Turkey: The Unlikelihood Of A Subsequent Debt Repayment In Accordance With The Swiss Federal Court Decision Dated 21 July 2015

Introduction

Both in the Turkish Code of Obligations ("TCO") and the Swiss Code of Obligations ("SCO"), the notion of unlikely debt repayment is regulated under two different parts. According to Article 27 of the TCO (Article 20 of SCO), contracts with an impossible subject are null and void.

In the case of a subsequent unlikelihood of debt repayment, the consequences vary according to differing circumstances: if the debtor is not responsible for the occurrence of the unlikelihood for the debt to be made whole, the debt ends according to Article 136 of TCO (Article 119 of SCO). To the contrary, if the debtor is responsible for the occurrence of the unlikely repayment, the denouncement of the contract is controversial.

The Swiss Federal Court adopted a different view in its recent decision, which will be examined. Below, the doctrinal view on the subsequent unlikelihood of repayment for which the debtor is responsible will be addressed and, lastly, the new precedent of the Swiss Federal Court will be analyzed.

The View of Non-Termination of the Debt Even If the Debtor is Responsible for the Subsequent Unlikelihood of Repayment

According to widely accepted doctrinal views, if the debtor is not responsible for the unlikely repayment of the debt, the debt does not terminate, only the content of the debt changes, and the debt transforms into compensation liability according to the TCO, Article 112. In synallagmatic contracts, the liability of the creditor to fulfill his debt obligations continues.

If the debt does not end, all securities linked to this debt continue to exist, a lapse of time continues, and all defenses related to the debt at the beginning may be brought forward by the creditor in terms of a compensation claim.

The View of Terminating the Debt in Cases Where the Debtor is Responsible for the Subsequent Unlikelihood of the Debt Repayment

According to another view, termination of the debt by the subsequent repayment unlikelihood is not related to the fault of the debtor; even if the debtor is at fault, the debt ends - as if the non-repayment has occurred due no fault of his own (Article 136 of TCO) - and the compensation obligation is in line with Article 112 of TCO.

The View of the Federal Court in its Decision Dated 21 July 2015 and Numbered 4A_101/2015

The Swiss Federal Court embraced a different view compared to its previous view in its 21 July 2015, 4A_101/2015 numbered decision, which is a follow up to the first view. In this decision, it was ruled that if subsequent unlikelihood of debt repayment occurred due the fault of the debtor, the creditor may revoke the contract if the counter-performance obtained in part holds no significance for him.

Indeed, according to this view, which is accepted in the Swiss doctrine and, particularly, by SEROZAN in the Turkish doctrine1, even in the event of unlikelihood of debt repayment occurring due to the fault of the debtor, Articles 112 and 125 of the TCO (Articles 97,107,109 of SCO) shall be applied by analogy, and the creditor shall have the right to revoke the contract.

According to this view, it is unreasonable to prevent the creditor from requesting the restitution of the performance already executed in the event of non-repayment where the debtor is liable, as it is possible to request so when the debtor is not so liable. In parallel, as it is possible to revoke the contract where performance of the obligation is possible in in the event of default, the same right to revoke the contract shall exist in cases where it is impossible to perform the obligation.

If this view is accepted, in the event of the unlikelihood of repayment of a debt of a the debtor is responsible, the creditor will have a right of choice, the same as in the event of default of the debtor, and may claim either the compensation of the positive damage or the negative damage by revoking the contract. In the event that the amount of the negative damage is higher than the positive damage, revoking the contract is more beneficial for the creditor.

The Federal Court reasoned its stated decision as follows: in the event of subsequent unlikelihood of repayment of a debt of which a debtor is responsible, it is not right to place the creditor in a worse situation than that of the default of the debtor2. Especially, if part of the obligation that was performed, prior to the debt being unpaid, has no significance for the creditor any longer, and different from the default situation, the creditor may not terminate the contract3. In such a case, it would be convenient to grant a formative right to the creditor allowing ex tunc termination of the contract through application of Articles 107 II and 109 of the SCO (Articles 123 and 125 of TCO) by analogy. Accordingly, the court decided that such a right to revoke is necessary for the parties to escape their conventional obligations entirely, and revert to their conditions during the formation of contractual relationship. The debtor will be held liable for reimbursement of any negative damages4.

Conclusion

The highly supported decision of the Federal Court dated 21 July 2015 and numbered 4A_101/2015, in Switzerland, holds a minority view under Turkish Law. Yet, this decision of the Swiss Federal Court will heat up discussions on this issue in Turkey.

Footnotes

[1] Rona SEROZAN, Termination of the Contract (Sözleşmeden Dönme), İstanbul 2007, p. 265 ff.

[2] TF, 4A_101/2015, c. 4.5 (21.07.2015).

[3] TF, 4A_101/2015, c. 4.4 (21.07.2015).

[4] TF, 4A_101/2015, c. 4.4 (21.07.2015).

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