Paying the price in instalments by means of a promissory note is a widespread practice in individual purchases. Notes of this kind are used most often in the purchase of relatively high-value goods such as housing, cars, furniture and household appliances; for the seller, the note is a practical way of securing the debt owed. Once the debt secured by the note has been discharged, the document must be returned to the consumer; in practice, however, one frequently encounters cases in which notes whose value has been collected are not returned. In such a situation there are legal remedies available to the consumer.
Where a legal relationship is in the nature of a consumer transaction, Consumer Protection Act No. 6502 brings into play a series of protective provisions in the consumer’s favour. Similar protective mechanisms are also provided for in respect of the promissory notes signed by the consumer. In this briefing note, we address the recovery of consumer promissory notes whose value has been paid.
The Concept of a Consumer Transaction
In order to understand the legal regime governing consumer promissory notes, the boundaries of the consumer transaction must first be drawn.
Consumer Protection Act No. 6502 describes the consumer transaction in broad terms. Accordingly, every contract and legal transaction concluded with consumers by natural and legal persons acting for commercial or professional purposes in the goods or services markets — including public legal entities — or by those acting in their name or on their account, falls within this scope. Contracts for work, carriage, brokerage, insurance, agency and banking are also counted within the definition.
The test laid down by the definition is a single one: one of the parties to the transaction must hold the status of consumer. The consumer, in turn, is the individual user who acts solely in line with their consumption needs, without pursuing a commercial purpose.
What Is a Consumer Promissory Note?
In its broadest sense, a consumer promissory note means the notes signed by the consumer in respect of a debt arising from a consumer transaction.
As a rule, promissory notes are accepted as being independent of the reason for which they were issued; nonetheless, behind every note there lies an underlying relationship. The decisive point is this: if the person signing the note issued that document in consideration of a consumer transaction, a consumer promissory note is present.
For instance, the note signed for the instalments by a person who buys a household appliance for use in their home will be regarded as a consumer promissory note, since the transaction behind it is in the nature of a consumer transaction.
Characteristics a Consumer Promissory Note Must Bear
The general features of promissory notes and the elements they must necessarily contain are laid down in the Turkish Commercial Code No. 6102.
Consumer promissory notes likewise bear all of these general elements; the Consumer Protection Act, however, has introduced a number of additional requirements.
Foremost among these requirements is the form of issue. While promissory notes may in general be issued as registered, to order or to bearer instruments, consumer promissory notes may be issued only in registered form. This is the most important feature distinguishing the consumer promissory note from the others.
The second requirement concerns the instalments: the notes given in consideration of the goods purchased by the consumer must be issued separately for each instalment payment.
Under the Consumer Protection Act, notes that do not bear these two characteristics are deemed invalid as against the consumer.
For detailed information on the elements and mandatory particulars of promissory notes, our note entitled “Elements a Promissory Note Must Contain” may be consulted.
Transfer of Registered Notes and the Defences Available
What really distinguishes registered consumer promissory notes from other types of note is how the transfer is to be effected and which defences may be raised after the transfer.
If a note bears a statement that it is registered, that note thereafter takes on the character of a registered instrument. Notes of this kind change hands not by endorsement but by assignment of the claim.
Endorsement is a statement placed on the reverse of the note which manifests the intention to transfer the note and the right embodied in it. Assignment of the claim is likewise subject to a written form of transfer and is again effected by a statement placed on the reverse of the note.
The most conspicuous advantage afforded by registered form emerges in the field of defences. As a rule, promissory notes are transferred in abstraction from the underlying relationship; for that reason, the debtor under the note cannot raise defences and objections based on the underlying relationship against the person holding the document. In the case of registered notes, however, since the transfer is effected by assignment of the claim, the debtor may also raise against the new holder of the note all of the defences and objections arising from the underlying relationship.
Transfer of a Paid Note to a Third Party
As we noted above, consumer promissory notes must be issued in registered form. Where a registered note is transferred to a third party, the consumer as debtor may raise against the transferee as well the objections and defences arising from the underlying relationship.
Let us give this concrete form. The consumer gives the shop owner a registered promissory note for the instalments on a household appliance they have purchased. Once the debt secured by the note has been paid, the document must be returned to the consumer. Where the shop owner does not return the note but transfers it to someone else on account of their own debt, the consumer faces the danger of paying the same debt a second time.
It is here that the registered form of the note becomes decisive: the consumer can establish that they are not indebted by asserting against the new holder of the document that they paid its value to the shop owner. Had the note been issued in another form, they would not have been able to rely on that defence.
The same logic applies to allegations of defect. Where the goods received in consideration of the note turn out to be defective, the consumer may rely on that circumstance to refuse payment to the person who has taken transfer of the note.
Establishing Non-Indebtedness by a Negative Declaratory Action
The legislation regards the person holding the note as the rightholder, provided that the chain of endorsements is also lawful. For this reason, the original of a note whose value has been paid must without fail be recovered; otherwise the possibility arises of the same debt being paid twice.
The same principle applies to consumer promissory notes. A consumer who has discharged their debt must recover the note. If, despite payment, the original of the note is not handed over, a negative declaratory action must be brought against the person holding the document so that the court establishes that no debt is owed to them.
In its broadest formulation, a negative declaratory action is an action seeking a declaration that no debt is owed. In such an action the claimant demonstrates that they face an imminent threat of enforcement and seeks a declaration that they owe no debt to the respondent.
For details on this type of action, our note entitled “Negative Declaratory Action” may be consulted.
The method is the same for consumer promissory notes that are not returned although their value has been paid: the consumer may seek a declaration that they are not indebted by proving that they previously paid the value of the note.
On matters relating to the annulment of promissory notes, our note entitled “Action for Annulment of a Promissory Note” may be consulted.
The Court with Subject-Matter and Territorial Jurisdiction
In negative declaratory actions arising from a consumer promissory note whose value has been paid, the question of subject-matter jurisdiction has not been settled in the case law of the courts.
On one approach, since negotiable instruments are governed by the Turkish Commercial Code, such an action should be regarded as an absolute commercial action and heard before the commercial court. The opposing approach argues, on the basis that the transaction behind the note is a consumer transaction, that jurisdiction lies with the consumer court.
As regards territorial jurisdiction, the provisions of the Code of Civil Procedure No. 6100 apply. Accordingly, the court of the respondent’s place of residence has jurisdiction, as does the court of the place where enforcement proceedings have been commenced, if any.
Independent Legal Assessment
In disputes arising from consumer promissory notes, the real risk is that the document remains physically in the other party’s hands even though payment has been made. So long as the original of the note is not recovered, the consumer remains under a constant threat of enforcement proceedings brought by third parties. Although the requirement of registered form considerably mitigates this risk, the effectiveness of the defence depends on payment being capable of proof by documentary evidence.
The divergence in the case law on subject-matter jurisdiction must also be assessed carefully at the outset of the file; an action brought before the wrong court leads to a loss of time. In a given dispute, it would be appropriate to give priority to the following matters:
- Checking whether the note was issued in registered form and whether a separate note was given for each instalment
- Keeping payments in a state where they can be proved by bank records, receipts or similar documents
- Taking delivery of the original note once the debt has been discharged and, where this is not possible, recording the position in writing
- Raising in good time the defences based on the underlying relationship where the note has passed to a third party
- Devising the litigation strategy from the outset in light of the debate over subject-matter jurisdiction
- Setting out clearly the connection between the negative declaratory claim and the threat of enforcement where enforcement proceedings have been commenced
Independent Legal provides advisory services and conducts litigation across the whole process in disputes arising from consumer promissory notes, from the examination of the validity of the note through to the conduct of the negative declaratory action.