of doing so. If the debtor scales up its operations by having its work done by others, it must assume the losses that scale produces. This liability does not rest on the debtor's own fault; the act of the auxiliary person suffices. In commercial life the scope of this provision is exceedingly broad; employees, subcontractors and other third parties participating in performance may fall within it. A company's contractual liability therefore covers the acts not only of its own organs but of every auxiliary person participating in performance.
7. The Asymmetry in Excluding Liability for Auxiliary Persons
The most striking feature of Turkish law in this field, and the one most often overlooked, is the broad latitude given to exclusion agreements relating to the acts of auxiliary persons. Under the law, liability arising from the acts of auxiliary persons may be removed wholly or in part by an agreement made in advance. No distinction is drawn in this provision as to the degree of fault; an exclusion agreement may be made in respect of both slightly and grossly negligent acts. From this arises an exceedingly interesting asymmetry. While the debtor cannot escape by an exclusion agreement liability arising from its own gross fault, it can escape by an exclusion agreement liability for loss caused by the gross fault of its auxiliary person. This asymmetry offers an opportunity that can be used deliberately in contract design; in works where subcontractors are used in particular, limiting by contract the liability for the acts of auxiliary persons affords valid protection. But this opportunity too has a limit, addressed under the next heading.
8. The Licensed Activity Limit for Auxiliary Persons
The broad latitude given to exclusion agreements concerning auxiliary persons is narrowed by the third paragraph of the relevant article. Under that provision, where a service, profession or craft requiring expertise may only be carried on by permission given by statute or by the competent authorities, an agreement that the debtor will not be liable for the acts of its auxiliary persons is absolutely void. The feature of this exception is that it operates independently of the degree of fault; in a licensed expert activity no exclusion agreement may be made even in respect of the slight fault of the auxiliary person. The legislature has thereby subjected the debtor's own liability and its liability for the acts of its auxiliaries to the same strict regime in this particular field. The parallel is meaningful; in activities of importance to society, and made subject to authorisation for that reason, permitting liability to be displaced through auxiliary persons would defeat the purpose of the authorisation regime. Companies operating in licensed sectors should therefore not rely on liability limitations resting on the use of subcontractors.
9. Types of Liability Clause
Liability clauses are not of a single type in practice, and the legal fate of each type differs. The first type is the total exclusion; it provides that the debtor shall have no liability at all and is invalid to the extent that it covers gross fault. The second type is limitation by degree of fault; it excludes liability only for slight negligence and is valid where no licensed expert activity is involved. The third type is limitation by head of loss; it provides that indirect losses, loss of profit, loss of data or reputational harm will not be compensated. The fourth type is limitation by amount; it provides that aggregate liability is capped at a given ceiling, for example the contract price or a multiple of it. The fifth type is limitation by time; it requires the claim to be brought within a specified period. What these types share is that the prohibition on excluding gross fault stands above all of them; where the breach was committed with gross fault, neither the monetary cap nor the exclusion of heads of loss operates. This fact constitutes the most important weakness of liability clauses in practice.
10. Where the Clause Is a General Term
Limitation of liability provisions are most often part of standard contract texts, general conditions of sale or service terms. In that case the clause is subject not only to the mandatory provisions on exclusion agreements but also to the review regime applicable to general terms and conditions, and meets a second filter. This second layer has three consequences. First, the clause is subject to the incorporation review; where express information was not given to the other party or no opportunity to learn its content was afforded, it may be deemed unwritten. Second, the clause is subject to the surprising clause review; a severe exclusion foreign to the nature of the contract may be eliminated on that ground. Third, the clause is subject to the content review; limitations of liability aggravating the other party's position contrary to the rules of good faith may be held invalid at this stage. Most importantly, this review regime applies in relations between merchants as well. A liability clause embedded in standard terms is therefore open to attack on two separate fronts, which is why such clauses should be highlighted separately and negotiated.
11. The Relationship with Penalty Clauses
Limitation of liability and the penalty clause appear to pull in opposite directions but are two faces of the same question and must be considered together. The penalty clause secures a minimum recovery by relieving the creditor of the burden of proving loss; the limitation of liability determines the debtor's maximum exposure. Where both appear in a contract, the relationship between them must be expressly regulated. The basic question is this; is the penalty counted within the liability cap or is it additional to it? Where this is not written, the parties will advance diametrically opposed readings in a dispute. The second point is whether the penalty is without prejudice to claims for further damages; if it is, it must be determined whether that excess claim is subject to the liability cap. The third point is that the question of gross fault affects both institutions simultaneously; since the cap does not operate in the case of gross fault, the creditor becomes able to claim the whole of its loss exceeding the penalty. Structuring these interconnections from the outset is decisive for the coherence of the contract.
12. The Problem of Imported Precedents
Limitation of liability clauses in international commercial contracts are most often taken from English or United States precedents, and this gives rise to a serious problem of fit. In the common law tradition the room given to limitations of liability is as a rule broader and priority is given to party autonomy; the exclusion of indirect losses and monetary caps are settled practice. Where the same text is used in a contract governed by Turkish law, the prohibition on excluding gross fault and the limit relating to licensed expert activities come into play, and a significant part of the clause may be left inoperative. The choice of governing law in an international contract therefore directly determines the fate of the liability clause. Where the governing law is Turkish law, the clause must be rewritten with these mandatory limits in mind. Care is required even where the governing law is foreign; where the award or judgment is to be enforced in Türkiye, the possibility that a provision excessively displacing liability may meet a public policy review should be borne in mind. Using a precedent text unadapted is accordingly a serious risk.
13. The Relationship with Insurance
The possibility that a limitation of liability will prove legally inoperative makes a second layer of risk management essential; that layer is liability insurance. Since a liability clause will not operate in the case of gross fault or in a licensed activity, the debtor's real protection is often not the contract text but the insurance cover it holds. Liability clauses and insurance obligations should therefore be addressed together in contract negotiations. The typical approach in practice is to include an obligation to take out professional indemnity or employer's liability insurance in a specified amount, to produce the policy to the other party and to maintain the cover throughout the term. Setting the liability cap consistently with the available insurance cover is likewise a rational approach. The exclusions of the policy must also be examined; intentional acts are outside cover under most policies, which means that in the case of gross fault the debtor may be left without either contractual or insurance protection. This reality shows that managing liability is not merely a legal but a commercial exercise.
14. Mistakes Frequently Made in Practice
Certain mistakes are frequently repeated in liability clauses. The first is drafting a broad exclusion covering all liability and believing oneself protected by it; the clause is invalid to the extent it covers gross fault. The second is failing to distinguish by degree of fault; where the clause is not confined to slight negligence, the risk of invalidity threatens the whole provision. The third is a party carrying on a licensed activity relying on a standard limitation; no exclusion is possible in that field even for slight fault. The fourth is obtaining an exclusion in an employment relationship; such documents produce no effect. The fifth is burying the liability clause in a standard text and leaving it exposed to the general terms review. The sixth is failing to regulate the relationship between the penalty clause and the liability cap. The seventh is using a foreign precedent without adapting it to the governing law. The eighth is relying on the liability clause and neglecting insurance cover; where the clause does not operate, no protection remains at all.
15. Conclusion and Practical Recommendations
Exclusion agreements are one of the fields in which the balance between freedom of contract and mandatory protection is struck most sharply under Turkish law. The basic considerations may be summarised as follows. The rule is that the debtor is liable for every degree of its fault; an exclusion narrows that rule and must rest on a written agreement. An agreement excluding gross fault is absolutely void, and that prohibition stands above monetary caps and exclusions of heads of loss alike; where there is gross fault, no limitation operates. In obligations arising from an employment contract, any exclusion is invalid regardless of the degree of fault. Where the activity is subject to statutory or regulatory authorisation, even slight fault cannot be excluded. By contrast, liability for the acts of auxiliary persons may be limited without regard to the degree of fault; this asymmetry should be considered deliberately in works using subcontractors, though it too is closed off in licensed activities. Where the clause forms part of a standard text it is also subject to the general terms review. Finally, a liability clause is not by itself adequate protection; it must be structured together with insurance cover.
Exclusion clauses are closely connected with the other fields of contract law. Our article on penalty clauses under Turkish law, which must be considered together with the liability cap, and our analysis of the review of general terms and conditions, which addresses the review of provisions in standard texts, address the matters connected with liability clauses.
For advisory services on the design of liability clauses, the assessment of the validity of exclusion agreements, the risk structuring of commercial contracts and the resolution of liability disputes under Turkish law, you may contact us at info@guzeloglu.legal.