The failure to pay a debt when due does not, of itself, open a broad range of claims to the creditor. Default of the debtor, as defined in Article 117 of the Turkish Code of Obligations No. 6098, arises as a rule only upon notice by the creditor. Apart from the exceptions expressly set out in the following articles of the Act, the mere fact that the due date has passed is not regarded as sufficient.
Once default has been established, however, the way is open for the creditor. At this point the law does not impose a single solution; it lists the courses available to the creditor as alternatives. Which course is preferred is most often determined by the nature of the claim and by the economic consequence the delay produces for the creditor.
In this briefing note we address the conditions required for default to arise, the distinction between compensation for delay and default interest, the requirement that a period be granted before the alternative rights may be exercised, and the three-option structure set out in Art. 125 of the Turkish Code of Obligations No. 6098.
Turkish Code of Obligations No. 6098, Art. 117
“The debtor of a debt that has fallen due falls into default upon the notice of the creditor.
Where the day on which the debt is to be performed has been determined jointly, or has been determined by one of the parties by means of a duly made notification on the basis of a right reserved in the contract, the debtor falls into default upon the passing of that day; in tort, on the date on which the act was committed, and in unjust enrichment, on the date on which the enrichment occurred. However, in cases where the party unjustly enriched acts in good faith, a notification is required for default.”
Conditions of Default of the Debtor
The Debt Having Fallen Due
The first condition of default is that the debt should have fallen due; in other words, there can be no question of default in respect of a debt whose due date has not yet arrived. For this reason the provisions on default find application only in respect of debts not performed when due.
Notice
Alongside maturity, the law has added the creditor’s notice as a second condition. Any declaration made by the creditor from the moment they are able to exercise their right to claim, and which demands performance, is treated as notice. That declaration need not comply with any particular form.
The exception to the rule lies in cases where the day of performance has been agreed jointly by the parties. In such a case there is no need for a separate notice to place the debtor in default. What is decisive here is that the due date should be tied to a day the debtor can calculate without hesitation. Where, for example, the time of performance is fixed as “30 March 2020”, “the last day of March” or “the tenth day following the signing of the contract”, the date is capable of being known with certainty; if payment is not made on that date, the debtor falls into default automatically.
Performance of the Debt Being Possible
Default is particular to debts whose performance is still capable of being carried out. Where performance of the obligation is no longer possible — as in the example of a contract for the sale of a specific telephone in which that telephone is stolen — the provisions on impossibility, rather than those on default, apply to the case.
Fault of the Debtor
A frequently encountered misconception should be corrected at this point: fault on the part of the debtor is not required for default to arise. The debtor cannot escape the state of default by asserting that they are not at fault in failing to pay the debt when due. By contrast, in respect of a debtor who falls into default without fault, the obligation to pay compensation for delay ceases.
Rights of the Creditor in Default of the Debtor
Compensation for Delay
Where a debtor who has not performed their obligation in time falls into default, the creditor may claim not only performance of the obligation but also compensation for the loss arising from the late performance.
The scope of that loss cannot be determined in the abstract in advance; it is established by separate examination in each instance of default. The following items may be counted among those capable of falling within the scope:
- The profit the creditor was unable to obtain because the debt was performed late
- The damages the creditor has had to pay to third parties by reason of the delay
- The expenses the delay has imposed on the creditor
- The loss suffered by the creditor because the value of the goods did not fall during the period of default
The ability to claim compensation for delay depends on two matters: that the debtor is at fault in falling into default, and that the creditor has genuinely suffered a loss as a result of that delay. Proof of the absence of fault falls on the debtor; a debtor wishing to escape paying compensation for delay must establish that they are not at fault.
Default Interest
Where the subject matter is a monetary debt, the creditor may take the course of claiming default interest instead of compensation for delay. There are two differences between the two institutions that are decisive in practice:
- No fault is required. Unlike compensation for delay, default interest may be claimed without the debtor being at fault. A creditor who is unable to collect a claim that has fallen due may claim interest whatever the debtor’s fault in the default may be.
- No loss is required. The element of loss, which is a precondition of compensation for delay, does not operate in respect of default interest. The creditor may claim interest on the basis of default alone, without having to prove that they suffered any loss by reason of the delay.
Default interest runs, as a rule, from the day following the day on which the debtor fell into default and continues until the day on which the debt is performed.
That said, in monetary debts the creditor’s loss may exceed the default interest calculated. If the creditor proves that excess loss and the debtor is also at fault in falling into default, the difference may be claimed from the debtor. As will be seen, while proof of fault and loss is not required in respect of default interest, all the conditions particular to compensation for delay are once again required for the recovery of loss exceeding the interest. The application of interest to claims of a commercial nature is a subject that should be examined separately under the heading Interest in Commercial Matters.
Alternative Rights in Contracts Creating Reciprocal Obligations
Granting a Period for the Exercise of the Alternative Rights
In contracts imposing obligations on both parties, a series of alternative rights is granted to the creditor. These rights can, however, come into play only after a preliminary step. Article 123 of the Turkish Code of Obligations No. 6098 expressly requires the creditor to grant the debtor an appropriate period for performance, or to request the judge to fix such a period.
Article 124 of the Act introduces an exception to that requirement. Where one of the following situations has occurred, the alternative rights may be exercised without any need to grant the debtor a further period:
- That it is apparent from the contract that performance will no longer be accepted if it does not take place at a particular moment or within a particular period
- That it is clear, in view of the situation the debtor is in or the attitude they display, that granting a period would produce no result
- That performance has become useless to the creditor by reason of the default
The Alternative Rights of the Creditor
The claims the creditor may bring against a debtor in default are regulated as alternatives in Article 125 of the Turkish Code of Obligations No. 6098. The three paragraphs of the article provide for three separate courses producing results that differ from one another.
Performance in Kind and Compensation for Delay
The first paragraph of the article contains the following provision:
Turkish Code of Obligations No. 6098, Art. 125(1)
“Where the debtor in default has not performed the debt within the period granted, or where a situation not requiring the granting of a period is in question, the creditor is at all times entitled to demand performance of the debt and to claim damages by reason of the delay.”
Under this option the creditor does not give up demanding that the obligation forming the subject matter of the contract be performed; together with performance, they also claim compensation for delay from the debtor.
Damages in Lieu of Performance: Compensation for Positive Loss
The option regulated in the second paragraph reflects a different choice:
Turkish Code of Obligations No. 6098, Art. 125(2)
“The creditor may also, by immediately declaring that they waive performance of the debt and the right to claim damages for delay, demand compensation for the loss arising from the non-performance of the debt, or withdraw from the contract.”
The possibility granted to the creditor here is to waive performance of the obligation and claim compensation for their positive loss. This item, also referred to as expectation loss, is the loss arising from the debt not being performed at all or not being performed in the manner agreed in the contract.
Withdrawal from the Contract and Compensation for Negative Loss
The last option, contained in the third paragraph, is as follows:
Turkish Code of Obligations No. 6098, Art. 125(3)
“In the event of withdrawal from the contract, the parties are mutually released from the obligation to perform and may demand back the performances they have previously rendered. In this case, unless the debtor proves that they are not at fault in falling into default, the creditor may also demand compensation for the loss suffered by reason of the contract ceasing to have effect.”
A creditor who chooses this course withdraws from the contract and demands compensation for their negative loss, otherwise known as reliance loss. Negative loss is defined as the loss arising from the difference between the state of the creditor’s assets following the conclusion of the contract and the state they would have been in had the contract never been made.
Conclusion
How the choice is to be made depends on the creditor’s concrete expectation. If obtaining the performance still holds value for the creditor notwithstanding the delay, the first option, in which performance and compensation for delay are claimed together, is appropriate.
By contrast, where the delayed performance no longer holds any meaning, what is decisive is the complete and accurate calculation of both heads of loss. In files where the positive loss exceeds the negative loss, it is appropriate to use the option in the second paragraph of Art. 125 of the Turkish Code of Obligations No. 6098, referred to in short as damages in lieu of performance. Where the opposite holds — that is, where the negative loss is higher — exercising the right of withdrawal from the contract under the third paragraph may produce a more advantageous result for the creditor.
Viewed from the debtor’s side, proof of one of the situations of impossibility of performance regulated in Art. 136 et seq. of the Turkish Code of Obligations No. 6098 brings the debt to an end. In such a case the debtor’s liability remains limited to the loss arising from their failure to notify the impossibility immediately and to show the effort required to prevent the creditor’s loss from increasing.
Independent Legal Assessment
In default disputes the element that determines the outcome is most often not the substance of the claim but the correct structuring of the process. The date on which the notice was sent and its content, whether the additional period granted for performance is regarded as reasonable, and the moment at which the alternative right was declared all directly affect the fate of the file. In particular, a failure to declare the option in the second paragraph immediately, as the law requires, may leave the creditor in a legal position other than the one they had planned.
Nor should the comparative calculation of positive and negative loss be neglected before the choice is made; the difference between the two heads may significantly alter the amount that can be claimed in the same case. In a concrete file the following headings should be addressed first:
- Examining whether the due date has been agreed with sufficient clarity to render notice unnecessary
- Documenting the content of the notice and the date of its service in a manner suited to proof
- Assessing whether one of the exceptional situations rendering the granting of a period unnecessary is present
- Deciding whether, in monetary debts, loss exceeding the default interest is to be advanced separately
- Not declaring the choice of alternative right before the positive and negative loss have been calculated
Independent Legal provides advice throughout the entire process in default disputes arising from commercial and ordinary relationships, from the preparation of the notice through to the pursuit of damages and withdrawal claims by way of litigation.