The Complex Commercial Litigation Law Review: Turkey

Overview

Turkey is a part of the civil law system and has the Turkish Code of Obligations and the Turkish Commercial Code as substantial laws regulating its civil law system. Besides these, rules for relations involving foreign elements are governed by the International Private and Civil Procedural Law. Regulations concerning contracts are held by the Turkish Code of Obligations and those rules are applicable for commercial contracts unless special provisions exist in the Turkish Commercial Code.

Civil law regulations in Turkey date back approximately 170 years. Under the law revolution that happened just after the establishment of the Republic of Turkey, the Turkish Code of Obligations inspired by the Swiss Code of Obligations and the Turkish Commercial Code inspired by the German Commercial Code were adopted in 1926. At the beginning of the 21st century, these codes were modernised. Accordingly, the Turkish Code of Obligations No. 6,098 (CO) and the Turkish Commercial Code No. 6,102 (CC) entered into force on 11 January 2011 and 13 January 2011, respectively.

Under the state jurisdiction system in Turkey, commercial dispute resolutions are conducted by commercial courts that are specialised in that regard. Where subject matter is over 500,000 lira, these courts adjudicate as a collective formed with three judges; and in disputes with a subject matter below 500,000 lira they adjudicate with one judge. From 2016, the Turkish civil litigation system has operated with three levels of judicial scrutiny comprising first instance courts (commercial courts in cases issuing commerce), regional Courts of Appeal and the Court of Cassation. Besides the above, Turkey supports alternative dispute resolution systems (arbitration and mediation) for the quick and efficient resolution of commercial disputes.

Contract formation

i Freedom of contract

'Freedom of contract' is a fundamental principle of the Turkish contract law and guaranteed by the Constitution. According to this principle, parties can dictate the content of the contract as they wish unless an exception exists.2

Freedom of contract also includes the freedom for deciding the type of contract. The sales contract, tenancy agreement, donation agreement, contract of work, general service agreement, loan agreement, publishing contracts, and power of attorney agreement listed as a type of contracts in the CO. Nonetheless, parties are not obliged with the types of contracts listed in the CO: they could make a contract in different forms at their will due to the existence of freedom of contract.

ii Necessary elements for the establishment of the contract

Parties shall agree on essential components of the contract per Turkish Law. Essential components of a contract are divided into two subcategories as 'objective essential components' and 'subjective essential components'. Objective essential components are components defined in the legal definition of the contract and constitute the minimum conditions for the contract (e.g., price in the sales contract). Subjective essential components are components that became an essential component through the common will of the parties, or one party's will and other's approval (place and date of performance).

Statements required for the establishment of the contract are offer and acceptance. The offer is an appeal for making a contract including all essential components of the contract and directed towards the other party or everyone.3 The person proposing may restrict the bindingness of the offer for time. If an offer is made without limitation of time; there will be two possibilities. If there is a face to face situation between parties, the offer will not be binding unless the counterparty accepts it immediately.4 If a face to face situation does not exist between parties, the offer will bind the proposer for a reasonable time.5 The contract will be established with the acceptance of the offered. Silence is not regarded as a declaration of will as a rule; hence, the person remaining silent against the offer is not considered as accepting it.

If the offer for making a contract does not include the essential components or will of binding, it will be called as 'invitation for offer'. In an invitation to an offer, one party calling the other party for making negotiations and contracts.

In Turkish law, the validity of contracts is not subject to any form unless the opposite is indicated by the law. Nonetheless, lawmakers required a form for making a contract as an exception. Assignment of claim, surety, and real estate sales contract can be provided as instances for this exception. If a contract is not made according to form ordained by law, it will be invalid.

Contract interpretation

In Turkish Law, international private and procedural law regulate which international transactions will be subject to which law. The lawmaker accepts the principle of freedom of contract in that regard. As a consequence of this principle, parties can decide the applicable law for the contract. Parties can decide the applicable law for a part or the whole of the contract.6 The choice of applicable law after the contract can be retrospectively applied without prejudice to third-party rights. If parties do not choose the applicable law, the most related law will be applied to the contract.

While interpreting a contract in Turkish law, the expressions (words) in the contract by the parties are initially taken as a basis. However, such expressions and words are considered as a whole in the contract, not on their own. The meaning obtained from that interpretation will be checked as if it fits the conditions existing in negotiations. Correspondence between parties during negations might have a pivotal role in that regard.

Dispute resolution

i State jurisdiction

In Turkish Law, Civil Procedure Code No. 6,100 (CPC) regulates the procedural rules that shall be applied in private law disputes. With that code, several specialist courts have been established, and commercial disputes will be resolved at commercial courts as a rule.

In civil litigation, two different trial procedures exist: simple trial procedure and written trial procedure. These two trial procedures are quite similar, yet a simple trial procedure can be considered as a simpler and quicker version of the written trial procedure. In commercial courts, a written trial procedure is enforced in cases that are worth 500 lira and above, and a simple trial procedure is enforced in cases that are worth below 500 lira.

The first instance is comprised of five stages in Turkish Law. These are pleadings, pre-trial examination, trial, verbal argument, and decision. At the stage of pleadings, each party has the right to submit two pleadings, in those pleadings parties can argue their claims.7 In the pre-trial examination, the court examines and eliminates deficiencies about the procedural process, and decides contentious issues between parties, and invites them to mediation. At the stage of the trial, the evidence submitted by parties in hearings is evaluated. After such an evaluation court proceeds with oral argument and asks the parties for their last sentences about the lawsuit and decides. Parties can apply regional court of appeal against first instance courts decisions, and they can apply to the Court of Cassation against the decision of the regional court of appeal.8

Parties can decide several matters through contracts in commercial disputes. For instance, merchants can decide which commercial court will be authorised in the event of dispute through jurisdiction agreement.9 Besides, parties can make an evidence agreement and determine what kind of evidence can be used in case of disputes. For example, parties may execute an arbitrator–expert contract.

In the 21st century, studies for integrating the judicial system into technology has begun. UYAP (National Judiciary Information System) entered into service in 2005 as an instance of those integration activities. Thus, a case can easily be brought and all documents can be electronically submitted from beginning to end. Secondly, in civil litigation courts may allow one party upon the requests of one of the parties to join trial remotely by transferring their voice and display.10

Publicity is regarded as the main principle in civil jurisdiction. Accordingly, trials and declaration of the decision shall be made public as a rule.11 Nevertheless, courts might decide for totally or partially private trials upon request or ex officio in cases where public morality, public security or benefits that should be protected are required.12 The exception of benefits to be protected paves the way for private sessions in cases where business secrets might be revealed.

ii Costs

In the Turkish judiciary system, legal representation is not compulsory. Therefore, a person wanting to commence a lawsuit shall only pay judicial costs in the civil jurisdiction system.

The first litigation cost in the civil jurisdiction system is a fee. There are two different fees, such as application fee and advance fee. The application fee is fixed (54 lira for 2020). The fee for the verdict is 0.6831 per cent of the amount of the case (for instance, 683 lira for a case that worth 10,000 lira). A quarter of the verdict fee will be paid in advance while pressing charges and the remaining amount will be made within two months of declaring the decision.

The second litigation cost is advance for expenses. To accelerate the trial procedure, the costs of transactions are paid in advance. The amount of advance for expenses might shift according to the number of parties and evidence, and it costs 1,000 to 2,000 lira on average. All judicial costs are incurred by the party that lost the case. In light of the information above, it can be said that the judicial process is not expensive in Turkey.

iii Mediation

From the start of 2000, Turkey has shown its will to improve and generalise mediation and arbitration which are alternative dispute resolution methods. In this context, the main purpose is the provide integration of the alternative dispute resolution methods into the judicial system.

Mediation in civil litigation is regulated in the Code of Mediation in Law Disputes No. 6,325, dated 7 June 2012. In Turkish law, mediation can be used in all disputes of which the parties can freely dispose. The parties may apply for mediation before the case, or they can decide to apply for mediation at every stage of the case.

Turkish law has made it mandatory to apply for mediation in some disputes before commencing a case to fully integrate mediation into the judiciary. Accordingly, it is mandatory to apply for mediation before commencing a lawsuit in disputes between the employee and the employer, commercial disputes and consumer disputes. Under CC Article 5/A, in commercial lawsuits regarding claims and compensation claims, the subject of which is the payment of a certain amount of money, it is obligatory to apply to the mediator before filing a lawsuit.

In commercial disputes is mandatory to apply for mediation and attend the first session. After participating in the first session, the parties are completely free to decide whether to continue the mediation process. The first meeting is without charge for both parties. After that, each party willing to continue the mediation process will pay 330 lira for one hour of mediation.

Mediation has shown success in Turkey. That is, the agreement rate at the end of compulsory mediation in labour disputes is 65 per cent.13 The agreement rate is 57 per cent at the end of compulsory mediation in commercial disputes.14

iv Arbitration

Arbitration is divided into two as national arbitration and international arbitration in Turkish law. National arbitration is regulated in the Code of Civil Procedure, and international arbitration is regulated in the International Arbitration Code. Both laws are inspired by the UNCITRAL Model Law. Therefore, the regulations on national arbitration and international arbitration are quite similar.

In Turkish Law, an arbitral award constitutes a res iudicata like a court decision and can, therefore, be enforced like a court decision. At the same time, the arbitral awards were not subject to legal remedies; an action for annulment can be filed against an arbitrator's decision solely on grounds enumerated in the law. Although public order is among these reasons, the Court of Cassation has an arbitration-friendly attitude by narrowly interpreting public order.

The Istanbul Arbitration Centre (ISTAC) was established on 1 January 2015 to improve arbitration in Turkey and to make Istanbul an arbitration centre. ISTAC is an important alternative especially in commercial disputes with its serial arbitration procedure, emergency arbitrator procedure and the med-arb procedure applied in disputes below 300,000 lira.

Turkey has also signed the New York Contract. Therefore, a foreign arbitrator decision can be enforced per New York Contract.

Breach of contract claims

Not performing obligations arising from the contract is regulated in Article 112 and the rest in the CO. Accordingly, impossibility, default, failure to perform the debt properly and excessive performance difficulties can be evaluated within this framework.

i Impossibility

Impossibility is the failure of a contractual debt to be fulfilled for an objective or subjective reason. Subjective or objective impossibility doesn't matter in terms of the legal consequences of it.15

In case of impossibility, the debtor is obliged to compensate for the creditor's resulting damage, unless he proves that no fault can be imposed on him.16 Therefore, the debtor must fault concerning the impossibility to be responsible Nonetheless, the presumption of fault is accepted for the debtor, therefore, the obligor must prove that no fault can be laid on him/her.

ii Delay in performance (default)

The default of the obligor is the failure of the debtor to fulfil a debt on time. For debtor's default, the debt shall be payable, and the time of payment shall be due. The creditor must also notify the debtor for the debtor's default, in principle. No form of the rule is required for the validation of notification as a rule. However, notices to be made between merchants are made through a notary public or via email system using an electronic signature. If the parties have agreed on the date on which the debt will be paid, there is no need to notify the debtor.

iii Defective performance

Defective performance refers to the failure of the debtor to fulfil his or her debt properly. In Turkish law, no performance includes all breaches of the contract excluding default and impossibility. For example, selling damaged goods is one of the good examples of no performance.

Defences to enforcement

i The invalidity of the contract

Per the principle of freedom of contract, the parties can freely determine the content of a contract within the limits prescribed by law. However, agreements that are against the mandatory provisions of the law, morality, public order, personal rights, or contracts with impossible subjects are void.17 The invalidity of some of the provisions in the contract does not affect the validity of the others. However, if it is clearly understood that the contract will not be made without these provisions, the entire contract will be invalid.18

ii Non-liability agreements

The prior agreement that the debtor will not be liable for gross fault is invalid according to the Article 115/1 of the CO. This clause prohibits agreements concluded before the liability arises. Therefore, the parties may decide that the debtor will not be liable due to the serious fault of the debtor after the liability arises. The parties can also agree in advance that the debtor will not be liable for minor defects.

iii Statute of limitations

Statute of limitations refers to the obligor having the right to refrain from performing his or her debt after a certain period has passed. Accordingly, when the statute of limitations expires, the debt does not expire, only the debtor gets the right to refrain from performing the debt.19 The statute of limitations is for the right for claims; real rights do not expire.

The statute of limitations is 10 years for all receivables unless another period is specified in the law.20 As a rule, the statute of limitations specified in the law cannot be changed by the parties. Even if the court understands this from the case file, it cannot automatically take into account that a claim has expired.21 This must be put forward by the debtor.

Fraud, misrepresentation and other claims

i Misconduct in negotiations

Establishing commercial contracts may require long negotiations between the parties. Parties that start negotiations to conclude a contract must behave mutually, with care and honesty with the trust they have engendered. If one of the parties has caused damage by acting contrary to this, the responsibility of culpa in contrahendo may arise.22

ii Defect in consent

While the contract is being made, some defects may occur during the formation or disclosure of the will of the person or persons making the contract. In Turkish law, these are generally referred to as 'defect in consent'.

The first type of defect in consent is an error. The party that made a fundamental error while establishing the contract will not be bound by the contract according to the CO Article 30. The following examples of fundamental error cases are prescribed in law:

  1. if the person has declared his or her will for a contract other than the one he or she wants to be established;
  2. if the person has declared his or her will for a subject other than what he or she wanted;
  3. if the person has explained his or her will to make a contract to someone other than the person he or she wanted to contract;
  4. when the person has declared his or her will for another person despite considering a person with certain qualifications while making the contract; and
  5. when the person has declared his or her will for a significantly greater deed than he or she wanted to undertake, or for a significantly lesser deed than he or she wanted.

Simple miscalculations do not affect the validity of the contract; the correction of these will be enough. Failure in motive is not considered as a fundamental error. If the failing person counts the motive of the error as the basis of the contract, it is deemed to be based on error if this failure is acceptable according to good faith in business relations. However, this situation must be known by the other party. In case of error, fraud, or threat, the party will not be bound by that contract. As a result of error, fraud, or threat, the contracting party must declare that it is not contractually bound within one year, starting from the moment the error or fraud is learned or the effect of the threat disappears. Otherwise, it will be bound by the contract.

The error cannot be claimed against good faith. For example, if the other party states that the contract is agreed to be established in the sense intended by the perpetrator, the contract is deemed to have been established in this sense.

Unlike the deficiency in consent, one of the parties acts to deceive the other. Fraud can be with a positive action or with a negative action (being quiet). A person's silence in a situation where he or she has the task of enlightening (informing) the other person is an example of fraud with a negative action.

Fraud by a third party, as a general rule, does not affect the validity of the contract. The deceived person is bound by the contract in such a situation. However, if the counterparty knows or shall know the third party's fraud at the time the contract is concluded, the deceived party may cancel the contract.

If one of the parties made a contract as a result of a threat of the other or a third party, it is not bound by the contract (TCO Article 37/1). If the person is justified in believing that there is a serious and imminent danger of damage to his or his relatives' rights or assets, intimidation will be deemed to have occurred.

iii Excessive fulfilment of debt difficulty

Per the principle of pacta sunt servanda in Turkish law, every debtor must perform the action stipulated in the contract, despite the difficulties and obstacles that arise after the contract is established. However, an extraordinary situation that was not foreseen and was not expected by the parties at the time of the conclusion of the contract may arise later, and this change may disrupt the balance in the contract unbearably against one party. In such a case, the obligor has the right to ask the judge to adapt the contract into the new conditions and to terminate the contract if this is not possible.23 For example, the covid-19 pandemic is a significant example.

Remedies

i Impossibility

If there is a fault of the obligor, in the emergence of the impossibility, the obligor will be responsible. The lawmaker has accepted a presumption of fault against the obligor, namely the obligor will be obliged to compensate the creditor's damage arising from it unless he or she proves that no fault can be imposed according to CO Article 112.

The loss for which the faulty obligor is liable is a 'positive loss'. The difference between the condition that the creditor would be in if the debt was properly executed and the condition of the creditor due to the realisation of the impossibility determines the scope of the positive loss. The penalty that the creditor had to pay to third parties, loss of profit, etc., is covered by the positive loss.

ii Delay in performance

If the debtor is at fault in default, he or she will be obliged to compensate for the damage incurred by the creditor.

In the event of default of the debtor in a contract that imposes a mutual debt, the creditor is given three optional powers. However, to use these optional rights, the creditor must first allow reasonable additional time to the debtor.24 At the end of this period, if the debtor does not repay its debt, the creditor can choose one of the following:

Fulfilment of debt and compensation of delay

In this sense, the creditor will be able to claim the damage that arises due to the late performance of the debt. This includes the expenses incurred by the creditor due to delay, the compensation that the creditor has to pay to others due to the delay, the loss suffered by the creditor due to the decrease in the value of the property during the delay and the profit that the creditor is deprived of due to the delay.25

In the case of money debt, the obligor in default has to pay default interest, even if it is not agreed in the contract. The delay interest rate in commercial affairs can be freely determined by the parties.26

Giving up performance and compensation for its positive damage

If the debtor goes into default in a contract that creates a mutual debt, the creditor will be able to waive the performance and claim compensation for the positive loss. The scope of the damage to be incurred by the debtor is the same as the loss mentioned in the case of impossibility.

Renounce the contract and compensation for negative damage

The third optional right owned by the creditor is to renounce the contract. The debt relationship is effectively eliminated retrospectively with the renouncement of the contract.27 In this case, the creditor may request compensation for the negative loss incurred due to the termination of the contract.

Negative loss is loss caused by reliance on the validity of the contract, In other words, the difference between the condition that the creditor would be in if the contract was never made and the current situation determines the extent of the negative loss. For example, expenses incurred for the establishment of the contract and losses arising from the loss of the opportunity to contract with others due to reliance on the contract are among the elements of the negative loss.28

iii Failure to repay the debt in time

Failure to repay the debt properly is specifically regulated in the law in terms of some contracts. For example, detailed regulations are included in CO Article 219 et seq. for sales contracts, CO Article 417 et seq. for the contract of work and CO Article 301 for loan agreements. Other than that, CO Article 112 will be in effect '[w]here the obligation has not been performed at all or required, the obligor shall compensate the damage or loss of the creditor unless the obligor proves that he was not at fault'.

iv Defect in consent

If the party that made a fundamental error is in fault, he or she is obliged to eliminate the damage (negative loss) arising from the invalidity of the contract. However, compensation cannot be sought if the other party knows or needs to know fault.

The party that cancels the contract due to fraud or threat may demand compensation for the negative loss from the person cheating Even if the person who is cheated or threatened chooses to be bound by the contract, he or she does not lose his right to demand compensation for his negative loss.

v Penal clause

The parties may decide that a penalty will be paid in the contract between them if the contract is not performed at all or in the permitted time. Especially in commercial contracts, penal clauses are frequently used. In this case, unless otherwise is specified, the creditor may request the fulfilment of the debt or penalty.29 If the penalty is decided for the non-execution of the debt at the specified time or place, the creditor may request the execution of the penalty together with the original debt.30

For the penalty determined in the contract to be demanded, it is necessary and sufficient that the debt not be performed at all or as required. Unless the parties agree otherwise, the obligor must fault not performing the debt at all or properly. Also, the creditor does not need to suffer a loss.

The parties can freely decide on the amount of the penal clause. The penal clause does not depend on the amount of the loss.31 If the parties determine the penal clause lower than the damage, the creditor can demand the damage exceeding the penalty clause, given that the obligor is faulty.32

If the amount of the penal clause is determined excessively, a judge is authorised to reduce it. The merchant does not have the authority to demand a reduction from the court by claiming that the penal clause is excessive, because in commercial law, it is essential for the trader to be prudent. However, in the doctrine and the Court of Cassation judgments, it is accepted that if the penal clause is so high as to cause the economic ruin of the merchant, parties may require a reduction from the judge.33

Conclusions

Turkey is a representative of the civil law system concerning private law and has a very liberal view shaped around freedom of contract in that context. Turkish contract law contains robust solutions for the conclusion of a contract, its invalidity or the consequences of the contractual debts not being fulfilled at all or improperly, and to compensate for the damage that the parties may incur. Likewise, Turkish doctrine and judicial decisions on this issue are very rounded.

The resolution of commercial disputes is carried out entirely by specialised commercial courts. At this point, it should also be noted that the Turkish civil litigation also has a liberal perspective; it is based on fundamental principles that guarantee the independent functioning of the judiciary. This point of view is reinforced by the idea of full integration of mediation and arbitration especially into commercial dispute resolutions so that parties can resolve disputes between them in a very wide area.

Footnotes

Footnotes

1 Mert Namli is an associate professor at Istanbul University's Faculty of Law.

2 Contracts that are contrary to the mandatory provisions of the law, morality, public order, personal rights, or whose subject is impossible are void. The invalidity of some of the provisions in the contract does not affect the validity of the others. However, if it is clearly understood that the contract will not be made without these provisions, the entire contract will be invalid.

3 M. Kemal Oguzman/M. Turgut Öz, Borçlar Hukuku Genel Hükümler, 12th Edition, 51.

4 Article 4 Paragraph 1 of the CO.

5 Article 5 Paragraph 1 of the CO.

6 Article 24 Paragraph 1 of International Private and Procedural Law.

7 In the simple judgment, each party has the right to give one pleading.

8 A value limit has been accepted for appeal and appeal in cases related to assets. The limit of appeal for 2020 is 5,390 lira. The decisions below this cannot be appealed. The appeal limit for 2020 is 72,070 lira. There is no appeal against decisions below this amount.

9 Article 17 of the CPC.

10 Article 149 Paragraph 1 of the CPC.

11 Article 28 Paragraph 1 of the CPC.

12 Article 28 Paragraph 1 of the CPC.

15 Oguzman/Öz, 568; Rona Serozan, Ifa Engelleri, 5th Edition, § 14 n 5.

16 Article 112 of the CO.

17 Article 27 Paragraph 1 of the CO.

18 Article 27 Paragraph 2 of the CO.

19 Cour of Cassation, 3rd Chamber, 4074/7712, 05 July 2018 (Official Journal, 11 September 2018).

20 The 10-year time limitation period is mainly valid for the receivables arising from the contracts. There are special regulations for receivables arising from tortious acts and unjust enrichment. Claims for compensation due to wrongful act expire two years from the date the injured person learns about the damage and the liability of compensation, and in any case, ten years from the date of the act. The right to claim arising from unjust enrichment expires from the date on which the right owner learns that he has the right to reclaim it for two years and in any case ten years from the date of enrichment.

21 Article 161 of the CO.

22 Haluk Nami Nomer, Borçlar Hukuku Genel Hükümler, 17th Edition, 203.

23 Article 138 of the CO.

24 The granting of this period is required for termination of the contract and compensation of the positive damage, withdrawal from the contract, and compensation of the negative damage. It is not necessary to give such a period for performance and delay compensation.

25 Oguzman/Öz, 449; Tekinay/Akman/Burcuoglu/Altop, 962.

26 Article 8 Paragraph 1 of the CC.

27 Oguzman/Öz, 660.

28 Nomer, 201; Court of Cassation, 15th Chamber, 2015/5697, 2 February 2017 (http://www.yargitay.gov.tr).

29 Article 179 Paragraph 1 of the CO.

30 Article 179 Paragraph 2 of the CO.

31 Article 182 Paragraph 1 of the CO.

32 See also: Irem Yayvak Namli, Penal Clause in Labor Law, 149.

33 Cour of Cassation, 19th Chamber, 4335/157027 13 December 2016. Oguzman / Öz, 555; Tekinay/Akman/Burcuoglu/Altop, 357; Yayvak Namli, 180-182.

Get unlimited access to all The Law Reviews content