TURKEY: An Introduction to Litigation
Justice delayed, it is said, is justice denied. That may or may not be true, but is it an obvious enough fact that courts may take judicial notice of it? Specifically, must plaintiffs specifically prove that inflation has eroded the value of their receivables? That is a point of disagreement between two of Turkey’s high courts, and their divergence of views highlights an unusual legal question created by Turkey’s recent inflationary woes.
Under the Turkish Code of Obligations, when plaintiffs sue to recover unpaid monies and win a judgment, they can be entitled to collect default interest accruing on the amount they are owed, at a rate set by statute or by the Central Bank, upon demand. There is no need for plaintiffs to prove that they have incurred damages or that the debtor was at fault – this type of interest simply follows as a natural consequence of a debt that has not been timely paid.
While the concept of default interest may have been intended to ensure that creditors recover the full value of their receivables, there are factors that complicate its operation in the real world. For starters, the statutory rate of default interest may sometimes lag behind the actual rate of inflation. When that happens, the default interest to be collected will, by definition, not be enough to offset the value that the unpaid receivables lose in the interim. Second, Turkish courts do not award compound interest, which means that creditors may collect interest only on the principal, and not on interest earned from previous periods. When the rate of inflation is high, interest amounts can quickly outgrow the principal, and the unavailability of collecting interest on those sums can seriously hinder creditors’ ability to recover full value. In an inflationary economy, in order to preserve value, one must periodically reinvest assets, and must not allow any part of it to remain idle.
Of course, all of this is not to say that under Turkish law a creditor is never in a position to make full recovery – the Code of Obligations plainly permits plaintiffs to allege, and collect, damages above and beyond the default interest. These are called “excess damages”, and they represent the difference between where the plaintiff’s finances would have been without the debtor’s default, and the way that things have actually turned out with the default. But excess damages constitute a different category of damages, and whether they can be recovered turns on slightly different elements than the actual claim.
And herein lies the wrinkle: precisely what elements plaintiffs must prove before they can collect excess damages depends on whom you ask. Historically, in order to make such a recovery, plaintiffs had to prove the extent of their damages above and beyond what default interest could compensate; that the debtor was at fault; and also that there was a causal link between the debtor’s default and their excess damages (in addition to the elements required for recovery of debts in the first place). Under this understanding, simply pointing out the fact that hard currencies or various other safe investment vehicles have gained more in value than the default interest rate was not enough to prove the plaintiff’s losses against inflation. Rather, courts demanded a particularised showing of loss, such as the creditor having had to borrow money at high interest, or having had to buy foreign currency at an unfavourable exchange rate, to cover other debts that would have otherwise been repaid with funds received from the debtor.
As it happens, this is still the test that is preferred by the General Assembly of Civil Chambers of the Court of Cassation. In recent decisions, the General Assembly has explained that the legislature enacted the concept of default interest specifically to combat the problem of loss of value against inflation, and therefore attempts at supplementing the default interest on the basis of generally prevailing economic circumstances, rather than specifically identified losses, are impermissible attempts at circumventing the will of the legislature. The General Assembly has reasoned that courts may not use the very same considerations that led the legislature to settle on a particular rate of default interest to land on a different rate, and concluded that any deviations from the solution adopted by the legislature must depend on the particularised circumstances of individual litigants.
But recently, certain chambers of the Court of Cassation have begun to soften their line, and recognise that in highly inflationary economies people tend to take whatever precautions may be necessary to preserve the value of their assets. From that, these chambers adopted the presumption that, in the natural course of events, where reasonably safe investment vehicles such as hard currencies or interest-bearing savings accounts earn more interest than the default interest rate, creditors would have sought safe harbour in one of those vehicles if their debtors had performed their obligations towards them on time. In other words, they began to forgo the requirement of a particularised showing of loss above and beyond the default interest rate, when any reasonable person would have sought shelter in an investment vehicle with better returns.
In recent years, this question has also come before the Constitutional Court. The issue arose in the context of a suit against a governmental agency, where the plaintiff was trying to collect payment for partial performance towards a government contract. The plaintiff filed suit, but the case took a torturous path up and down the court system and went through multiple rounds of appeals and reversals, and the plaintiff was not able to get a favourable judgment and execute on it until twelve years had passed since the filing of the initial complaint. According to the Constitutional Court, the cumulative rate of inflation during that period was a whopping 203,613%.
The plaintiff’s claims for excess damages were bifurcated along the way, and they were eventually rejected, along with an additional set of claims for excess damages, nine years later, in total twenty-one years after the initial case was filed. The rejection was based on the grounds that the plaintiff was unable to substantiate its particularised losses. Ironically, the reason why the plaintiff could not substantiate its losses was that the government records on which it sought to rely were so old that they had been sent away to recycling. As a result, despite an award of default interest, the recovery obtained by the plaintiff came out to less than one percent of the true value of his entitlement.
Under these circumstances, the Constitutional Court held that the courts’ insistence on particularised proof that the plaintiff had suffered losses in the face of inflation was a violation of the plaintiff’s constitutional right to quiet enjoyment of its property. The Court held that the negative consequences visited upon the plaintiff by the application of the rule outweighed the public interest in the predictability of having a set rate of default interest.
While this holding does not constitute binding precedent regarding whether loss of value against inflation must be established through particularised proof, it adds another significant data point in the analysis. Specifically, it establishes that where the recovery with default interest is dwarfed by the true loss of value, and where the debtor is a governmental entity, strict demand for particularised proof can constitute a constitutional violation.
It does not appear that Turkish jurisprudence regarding excess damages is likely to be resolved in the near future. Individual chambers of the Court of Cassation have not visibly adjusted their jurisprudence in the face of the Constitutional Court’s holding. But the Constitutional Court may be asked to further refine its gloss if and when it is presented with similar fact patterns in the future, adding yet more data points from which inferences may be drawn.