Turkey: Court Of Cassation Decisions Regarding The Scope Of The Application Of Article 138 Of The Turkish Code Of Obligations Of Indebtedness In Foreign Currencies

Introduction

Turkish Code of Obligations No. 6098 ("TCO") that entered into force on 01.07.2012 has a provision entitled "hardship," which was not found in the former Code of Obligations No. 818. It can be deduced from the limited number of Court of Cassation decisions that such provision has a rather controversial implementation. Such implementation shall be briefly evaluated, below.

TCO Art. 138 with regard to Foreign Currency Debts

As per the first paragraph of Art. 138 of the TCO, if an unexpected event occurs that was unforeseen and not expected to be foreseen during the execution of the agreement, due to reasons that are not caused by the obligor, the performance becomes excessively burdensome for the obligor because of such unexpected event in light of the principle of good faith, and the obligor performs his obligation by reserving the right of hardship, or has not yet performed his obligation, the obligor may request that the agreement be adapted in accordance with the circumstances, as changed, or may revoke the agreement, if adaptation is not possible.

The second paragraph of the aforementioned Article explicitly allows for such provision to be applied to foreign currency debts.

The Reason Underlying the Issue in Implementing TCO Art. 138 Regarding Foreign Currency Debts

TCO Art. 138/f.2 explicitly enables the hardship provision to be applied to foreign currency debts, as well. The underlying causes of controversial decisions regarding foreign currency debts, in spite of the existence of such explicit provision, are the other implementation conditions of the provision.

Indeed, in spite of the fact that this Article does not include detailed explanations on implementation conditions1, in order to claim adaptation or revocation of the agreement as per Art. 138 of the TCO, the basis of the agreement shall be changed and the performance shall become excessively burdensome for one of the parties because of such change; additionally, these changes shall be "unforeseeable." At this point, the critical question is: Do the sudden changes in foreign exchange rates in foreign currency debts require adaptation as per Art. 138 of the TCO or not?

Diversity in Court of Cassation Decisions

There are two dissenting opinions regarding the abovementioned question. According to the first opinion, if the increase in the foreign exchange rate is "unforeseeable," there shall be no reasons not to apply Art. 138 of the TCO. However, according to the opposing view, by taking Turkey's economic conditions into consideration, it cannot be argued that the sudden and eminent increase in the foreign exchange rates is "unforeseeable." Pursuant to such view, the obligor of foreign currency is considered as he also undertakes the risk of change in the foreign exchange rates.

Decisions that are in accord with both of the aforementioned opinions can be observed in the latter decisions of the Court of Cassation that are rendered as of the entry into force of Law No. 6098.

For instance, in accordance with the decision (11149/26086) of the 13th Civil Chamber of the Court of Cassation, dated 28.10.2013: "The lawsuit is about a claim of adaptation to a Japanese Yen indexed mortgage loan which is being used by the claimant, due to the changes that have occurred in the foreign exchange rates. It is understood that the claimant initially had the opportunity to freely choose the type of the loan and, accordingly, chose the type of loan by electing to become indebted by an allowed foreign currency, and signed a long term agreement; the assertion that the respondent bank is manipulating the claimant has not been proven. On the other hand, the lawsuit is filed 3 years and 7 months later than the initiation of the loan repayment; and given that the obligor has not lapsed into default in terms of installments, it should be accepted that the claimant has acknowledged the agreement."

According to the decision (1042/31247) by the same chamber, dated 12.12.2013: "In the lawsuit concerning the adaptation claim, despite the fact that the claimant had the opportunity to foresee the risk beforehand, he made use of the loan. Moreover, the lawsuit in question is filed three years later than the initiation of the loan repayment; hence, it should be accepted that the claimant has acknowledged the agreement. Taking everything into consideration, it is understood that the requirements of adaptation are not fulfilled in the case at hand. By considering these mentioned facts, the Court shall refuse to hear the lawsuit in its entirety."

However, the same chamber of the Court of Cassation came to different conclusions in its other decisions. For instance, a decision (16898/18895) dated 13.06.2014 explicitly found as follows: "The claimant initially requested the determination of the validity of the agreement and, if so, the adaptation of the conditions of the agreement by alleging that he used a Swiss Franc (CHF) indexed mortgage finance loan, an extreme difference in the foreign exchange rate has occurred between the date of usage of the loan and the current date, and therefore, the payment of the installments has become extremely burdensome for him. Due to the fact that the Turkish Code of Obligations No. 6098 is in force as of the date of the lawsuit, adaptation may be claimed. The Court has emphasized that the possibility of devaluation of Turkish Lira in foreign currency debts can easily be foreseen. However, the Court has not explained the objective criteria in drawing such conclusion, and solely evaluated the latest economic depressions. The judge is obliged to intervene and adapt the agreement in the case of an extreme and unforeseeable change in the agreement conditions."

Conclusion

In the Court of Cassation decisions, the issue is whether the implementation of Art. 138 of the TCO is necessary, and in the cases where foreign exchange rates change, this remains unresolved. In our opinion, rather than our assumption be grounded on the predictability of changes in foreign exchange rates, conclusions reached for each period, and even each case, will stand to reason.

Footnote

1. Please see the Newsletter article of August, 2013, http://www.erdem-erdem.av.tr/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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