A. Introduction
Long-term commercial contracts play an important role in ensuring continuity in commercial activities and maintaining stability in economic relationships between parties. In particular, contracts giving rise to continuing contractual obligations, such as distribution, dealership, franchise, supply and service agreements, not only establish reciprocal obligations between the parties but also create long-term relationships based on cooperation and mutual trust.
Nevertheless, various circumstances arising during the course of a contractual relationship may render its continuation intolerable for one of the parties. In such cases, the termination of the contractual relationship for just cause may become relevant. However, termination for just cause is a legal matter that must be assessed not only in terms of the existence of the right to terminate, but also with regard to the manner in which such right is exercised and the effects of termination on the parties' respective rights and obligations.
Under Turkish law, the termination of long-term commercial contracts for just cause may vary depending on the nature of the contract, the provisions agreed upon by the parties and the applicable legislation. In this respect, it is important to identify the circumstances constituting just cause, ensure that the right to terminate is exercised in accordance with the principle of good faith, and assess any potential claims for damages arising from termination.
This article examines the circumstances under which long-term commercial contracts may be terminated for just cause, the legal principles governing the exercise of the right to terminate, and the legal consequences of such termination in light of the relevant legislation and judicial decisions.
B. The Right to Terminate Long-Term Commercial Contracts
- Legal Nature of Long-Term Commercial Contracts and Types of Termination
Under Turkish law, pursuant to the principle of freedom of contract, parties are free to determine the terms and conditions of their contracts, provided that such terms do not contravene mandatory provisions of law, public order, morality or personality rights. Accordingly, parties may agree on provisions governing the duration of the contract, the conditions for its termination and the exercise of the right to terminate.
Long-term commercial contracts are contracts under which the contractual relationship between the parties extends over a certain period of time and the contractual obligations are performed continuously or periodically. In determining the termination regime applicable to such contracts, whether the contract is concluded for a fixed or indefinite term is of particular importance.
In the case of contracts concluded for an indefinite term, depending on the nature of the contract and the applicable specific provisions, the parties may exercise their right to ordinary termination by complying with the relevant notice period. In contrast, fixed-term contracts are, as a general rule, intended to remain in force until the expiry of the agreed contractual term. However, early termination may be possible where the parties have expressly agreed upon an early termination right or where just cause exists.
At this point, a distinction must be drawn between ordinary termination and extraordinary termination for just cause. While ordinary termination does not, as a general rule, require proof of the existence of just cause, extraordinary termination requires the existence of circumstances rendering the continuation of the contractual relationship intolerable for the terminating party.
- The Concept of Just Cause and Circumstances Constituting Just Cause
Turkish law does not provide a general and exhaustive definition of just cause applicable to all long-term commercial contracts. Nevertheless, the right to terminate for just cause is expressly recognised under various specific statutory provisions governing continuing contractual relationships.
The existence of just cause must be assessed in light of the particular circumstances of each case. In this context, a material breach of a party's principal contractual obligations, continuous or repeated failure to perform contractual obligations, a serious breakdown of the relationship of trust between the parties, or the emergence of circumstances objectively rendering the continuation of the contract intolerable may constitute just cause.
However, not every contractual breach automatically constitutes just cause for termination. The nature, severity and persistence of the breach, its impact on the contractual relationship and the respective interests of the parties must be assessed collectively. In particular, where a breach is capable of being remedied, the circumstances of the case may require that the breaching party be granted a reasonable period to cure the breach and that an opportunity be provided for the continuation of the contractual relationship.
Accordingly, the decisive consideration in exercising the right to terminate for just cause is whether the terminating party can reasonably be expected, in accordance with the principle of good faith, to continue the contractual relationship.
- The Importance of the Principle of Good Faith in Exercising the Right to Terminate
The fact that the parties have expressly provided for a termination right in their contract does not mean that such right may be exercised without limitation. Indeed, pursuant to Article 2 of the Turkish Civil Code No. 4721 ("TCC"), every person is obliged to act in accordance with the principle of good faith when exercising their rights and performing their obligations. The same provision further establishes that the legal system does not protect the manifest abuse of a right.
Therefore, even where a contract grants one of the parties the right to terminate without providing any justification and without paying compensation, the exercise of such right remains subject to scrutiny under the principle of good faith.
In its decision dated 26 April 2022, numbered E. 2019/566 and K. 2022/599, the General Assembly of Civil Chambers of the Turkish Court of Cassation emphasised that mere formal compliance with the contractual termination requirements is not, in itself, sufficient to establish that the right to terminate has been exercised in accordance with the principle of good faith. In this respect, the Court stated:
"Although the defendant terminated the contract by observing the notice period stipulated therein, pursuant to Article 2 of the Turkish Civil Code, which provides that everyone must comply with the rules of good faith when exercising their rights and performing their obligations, it is necessary to assess whether the defendant exercised the contractual right of termination in accordance with the principle of good faith."
In the aforementioned decision, the Court further stated that even where termination is effected in compliance with the contractual notice period, it must be separately assessed whether the right to terminate has been exercised in accordance with the principle of good faith. Accordingly, the Court emphasized the necessity of sufficiently examining whether the grounds relied upon for termination actually existed and whether such grounds constituted just cause.
Particularly in long-standing commercial relationships, where one party has, through its conduct, created a legitimate expectation on the part of the other party that the contractual relationship would continue, the sudden exercise of the termination right in a manner inconsistent with such expectation may, depending on the circumstances of the case, be regarded as an abuse of rights.
Consequently, the exercise of the termination right in compliance with the contractual provisions does not necessarily release the terminating party from legal liability in all circumstances. Where the right to terminate is exercised in breach of the principle of good faith, the terminating party may be liable to compensate the other party for the losses suffered, provided that the relevant legal requirements are satisfied.
C. Legal Consequences of Termination for Just Cause
- Termination of the Contractual Relationship and the Parties' Obligations
The principal legal consequence of terminating a long-term commercial contract for just cause is the prospective termination of the continuing contractual relationship between the parties. In this respect, termination generally does not operate retrospectively; rights and obligations accrued prior to the effective date of termination remain in force.
Accordingly, payment obligations arising before the termination date, receivables that have become due and payable, and claims arising from obligations already performed are not affected by the termination of the contract. Furthermore, depending on the nature of the contract and the provisions agreed upon by the parties, certain obligations relating to confidentiality, non-competition, protection of intellectual property rights and dispute resolution may survive termination.
In addition, following termination, matters such as the return of materials, documents and equipment provided by the parties under the contract, as well as the winding-up of ongoing contractual activities, must also be considered. Particularly in long-term supply, distribution and dealership agreements, the effects of termination on existing inventory, outstanding orders and commercial relationships established with third parties are of considerable importance.
Therefore, termination for just cause does not automatically extinguish all contractual obligations of the parties. Rather, it requires a separate assessment of rights and obligations accrued prior to termination, as well as those intended, by their nature, to survive the termination of the contractual relationship.
- Liability for Damages Arising from Termination for Just Cause
One of the key issues concerning the termination of long-term commercial contracts is whether such termination gives rise to liability for damages on the part of either party.
As a general rule, termination based on the existence of just cause does not, merely by reason of the termination itself, require the terminating party to pay compensation. However, where just cause arises from the other party's breach of contract, the terminating party may be entitled to claim compensation for losses suffered as a result of such breach. In this context, the general principles governing contractual liability under Article 112 of the Turkish Code of Obligations No. 6098 ("TCO") may apply.
Conversely, termination effected without just cause or in breach of the termination conditions stipulated in the contract may, depending on the circumstances of the case, constitute a breach of contract and give rise to liability for damages.
In this regard, when determining the scope of recoverable damages arising from termination, consideration must be given to the nature of the contract, the grounds for termination, the parties' respective fault and the causal link between the unlawful conduct and the damage suffered. In particular, loss of profits resulting from premature termination, investments made in reliance on the expected continuation of the contractual relationship, and expenses incurred as a consequence of termination may, depending on the circumstances of the case, form the basis of claims for damages.
Nevertheless, it cannot be assumed that all such categories of loss are recoverable in every termination scenario. Any claim for damages must have a valid legal basis, and the losses claimed must be substantiated in accordance with the applicable rules governing liability.
- Consequences of Abuse of the Right to Terminate
The exercise of a contractually stipulated termination right does not, in itself, eliminate the terminating party's potential liability for damages. This is because the exercise of the right to terminate remains subject to the principle of good faith and the prohibition of abuse of rights under Article 2 of the TCC.
Indeed, in its decision dated 26 April 2022, numbered E. 2019/566 and K. 2022/599, the General Assembly of Civil Chambers of the Turkish Court of Cassation acknowledged that the legal system does not protect the manifest abuse of the right to terminate and that a claim for damages may arise in such circumstances.
In this context, particularly where a commercial relationship that has continued for many years is terminated in breach of the principle of good faith, after one party has created a legitimate expectation on the part of the other that the contractual relationship would continue, such termination may give rise to liability for damages.
However, neither the existence of a long-standing commercial relationship nor the other party's expectation that the contract would continue is, in itself, sufficient to establish an abuse of the right to terminate. Such an assessment requires consideration of the parties' conduct throughout the contractual relationship, their communications prior to termination, the manner in which the contract was terminated and the effects of termination on the other party.
Accordingly, the mere fact that the right to terminate is expressly provided for in the contract does not mean that such right may, in all circumstances, be exercised without giving rise to legal liability.
D) Conclusion
Termination of long-term commercial contracts for just cause constitutes an important legal mechanism enabling the parties to bring a continuing contractual relationship to an end. Nevertheless, the existence of just cause and the conditions governing the exercise of the right to terminate must be assessed in light of the nature of the contract, the provisions agreed upon by the parties and the particular circumstances of each case.
Although Turkish law does not provide an exhaustive definition of just cause applicable to all long-term commercial contracts, circumstances rendering the continuation of the contractual relationship intolerable for one of the parties may be regarded as constituting just cause. In this respect, material contractual breaches and a serious breakdown of the relationship of trust between the parties are particularly significant in assessing termination for just cause.
Furthermore, the express inclusion of a termination right in a contract does not mean that such right may be exercised without limitation. In accordance with Article 2 of the TCC and the case law of the Turkish Court of Cassation, the right to terminate must be exercised in compliance with the principle of good faith, and its abuse may give rise to liability for damages.
In conclusion, when assessing the termination of long-term commercial contracts, consideration must be given not only to whether the contractual termination requirements have been satisfied, but also to the legal nature of the grounds underlying the termination, the manner in which the right to terminate is exercised and the legal consequences of termination for the parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
