Invalidity of Exemption Agreements
Introduction
Although the general principle in the law of contracts is freedom of contract or, in other words, freedom of will, the parties’ wills are not completely free in the case of exemption agreements. The validity of these agreements is limited by the mandatory provisions of the Turkish Code of Obligations (“TCO”).
In order to clarify the validity and the extent of exemption agreements, the concept of liability must first be analyzed and correctly defined.
The term “Law of Liability” is used to refer to both liability arising from breach of contract and to all cases of extra-contractual liability. In other words, liability may arise from breach of obligation as well as from breach of general rules of conduct.[1] Although it is possible for a breach of obligation to constitute a tort, the conditions for the occurrence of contractual liability and tort liability and the consequences attached to these types of liability are different from each other.
What is Liability and Debt?
Pursuant to Article 49 of the TCO, a person who causes damage to another person through fault and unlawful acts is obliged to compensate for this damage. Scholars define unlawfulness as engaging in an act prohibited by the legal order in order to protect the damaged interest. As can be understood from the provision, in order for a party to be liable for a tort, (i) the act committed must be unlawful, (ii) the person committing the act must be at fault, (iii) a damage must occur, and (iv) there must be a causal link between the tortious act and the damage. Although the general rule in tort liability is that the person committing the act must be at fault, the TCO recognizes the existence of strict liability.
According to Article 112 of the TCO, which regulates contractual liability, if an obligation is not fulfilled at all or as required, the obligor must compensate the creditor for the damage arising therefrom, unless they prove that no fault can be attributed to them. In cases of liability for non-performance of an obligation, the obligor must prove the absence of fault. Liability within the meaning of Article 112 of the TCO refers to the obligation to compensate for a loss, since it arises from a breach of obligation.[2]
This study will focus on the limitations imposed on the limitation or exclusion of liability arising from the breach of contractual obligations.
First of all, it should be noted that although the legal terms “obligation” and “liability” are similar, they are not the same. For this reason, it is necessary to distinguish between the obligation assumed by the contract and the liability arising from non-performance of the obligation. An obligation is a legal relationship that obliges the obligor to fulfill a certain performance against the creditor. On the other hand, liability is the obligation to indemnify, which is a secondary obligation that replaces the primary obligation or is added to the primary obligation in case the obligor fails to fulfill the contractual obligation at all or as required.[3]
Pursuant to the principle of freedom of contract, the liability may be expanded or limited in the contract, depending on the will of the parties. However, the law-maker has restricted the limitation or exclusion of the obligor’s liability in the contract with mandatory rules.[4]
Elements & Limitation of Exemption Agreements
Exemption agreements are a type of agreement that limits the liability arising from breach of obligation and ensures that the obligor will not bear the consequences of this breach as a result of the agreement made in case the obligor violates its commitments. These agreements may be arranged in the form of a separate contract or as a contractual clause within the existing contract giving rise to an obligation.
The elements of an exemption agreement are (i) a breach of obligation, (ii) concluded before the damage occurred, (iii) that changes the liability scheme determined by law in favor of the obligor. The exemption agreement may be manifested by the complete exclusion of liability, or by limiting the conditions for the obligor to be held liable, or by limiting the compensation to be paid. In addition, arrangements that make it difficult for the creditor to assert a claim for compensation against the obligor are also considered exemption agreements.[5] Agreements that place the burden of proof that legally belongs to the obligor on the creditor or that shorten a non-mandatory statute of limitations are also considered exemption agreements.[6]
There are a number of mandatory provisions in the TCO regarding the limitation of exemption agreements. Specifically, articles 115, 116 and 221 of the TCO, entitled “Exemption Agreements,” are of mandatory nature and require that under the circumstances mentioned in the law, exemption agreements are absolutely null and void.
The first of these provisions, Article 115, prohibits the limitation of liability in three different circumstances in three paragraphs.
The first paragraph of Article 115 stipulates that “A prior agreement that an obligor shall not be liable for gross fault is absolutely null and void.” This provision prohibits the exclusion of the obligor’s liability for both intentional acts and gross negligence. The most important reason why liability for intentional acts and gross negligence cannot be excluded is the principle of fault, which dominates the law of liability, and the principle of pacta sunt servanda, which dominates the law of contract.[7]
When the parties enter into a contractual relationship, a trust relationship arises between them. The obligor’s willful failure to fulfill its obligation not only violates the trust relationship, but also results in the creditor’s legitimate expectation not being met. In addition, because it is contradictory for a person to declare their intention to incur debt on the one hand, and on the other hand, to knowingly and willingly obtain the opportunity to violate their obligation, and it is argued that such agreements are contrary to the nature of the debt relationship.[8] Therefore, agreements that stipulate non-liability in case of willful breach of obligation are null and void.
Another aspect of the mutual trust relationship and the rule of pacta sunt servanda is that it is not possible to exclude the liability arising from gross negligence with an exemption agreement.[9] The creditor expects the obligor to exercise the same care when assuming an obligation as those who are in an equal position with them. Exemption agreements concluded for gross negligence will be null and void due to both the damage to the trust relationship and the failure to meet the expectation regarding the fulfillment of the obligation undertaken. The law-maker has established the same sanction for both intentional acts and gross negligence.[10]
The 2nd and 3rd paragraphs of Article 115 expand the circumstances in which the exemption agreement is null and void, and it is regulated in a mandatory manner that it is not possible to remove the liability arising from slight negligence in the cases included in these paragraphs.
According to Article 115/2, “Any prior agreement made by the obligor with the creditor that they will not be liable for any obligation arising from the service agreement is absolutely null and void.”
According to Article 115/3, “If a service, profession or craft requiring expertise can only be carried out with the permission granted by law or by the competent authorities, any prior agreement that the obligor will not be liable for their slight negligence is absolutely null and void.”
Similarly, another limitation on the exemption agreement is found in the third paragraph of Article 116:
“Even if the obligor has lawfully entrusted the performance of the obligation or the exercise of the right to auxiliary persons, such as his cohabitants or employees, they are obliged to compensate for the damage caused to the other party while they are carrying out the work.”
Article 116/2 states that “Liability arising from the acts of auxiliary persons may be fully or partially removed by a prior agreement.”
Finally, under Article 116/3 of the TCO, “If a service, profession or craft requiring expertise can only be carried out with the permission granted by law or by the competent authorities, any prior agreement that the obligor will not be liable for the acts of auxiliary persons is absolutely null and void.”
Although the law-maker expressly permits the exemption agreement in the second paragraph of Article 116, in line with Article 115, it also requires that if a service, profession or craft requiring expertise can only be carried out with the permission granted by law or competent authorities, the obligor shall also be liable for the acts of the auxiliaries and all agreements that exclude this liability shall be null and void. The legislation also imposes the risk on the obligor who expands his activities by using auxiliaries.[11] Here again, the breaches of obligation arising from intent, gross negligence and slight negligence are evaluated together, and the agreements involving any of them are deemed null and void by mandatory rule.
Another provision with the title “Exemption agreement” is Article 221 of the TCO, which limits the exemption agreements regarding the warranty against defects. The provision states that “if the seller is grossly negligent in transferring defective sold goods, any agreement that excludes or limits his liability for defects is absolutely null and void.” Under this provision, an exemption agreement will be invalid in all cases where the seller is deemed to be grossly negligent in disposing of the sold goods in a defective manner, as well as in concealing the defect intentionally and fraudulently.[12] In conformity with Article 115, any exemption agreement made in order to exclude or limit the liability in case of intentional acts and gross negligence will be null and void.
Article 221 is mandatory and limits the exemption agreement. It states that “A seller who is grossly negligent cannot avoid liability, not even partially, by claiming that he was not notified about the defect in the goods in due time. The same provision shall also apply to defects that should have been known by persons who are engaged in the profession of salesmanship.” This provision should be evaluated together with Article 225. Accordingly, the seller’s failure to be well-aware of the defects that the seller should have known professionally will be considered as a gross fault of the seller.[13]
Another legal provision limiting exemption agreements is found in the third paragraph of Article 214, which regulates the invalidity of exemption agreements regarding the warranty of quiet possession.
Article 214 of the TCO states that “The seller shall be liable to the buyer if all or part of the goods sold are taken away from the buyer by a third party due to a right existing at the time of the conclusion of the sales contract.
If the buyer knew of the risk of seizure at the time of the conclusion of the contract, the seller shall not be liable unless he has undertaken this risk separately.
If the seller has concealed the right of the third party, the agreement to exclude or limit their liability is absolutely null and void.”
As it can be understood from the provision, paragraph 3 of Article 214 stipulates that in cases where the seller acts willfully, the exemption agreement shall be null and void.
Conclusion
As a result, the most important element that forms the basis of the rules on the limitation of exemption agreements is that it is considered contradictory for a person to declare their intention to assume an obligation on the one hand and to preserve their freedom to act contrary to their obligation on the other.[14]Therefore, if a person expresses their intention to assume an obligation through a contract, their freedom of will and freedom of contract to make an agreement that they will not be liable for their breach of obligation is limited by the mandatory provisions of the law.[15]
- Tekinay, Selahattin Sulhi: Borçlar Hukuku Genel Hükümler, Filiz Kitapevi, 1993, p. 474.
- Eren, Fikret: Borçlar Hukuku Genel Hükümler 21. Bası Ankara 2017, p. 83.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 33.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 33.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 34.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 34.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 452.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 35.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 452.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 452.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 458.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 468.
- Başalp, Nilgün: Sorumsuzluk Anlaşmaları, On İki Levha Yayıncılık, 1. Baskı 2011, p. 468.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 81.
- Önay, Işık – Karaşahin, Yasin Alperen: Borcun Kapsamına ve Riskin Paylaşılmasına Dair Anlaşmaların Sorumsuzluk Anlaşmalarından Ayırt Edilmesi Sorunu, BATİDER 2018, C. XXXV, S. 4 p. 80.
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