Deposits (Kapora): Earnest Money (Pey Akçesi) – Forfeit Money (in Light of Court of Cassation Decisions)

Although kapora (deposit) is a widely used everyday expression, it is not a legal term and is not used in Turkish legislation. What is commonly known as kapora is regulated in two different ways in the Turkish Code of Obligations No. 6098 (TBK): as “Earnest Money (Pey Akçesi)” and as “Forfeit Money (Cayma Parası)”. While both institutions are accessory in nature (dependent on the validity of the underlying legal relationship), there are some important differences between them. For the legal dispute to be fully understood, it must be determined whether the money given as a deposit was given as earnest money or as forfeit money. In this article, these two institutions will be examined in light of Court of Cassation (Yargıtay) decisions.

1. What Is Earnest Money (Pey Akçesi)? Is a deposit given as earnest money returned if the contract is not performed?

Earnest money is the money that one party gives to the other when the contract is concluded, as evidence that the contract has been concluded. Another function of earnest money is partial performance. This is because the legislator has provided that the money initially given as earnest money is to be deducted from the principal debt (TBK Art. 177). The money that passes to one party when the contract is concluded also serves as security in the event that the other party fails to perform the contract. No form requirement is prescribed for the parties to agree on earnest money.

If the contract cannot be performed, a deposit given when the contract was concluded must, as a rule, be returned if it is in the nature of earnest money (pey akçesi).

“There is no contract between the parties bearing the plaintiff’s wet signature. It is understood that membership of the system was established digitally by depositing money into the account of a member of the defendant company’s business team. It is clear that the money deposited into the defendant’s account is, as a rule, earnest money, and that the defendant must prove that it was given as forfeit money. It has not been proven that the money paid by the plaintiff was clearly forfeit compensation. Since the contract has been terminated, the earnest money must be returned. The general commercial terms, which do not bear the plaintiff’s signature, do not bind the plaintiff. While the court should have decided to accept the action, rendering judgment in the manner written as a result of an erroneous assessment is contrary to procedure and law and requires reversal.” (Court of Cassation, 13th Civil Chamber, Docket No. 2016/23841, Decision No. 2019/6082, 13.5.2019)

“On the grounds that, according to the evidence gathered by the court, it was understood that the .... contract could not be concluded following the negotiations and correspondence between the parties, that the defendant suffered no loss of profit or damage because the contract could not be concluded, and that no fault could be attributed to the plaintiff or the defendant for the failure to conclude the contract, that sums given as a deposit, earnest money and the like must be returned unless it is stipulated that they constitute forfeit compensation, that it was understood that the money paid under the contract in dispute was paid as earnest money, and that the plaintiff may claim the return of the money, the action was partially accepted, and the judgment was appealed on points of law by the defendant’s counsel. CONCLUSION: In view of the documents in the file, the evidence on which the decision is based and the reasons requiring it, and since there is no error in the assessment of the evidence, it is decided that all of the objections on appeal of the defendant’s counsel, which are found to be without merit, be dismissed and that the judgment, found to be in accordance with procedure and law, be UPHELD…” (Court of Cassation, 19th Civil Chamber, Docket No. 2016/4403, Decision No. 2016/15392, 1.12.2016)

However, depending on whether or not the contract is valid and/or whether or not the party who received the earnest money has suffered damage, it may be possible for the earnest money (pey akçesi) to be retained, in part or in full, by the party who received the earnest money.

“The Regional Court of Appeal, stating that the money given by the plaintiff to the defendant was not the forfeit money set out in Article 178 of the TBK but the earnest money set out in Article 177, decided that this money must be returned. Although this part of the Regional Court of Appeal’s decision is correct, it is incomplete with regard to the case as a whole. This is because, under Article 236 of the TBK, a buyer who fails to perform its obligation is liable to compensate the damage the seller has suffered as a result. The defendant seller, for its part, argued in its defense that it had set off the earnest money it received against the damage it suffered. The Regional Court of Appeal’s disregard of this defense of the defendant and of Article 236 of the TBK was not correct, and the decision of the Regional Court of Appeal therefore had to be reversed. What the Regional Court of Appeal must do consists of collecting the defendant’s evidence concerning the damage it suffered under Article 236 of the TBK, setting off the defendant’s damage against the earnest money paid by the plaintiff and, if any amount remains, rendering a judgment ordering that this amount be returned to the plaintiff.” (Court of Cassation, 19th Civil Chamber, Docket No. 2017/4080, Decision No. 2018/4534, 26.9.2018)

“although the earnest money must be returned even where performance is not possible due to the fault of the party who gave the earnest money, in that case the party who received the earnest money has a right to compensation because the obligation was not performed, and may retain the part of the earnest money corresponding to this right to compensation. The defendant party also argued that, for this reason, they had no obligation to return the earnest money. Accordingly, while the court should have assessed the part of the action concerning the earnest money as stated above, within the scope of Article 156 of the Code of Obligations No. 818 (BK) and of Article 177 of TBK No. 6098, which repealed that law, collected the evidence and decided according to the outcome, its dismissal of the claim concerning this amount on the written grounds was not found to be correct and required reversal.” (Court of Cassation, 11th Civil Chamber, Docket No. 2014/423, Decision No. 2014/2613, 14.2.2014)

As can also be seen from the Court of Cassation decisions above, for the party who received the earnest money to be able to exercise the right to set off its damage against the earnest money, the party who gave the earnest money must be at fault for the non-performance of the contract. Otherwise, the earnest money will be returned.

If, on the other hand, the contract is not validly concluded (for example, if it is made in ordinary form when it should have been made in official form), the earnest money will in any event have to be returned in full.

“Since the transfer of a contract for the sale of immovable property is not valid unless made in official form pursuant to Article 705 of the Civil Code (MK), Article 213 of the BK (Article 237 of the TBK), Article 26 of the Land Registry Law, Article 60 of the Notaries Law and the decision of the Assembly of Civil Chambers of the Court of Cassation (HGK) dated 15.11.2000, Docket No. 2000/13-1612, Decision No. 2000/1704, it does not give rise to rights and obligations for its parties. However, the parties may reclaim what they have given under the rules on unjust enrichment. A person who acquires property without just cause is obliged to return it. The earnest money (kapora) or forfeit money paid in advance by one of the contracting parties to the other is also, like a penalty clause, an accessory stipulation serving to reinforce the obligation; in this respect, since the main contract is not valid, the accessory stipulation is also invalid. The return of earnest money (kapora) paid under an invalid contract may be claimed under the provisions on unjust enrichment.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2017/1137, Decision No. 2018/11653, 15.11.2018)

“In the present case, it is understood that a contract for the purchase and sale of real estate was concluded orally between the parties and that, under the contract, 20,000.00 TL was paid as a deposit through a bank. Accordingly, the contract in dispute concerns the sale of immovable property and is invalid because it was not drawn up in official form, which is a condition of validity. Since the contract is invalid, the provisions on the deposit contained in this contract are likewise invalid. That being so, since it has been established that 20,000.00 TL was paid by the plaintiff to the defendant under the invalid contract for the sale of immovable property concluded between the parties and that, under invalid contracts, everyone is obliged to return what they received, the court should have decided to set aside the objection made by the defendant; its dismissal of the action on contrary reasoning was not found to be correct and required reversal.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2016/18662, Decision No. 2018/5321, 16.5.2018)

2. What is forfeit money? Is a deposit given as forfeit money returned if the contract is not performed?

If, when the contract is made, one of the parties gives the other a sum of money and, under their agreement, the party who gave the money has the right to withdraw from the contract in return for leaving that money with the other party, the money given is forfeit money. The right of withdrawal may be exercised during the period from the giving of the forfeit money until the performance of the principal obligation that forms the subject of the contract. The party who gave the forfeit money may rescind the contract only on condition that it leaves the money it gave with the other party; the party who received the forfeit money, only on condition that it pays the other party twice the amount it received (TBK Art. 178).

The agreement made between the parties on forfeit money does not need to contain the expression ‘forfeit money’ expressly. It is sufficient that it can be understood from the text of the agreement that what was agreed is forfeit money.

“(...) the undated document bearing the signatures of the parties contains wording to the effect "that if the tenant party does not bring the rent on time and terminates the agreement unilaterally, it cannot take back the deposit it gave, and that if the property owner terminates the agreement unilaterally, it will pay compensation equal to the amount of the deposit it received'', and …. it must be accepted that each of the parties has the right to rescind the contract in return for forfeit money, as provided in Article 178 of the TBK, and that the deposit amount in dispute was agreed as a forfeit penalty.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2017/2060, Decision No. 2017/8732, 31.5.2017)

If the deposit was given as forfeit money, then, as a rule, there is no refund where the contract is rescinded before the principal obligations are performed in contracts involving instantaneous performance, or at any point in time in contracts involving continuing performance.

“The contract signed between the parties included the provision,"Forfeit money in the form of a 5,000 TL promissory note has been given by the buyer to the seller for the conclusion of the contract for the sale of the real estate described above. The buyer accepts and undertakes that, if he abandons the conclusion of the contract, he will not demand that the forfeit money he has not paid be refunded to him by the seller. The seller, for his part, accepts and undertakes that, if the said contract of sale is concluded, the forfeit money he has received will be deducted from the sale price, and that, if he himself abandons the conclusion of the contract of sale, he will pay the buyer twice the amount he received from the buyer." and accordingly there is no dispute that forfeit money was agreed between the parties. Forfeit money is regulated in Article 178 of the TBK, and according to that provision" If forfeit money has been agreed, each of the parties is deemed entitled to withdraw from the contract; in that case, if the party who gave the money withdraws, it forfeits what it gave; if the party who received it withdraws, it returns twice what it received." On the basis of the said statutory provision, while the court should first have determined the party that withdrew from the contract, examined the conditions of the forfeit money and decided according to the resulting outcome, its deciding in the manner written on the basis of an incomplete examination is contrary to procedure and law and requires reversal.” (Court of Cassation, 13th Civil Chamber, Docket No. 2017/6115, Decision No. 2020/1756, 10.2.2020)

We believe that if the party who gave the forfeit money rescinds the contract due to the fault of the other party, fairness requires that the forfeit money be returned to the party who gave it; likewise, if the party who received the forfeit money rescinds the contract due to the fault of the other party, it should not be held liable to pay the other party 2 times what it received. However, Court of Cassation decisions are not clear on this point.

“... the undated document bearing the signatures of the parties contains wording to the effect "that if the tenant party does not bring the rent on time and terminates the agreement unilaterally, it cannot take back the deposit it gave, and that if the property owner terminates the agreement unilaterally, it will pay compensation equal to the amount of the deposit it received'', and, since no sufficient and strong evidence or allegation has been put forward that the plaintiff rescinded the contract for just cause, it must be accepted that each of the parties has the right to rescind the contract in return for forfeit money, as provided in Article 178 of the TBK, and that the deposit amount in dispute was agreed as a forfeit penalty. In this situation, since the plaintiff/tenant did not bring the remainder of the rent on the specified date as agreed in the protocol and terminated the contract unilaterally, the plaintiff must be held liable for the damage suffered by the defendant party. For this reason, while the court should have accepted the money in dispute as a forfeit penalty and rendered a judgment according to the outcome, deciding on the basis of an erroneous assessment and on the written grounds is contrary to procedure and law.” (Court of Cassation, 3rd Civil Chamber, Docket No. 2017/2060, Decision No. 2017/8732, 31.5.2017)

If, on the other hand, the contract is not validly concluded (for example, if it is made in ordinary form when it should have been made in official form), the forfeit money will in any event have to be returned in full, and the party who received the forfeit money cannot be held liable to return 2 times the amount of the forfeit money.

“on the grounds that the contract concerning the sale of immovable property made between the parties is null and void because it was not made in official form, that the earnest money or forfeit money paid by one of the contracting parties to the other is, like a penalty clause, an accessory stipulation serving to reinforce the obligation, that if the main contract is not valid the accessory stipulation will not be valid either, and that the return of earnest money or forfeit money paid under an invalid contract may be claimed under the provisions on unjust enrichment, the action was accepted, and the judgment was appealed on points of law by the defendant’s counsel. CONCLUSION: In view of the documents in the file, the evidence on which the decision is based and the reasons requiring it, and since there is no error in the assessment of the evidence, it is decided that all of the objections on appeal of the defendant’s counsel, which are found to be without merit, be dismissed and that the judgment, found to be in accordance with procedure and law, be UPHELD…” (Court of Cassation, 19th Civil Chamber, Docket No. 2015/1769, Decision No. 2015/17126, 17.12.2015)

3. How can it be determined whether a deposit was given as earnest money or as forfeit money?

Under TBK Art. 177/1, a sum of money given by a person when a contract is made is deemed to have been given as earnest money (pey akçesi), that is, as evidence that the contract was made. In other words, there is a presumption that money given at the time the contract is made is earnest money (pey akçesi). The party claiming that the money is forfeit money is obliged to prove it. Money given as earnest money is, as a rule, returned to the party who gave it if the contract is not performed.

In light of all these explanations, if the parties have not specifically agreed that the money given as a deposit is forfeit money, the party who gave the deposit will be able to get the deposit back if the contract is not performed. If the parties have agreed that the money given as a deposit is forfeit money, the party who gave the deposit cannot get the deposit back in the event of withdrawal from the contract. If the parties wish to avoid a dispute later on as to whether the money given was forfeit money, it would be appropriate for them to put this matter in writing.

“The defendant-counterclaimant stated that they had agreed with the plaintiff-counter-defendant ... on the sale of the immovable property for a price of 200,000.00 TL, that on September 20, 2013 a deposit of 2,500.00 TL was transferred to the plaintiff-counter-defendant’s agent..., that they had agreed with the plaintiff-counter-defendant’s agent on the price of the immovable property, and that they subsequently could not reach an agreement when the plaintiff-counter-defendant’s agent wanted to sell the immovable property above the agreed price, and for all these reasons requested the return of the deposit. The plaintiff-counter-defendant ..., on the other hand, stated that the 2,500.00 TL transferred had been sent for the travel of his agent... from ... to ... and back and for certain expenses, and for this reason requested the dismissal of the deposit claim. The court dismissed the deposit claim on the grounds that the defendant-counterclaimant had to prove that the 2,500.00 TL transferred had been given as a deposit and had not submitted any evidence to that effect. Article 177 of the BK provides: "A sum of money given by a person when a contract is made is deemed to have been given not as forfeit money but as evidence that the contract was made. Unless otherwise provided by contract or local custom, the earnest money is deducted from the principal claim." In that case, while the court should have accepted that the sum transferred by the defendant-counterclaimant to the plaintiff-counter-defendant’s agent... on September 20, 2013 was sent as earnest money, its dismissal of the deposit claim in the manner written is contrary to procedure and law and requires reversal.” (Court of Cassation, 13th Civil Chamber, Docket No. 2015/30990, Decision No. 2018/135, 16.1.2018)

“In the present case, it is understood that the plaintiff was made a member of the system digitally by depositing money into the account of a member of the defendant company’s business team. Nor is there a contract between the parties bearing the plaintiff’s wet signature. Under Article 178 of the TBK, in order to speak of a forfeit sum, it must have been expressly agreed in the contract. Nor do the general commercial terms, which do not bear the plaintiff’s signature, bind the plaintiff. In this situation, the defendant must prove that the money deposited into the defendant’s account was not earnest money but was given as forfeit money. It has not been proven that the money paid by the plaintiff was clearly a forfeit sum. Since the contract has been terminated, the money deposited must be returned because it is earnest money. That being so, while the court should have decided to accept the action, rendering judgment in the manner written as a result of an erroneous assessment requires reversal.” (Court of Cassation of the Republic of Türkiye, 13th Civil Chamber, Docket No. 2015/23142, Decision No. 2017/8543, 25.9.2017)

“On the grounds that, at the end of the proceedings conducted by the court and according to the evidence gathered, no forfeit money was agreed in the agreement concluded between the parties for the event of rescission of the contract, that it was stated that the buyer would pay a deposit, that the 30,000.00 TL indicated in the bank transfer receipt for the payment made by the plaintiff was not forfeit money, that the defendant could not prove by written evidence that the money it collected was forfeit money, that, for this reason, fault in the non-performance of the contract had no bearing on the outcome, and that the plaintiff was justified in claiming the return of the money it paid, it was decided to accept the action, to set aside the defendant’s objection to the enforcement proceedings in respect of 30,000.00 TL, with advance interest at an annual rate of 11.75% and at varying rates, not exceeding the amount claimed, running from the date of the enforcement proceedings, to continue the enforcement proceedings and, since the receivable was liquidated, to order the defendant to pay the plaintiff compensation for denial of debt at the rate of 20% of the amount awarded; the decision was appealed on points of law by the authorized representative of the defendant company. CONCLUSION: In view of the documents in the file, the evidence on which the decision is based and the reasons requiring it, and since there is no error in the assessment of the evidence, it is decided that all of the objections on appeal of the authorized representative of the defendant company be dismissed and that the judgment, found to be in accordance with procedure and law, be UPHELD” (Court of Cassation of the Republic of Türkiye, 19th Civil Chamber, Docket No. 2015/12526, Decision No. 2016/3207, 26.2.2016)

In all these processes, it will be in the parties’ interest to obtain legal support from a lawyer in order to avoid any loss of rights.

Att. Ömer Çebi

Trainee Att. Veysel İnan

This article is a general assessment prepared in accordance with the legislation in force on its date of publication; it does not constitute a legal opinion. This English text is a translation of the Turkish original; in case of any discrepancy, the Turkish version prevails.