Chapter 3: Law of Contracts

Concept of Obligation and Contracts as a Source of Obligation

Law of obligations is the branch of civil law particularly concerned with the relations that create obligations. The main legal source of law of obligations is the Code of Obligations. The Code of Obligations is composed of two main parts. The first part is named as “General Provisions” and the second part is named as “Specific Types of Contracts”.

Concept of Obligation

Obligation is a legal tie between two persons, namely the creditor and the debtor, which binds one of them to do or to forbear from something in the benefit of the other. An obligation has three elements:

1. Creditor
2. Debtor
3. Consideration

Considerations can be classified as follows:

1. Positive consideration and negative consideration
2. Divisible consideration and indivisible consideration
3. Personal consideration and material consideration
4. Recurring consideration and non-recurring consideration

Sources of an Obligation

According to Turkish Code of Obligations there are three sources of obligations. These are:

1. Contracts
2. Torts
3. Unjust Enrichment

The first source of an obligation is named as the contracts in the Code of Obligations. But the Code actually means not only the contracts, but all legal transactions as the source of an obligation.

The second source of an obligation is torts. Every person has freedom of activity within the limits of law. Law restricts this freedom by the rights of the other persons. When a person acts beyond the restrictions of law, the acts become wrongful and such wrongful acts are named as “torts”.

Third source of an obligation is unjust enrichment. It is a gain acquired in an unjustifiable manner out of the property of another person.

Legal Transactions and Contracts as a Legal Transaction

A legal transaction can be defined as a declaration of intention to which the legal order binds legal effects. A legal transaction is directed to a specific legal result.

According to the classification made with regard to the intention declared there are three types of legal transactions:

1. Unilateral legal transactions: These legal transactions are formed by the assent of a single person.
2. Bilateral legal transactions: If at least two intentions are declared mutually, they are named as bilateral legal transactions.
3. Decisions (Multilateral legal transactions): In these legal transactions the assents of more than two persons are declared towards a common legal interest.

Conclusion (Formation) of a Contract

A contract is a bilateral legal transaction concluded by a mutual exchange of assent of two or more persons. Therefore, for the formation of a contract, there is a need of two mutually declared intentions.

Offer

An offer is a declaration of intention by one party, known as the offeror, whereby he/ she expresses his/her willingness to enter into a contract. Offer is the first intention that is declared and aimed to conclude a contract.

If a person declares an intention without having the purpose of being bound with it, or if the declaration does not include all the requisites, it is named as an “invitation to an offer”.

An offer, until it is terminated, gives the offeree a continuing power to create a contract by declaring an acceptance.

Where an offer is declared in the presence of the offeree and no time limit for acceptance is set, it is no longer binding on the offeror unless the offeree accepts this offer immediately. Offer declared by telephone, computer and such communication devices, on the condition that the parties may understand and respond simultaneously are considered to be made in the offeree’s presence.

As a rule, it is not possible for the offeror to withdraw his offer. If the offer is declared in the presence of the offeree, it is certain that the offeror shall not be able to withdraw his/her offer.

The offer is terminated if the offeree rejects the offer. In Turkish legal system, “keeping silent (silence)” means a rejection.

Acceptance

An acceptance is a declaration of intention to agree to the terms of the offer. Offeree is the party who declares the acceptance. An acceptance must exactly comply with the requirements of the offer.

A declaration of intention that requests a change or addition to the terms of the offer shall not be regarded as an acceptance, but a “counteroffer”.

Classification of Contracts

Contracts can be classified as unilateral contracts and bilateral contracts. In unilateral contracts, only one of the parties is under the burden of fulfilling a consideration while the other party does not owe any consideration.

Bilateral contracts are also classified into two groups: Equal bilateral contracts and unequal bilateral contracts. In equal bilateral contracts, there are mutual promises between the two parties and they involve an exchange of equivalent mutual obligations. In unequal bilateral contracts, the parties are both under an obligation, but their obligation is not mutual, and in other words one obligation is not exchanged for the other.

Form of a Contract

Form is the appearance of the intention declared through a certain medium. According to the principle of freedom of form, the parties are free to choose any type of form they want in concluding their contract. In that sense in terms of its appearance there are three types of form:

1. Oral form: This is the easiest type of form, and especially in the contracts that are daily concluded, parties mostly choose this form.
2. Written form: This type of form consists of two elements: the text part and the signature part. The text can be written by any kind of device. But the signature should be either handwritten or it should be signed by way of secured electronic signature.
3. Official form: The official persons who may give an official form are notaries, land registrars and peace court judges, though the latter does not serve this purpose any more, unless it is a necessity

“Form as means of proof" is prescribed by the Civil Procedural Code in order to prove an enacted contract. According to the Civil Procedural Code, legal transactions to establish, transfer, convert, renew, satisfy or release a right must be proved by a written document, namely a “deed”, if at the time of transaction, the value involved exceeds 2590 TL.

Contractual Freedom

Contractual freedom may be summarized as five different types of sub-freedoms:

1. Freedom to enter into a contract
2. Freedom to choose the other party of a contract
3. Freedom of form
4. Freedom to withdraw a contract
5. Freedom to choose the type and subject-matter of a contract

Within these five limits the parties have a freedom. If they do not act within these limits then the contract they have concluded shall be null and void.

Genuineness of Intention

A contract is formed by the declaration of intentions of the parties. The parties should first have an intention and then they have to declare this intention. The intention they really have should be the same with the one that is declared. This is named as the genuineness of intention.

Simulation

In simulations, the parties actually do not want to conclude a contract at all or a certain type of contract, but they seem as if they are concluding a contract and they declare an intention which is actually not their real intention.

In absolute simulation, parties of the contract give the appearance that they are entering into a contract although actually they are not. The parties actually do not want to conclude a contract, but they give the appearance that they are concluding a contract.

In relative simulation, parties want to enact a contract, but they do not want others to understand the type of their contract. Therefore they hide the contract they have actually concluded behind a fictitious contract.

Defective Intentions

Mistake is a state of mind which unintentionally conflicts with the declared assent. The Code of Obligations distinguishes material from immaterial mistakes. The legal result of mistake is that the contract concluded by mistake becomes a voidable contract. The mistaken party must notify the other party of the rescission of the contract or demand the return of the other party within one year running from the time he discovers the mistake. Otherwise the contract shall be deemed ratified.

Fraud is a false representation of fact with the intention of inducing the other party to conclude a contract. The defrauded party being deceived by the other party of the contract is induced to make a contract. Where a party has been induced to enter into a contract by the willful fraud of the other party, the defrauded party is not bound by the contract (Code of Obligations Art.36).

Where a contracting party was illegally induced to enter into a contract under effective duress by the other contracting party or by a third person, the party under duress is not bound by the contract.

Unconscionable Contracts

In an equal bilateral contract, the considerations of the parties are mutual, but these mutual considerations are not required to be equal in value. in the case of an evident disproportion in the relative considerations passing between the contracting parties due to one party taking advantage of the distress, the inexperience or the improvidence of the other party, the prejudiced party may within one year rescind the contract and demand restitution of the consideration already given.

Performance of Contracts

Performance is the fulfillment of the obligation. The main aim of all obligations is performance and normally an obligation is discharged by performance. The subject of the performance of the obligation is the exact execution of the consideration stipulated in the contract or by law with regard to the proper place, the proper time, the proper kind, the proper quality, and the proper value.

The parties are free to determine the place and time of performance.

Default

Default of the debtor is a form of failure of performance of an obligation where the performance is still actually possible. A debtor is in default when he delays the performance of an obligation which is already due.

It is also possible for the creditor to be in default as well. The creditor who has been offered a proper performance but refrains from accepting it or from carrying out preparations that has to be made to provide the debtor to perform his obligation, without a valid ground, is in default.

Discharge of Obligations

Discharge of an obligation means that this obligation shall no longer exist. If all the obligations resulting from a contract are discharged, then the obligative relation terminates. Apart from performance, there are some other ways to discharge an obligation regulated in the Code of Obligations.

1. Discharge (extinction) by Agreement (Release)
2. Novation
3. Merger
4. Impossibility
5. Set-off