Limitation of Penalty Clause by Justice and Equity Principles

An appealing option in order to insure that parties to a contract adhere to their obligations and to clarify their goals in a more reliable manner is to stipulate a penalty clause or civil remedy in the contract. In this way, on the one hand, the obligor finds himself involved in legal effects and tries both to avoid the stigma of breaching the contract and to avoid the penalty, and on the other hand the obligee monitors the results of the contract with peace of mind and in case the other party breaches the contract, he is confident that he would be compensated for his loss by relying upon the mentioned penalty. Such a condition has a logical and rational basis and is not inconsistent with legal foundations and principles. On this basis, our legislator, apart from its recognition in general articles such as articles 10 and 219 of the Civil Code, clearly gave it legitimacy in article 230 of this Act. However, the serious question is, to what extent and to what amount do those who enter into contract have freedom of action to insert such a condition in it? Can they stipulate a penalty clause in a contract as much as they want, even if it is manifestly excessive in amount? The passage of time has shown that in dealing with certain examples the freedom to insert a penalty clause arising out of breach of contract in any amount is far from justice and fairness. In order to remove this concern, in the amendment of the Civil Code (2016) the French legislator, according to Article 1231-5 restrained and modified this condition based on custom, logic and justice.However, in our legal system, heedless of the unwelcome results of this condition, not only the judicial precedent was not revised, but according to the binding precedent No. 805 dated January 5, 2021, the ruling prescribed in Article 230 of the Civil Code was affirmed.