Turkey: Strict Conditions Regarding the Use of the 'Organic Link Theory' Reiterated by the Court of Appeals: Extending Liability to Affiliates

"Organic link theory" applies to legal entities and is relied upon by such entities to extend the liability of one legal entity to another when there is an "organic link" between the two that could render both entities as one in terms of exposure to legal liability. Organic link theory has no positive stipulation or declaration under existing Turkish legislation; however, the courts have adopted and applied this theory in their decisions. Resorting to organic link theory has turned into a favored go-to move for extending or spreading liability to more convenient targets in Turkish litigation practice in recent years. For instance, this is a preferred move that is frequently observed in cases that concern foreign companies that have subsidiaries in Turkey, both of which are separate legal entities.

In such cases, the claimants direct their claims to the Turkish subsidiaries of foreign companies, despite the fact that the goods or services subject to their claims were provided to them directly by independent and completely separate foreign companies, or vice versa. This method is often utilized simply because of logistical/administrative expediency or opportunism; for instance, Turkish subsidiaries of foreign companies are usually easier to target, both in terms of the service of official papers and the enforcement of court decisions. In the reverse scenario, claims may be directed against foreign companies, even though it is actually the Turkish subsidiary that is the liable/responsible party for the goods or services that are subject to the claims. Once again, this "defendant shopping" technique might be used simply because suing the foreign entity could be more convenient and advantageous in terms of the enforceability of any final judgments (i.e., collectability of any compensation) due to the superior financial health or resources of the foreign entity. In both instances, the claimants rely on the organic link theory and argue that there is an organic link between the foreign company and its Turkish subsidiary, as a result of which both entities must be deemed a single entity and be held legally liable. The Court of Appeals has handled disputes related to the applicability of the organic link theory in numerous cases.

The 15th Civil Chamber of the Court of Appeals^[1] has acknowledged that there must be some sort of close relationship between two separate legal entities, such as an economic or commercial dependence of one on the other, or sharing a common fate, or acting together, for the organic link theory to be applicable. For instance, although it does not provide sufficient proof of an organic link on its own, the fact that two separate companies have the same shareholders could be an indication of an organic link. The General Civil Assembly of the Court of Appeals^[2] has ruled that mere similarities between the companies or merely sharing a location or operating at the same address do not provide conclusive proof of an organic link. In another case, however, it was ruled^[3] that the fact that two separate companies belonged to the same company group that was managed by a holding company may be considered as evidence of the existence of an organic link between these two companies.

That being said, the precedents clearly illustrate that the organic link theory is based on the prohibition of the abuse of rights and the principle of good faith, which translates to the abuse of the legal protections that separate corporate identities provide in such cases. For instance, in various cases, the Court of Appeals^[4] had sought evidence of an intention on the defendant's part to harm the claimant, before agreeing to apply the organic link theory or acknowledging that the legal entity that is not a part of the commercial relationship that is subject to the dispute could also be held legally liable for claims borne of that relationship. Such an intention can manifest itself in, for example, the total transfer of assets to another company, in order to turn the liable company into a hollow shell and make it virtually impossible for the creditor (i.e., claimant) to collect any judgments from that company. Thus, the Court of Appeals requires very strict conditions for the application of the organic link theory and does not allow this concept to be put forward so easily, whenever a claimant wishes to drag yet a third party into a dispute, often merely because it may be more convenient or advantageous for the claimant.

In a recent case, the Court of Appeals reiterated that the organic link theory can only be applied under very strict conditions, which is significant due to the precise wording used in the verdict with respect to this issue. In this case, the plaintiff, a company established in Turkey, brought a lawsuit against the Turkish subsidiary of a multinational company ("TS") and the multinational company ("MNC") itself due to unfair competition claims, and requested monetary compensation from the defendants. Although the commercial relationship was established solely between the plaintiff and the TS, the plaintiff tried to drag the MNC into the litigation by claiming that there was an organic link between these two companies, and that the MNC must therefore be held liable for the anti-competitive acts of the TS. The MNC argued that the case should be dismissed due to lack of standing, as there was no direct or indirect legal relationship between the plaintiff and the MNC. The local court ruled^[5] that the legal relationship existed only between the plaintiff and the TS; therefore, it was not possible to hold the MNC responsible by relying on the organic link theory.

The court's reasoning underlying this decision was that there was no evidence proving that the MNC had acted contrary to the principle of good faith by hiding its assets or resorting to similar evasive actions. The plaintiff appealed the decision, but the 11th Civil Chamber of the Court of Appeals upheld^[6] the lower court's decision. Thus, by this decision, it has been conclusively established, by virtue of the clear and unambiguous language of the court in its reasoning for relieving the MSN of legal liability, that proof of an intention to harm the claimant's chances of collecting a judgment or executing its rights is a prerequisite for the application of the organic link theory.

This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in March 2018. A link to the full Legal Insight Quarterly may be found here.

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