Turkey: A Litigation Overview

The Problem of Unpaid Debt and Default Interest in a Hyperinflationary Climate

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 prove that inflation has eroded the value of their receivables? That is a point of disagreement between 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 may 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 have lost in the interim. Secondly, 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 not being allowed to collect 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 them 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 a 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 is dependent 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 a high interest rate, or having had to buy foreign currency at an unfavourable exchange rate, to cover debts that would otherwise have been repaid with the funds received from the debtor.

Prior to the decisions of the Sixth Civil Chamber of the Court of Cassation in 2025, this was still the test that was preferred by the General Assembly of Civil Chambers of the Court of Cassation. Until then, the General Assembly had explained that the legislature enacted the concept of default interest specifically to address the problem of loss of value due to inflation, and therefore attempts to supplement default interest on the basis of generally prevailing economic circumstances, rather than specifically identified losses, were regarded as impermissible attempts to circumvent the will of the legislature. The General Assembly reasoned that courts may not rely on the very same considerations that led the legislature to adopt a particular rate of default interest to land on a different rate, and concluded that any deviation from the solution adopted by the legislature had to depend on the particularised circumstances of individual litigants.

Recently, however, the year 2025 witnessed developments that fundamentally shifted this rigid paradigm within Turkish judicial practice. The first major transition emerged when the Sixth Civil Chamber of the Court of Cassation introduced a binary distinction between “periods of high inflation” and “periods of normal inflation”. In several decisions issued last year, the Sixth Chamber ruled that the existence of damages should be presumed as part of the “natural course of life” during hyperinflationary periods, thereby relieving creditors of the burdensome requirement to present concrete documentation for all of their financial loss, specifically for excess damages. Under this so-called “abstract method” that has been applied during “periods of high inflation”, excess damages are no longer tied to concrete proof; instead, they are calculated by looking at the average performance of the USD, Euro, gold, interest rates, and even minimum wage increases, thereby providing a more holistic reflection of economic reality. The abstract method served as partial protection for creditors’ excess damages, compared to precedent court decisions. However, the Sixth Chamber still requires concrete evidence for damages incurred during “periods of normal inflation”.

Even as the Court of Cassation sought to ease the burden of proof, the Turkish Constitutional Court also intervened in July 2025 with a more far-reaching ruling. In a pilot judgment, the Constitutional Court ruled that the current statutory interest rates, together with the legal framework of excess damages under Article 122 of the Turkish Code of Obligations, are theoretically and practically incapable of protecting property rights during a hyperinflationary climate. The court stated that these mechanisms fail to provide an effective legal remedy, emphasising that this issue is not interpretative but structural. Consequently, the court ceased the examination of similar pending applications and formally notified the Grand National Assembly of Turkey of the urgent need for legislative intervention.

Taken together, the methods introduced by the Sixth Chamber serve as a temporary judicial bridge and signal a shift in Turkish practice regarding the compensation of excess damages; however, the issue should ultimately be resolved at its root by the Grand National Assembly of Turkey through legislation providing a definitive and comprehensive solution aimed at securing a fully equitable remedy for this critical gap in the law.