Further Damage Exceeding Interest upon the Debtor’s Default

There is no doubt that a receivable, a concept that arises frequently in commercial relationships, is the subject of the right to property, which is protected by the Constitution and is one of the fundamental rights and freedoms. In this respect, the debtor-creditor relationship and, accordingly, the rights, obligations and sanctions that arise from it have been regulated in detail by law and placed on a sound legal footing. In this study, after explaining the debtor’s default on monetary debts, its conditions and its consequences, we will address further (excess) damage, which has been shaped by the decisions of the Court of Cassation, particularly in order to protect the creditor’s rights.

1. What are the conditions for the debtor’s default on monetary debts?

First of all, in order to speak of the debtor’s default (delay), the following conditions must be met: performance must be possible, the debt must be due (its maturity date must have arrived), the debtor must not have a right to refuse performance, and non-performance must constitute conduct in breach of the obligation; in addition, in certain situations, it is also required that a formal notice has been given to the debtor. If these conditions are met together, the debtor will be in default and will face a number of consequences regulated in Art. 117 et seq. of the Turkish Code of Obligations (TBK).

It should be noted that, for the debtor to be considered in default, the debtor need not be at fault for the delay in performing the debt. In other words, even if the debtor has exercised the care and fulfilled the obligations incumbent on it, it is considered in default if it has delayed the performance of the debt, provided that the other conditions are present. Fault is therefore significant not for the debtor to be considered in default, but with respect to the legal consequences of default.

2. What are the consequences of the debtor’s default on monetary debts?

a. Compensation for delay

TBK Art. 118: “A debtor in default is obliged to compensate the damage suffered by the creditor as a result of the late performance of the debt, unless it proves that it was not at fault in falling into default.”

Through the provision cited above, in the event of the debtor’s default, the creditor is given the possibility of claiming specific performance and compensation for the damage it has suffered because of the delay (compensation for delay). The creditor may claim compensation for delay by proving the damage it has suffered because of the delay. However, if the debtor proves that it was not at fault in falling into default, the damage suffered because of the delay need not be compensated. As can be seen, fault here is not a condition of default but appears as exculpatory proof. In other words, a debtor who proves that it was not at fault in falling into default is released from paying compensation for delay.

b. Default interest

In addition to the general rule mentioned, if the subject of the debt is the payment of a sum of money, the debtor who falls into default in paying the money is obliged to pay, for the elapsed days/delays, the default interest (delay interest/interest for elapsed days) set out in Art. 120 et seq. of the TBK. However, since claiming default interest for a delay occurring in monetary debts is not subject to any condition – such as the creditor suffering damage or the debtor being at fault – it is not subject to any requirement of proof either. Accordingly, a debtor in default, even if it is not at fault, is held obliged to pay the creditor default interest in addition to paying its principal debt.

However, if the debtor is at fault in falling into default, the creditor has the right to claim, in addition to the delay-related expenses and loss of profit caused by the default, all of its other damage as well.

c. Excess/further damage

In some cases, with respect to monetary debts, the default interest paid to the creditor is not sufficient to compensate the damage the creditor has suffered because of the delay. In other words, the damage the creditor has suffered because of the default may exceed the default interest paid by the debtor. In such a case, the creditor has the right to claim, in addition to default interest, its damage that cannot be covered by default interest. The damage exceeding default interest referred to here is called excess/further damage (aşkın/munzam zarar). Indeed, the 19th Civil Chamber of the Court of Cassation, in its decision dated October 2, 1997, Decision No. 97/7979, defined further damage as the damage relating to the portion that cannot be covered by default interest and exceeds it, out of the difference between the position the creditor’s assets would have reached had the debtor paid its debt without falling into default and the position resulting from the default. (E.g.: “Since the claim of the contractor, who incurred a tax penalty because it could not receive its progress payments on time, for the penalty it paid is further damage exceeding interest...,” 15th Civil Chamber, 16.1.1995, 6546/65). Further damage applies to all monetary debts, whatever their source, provided that default interest can be applied to them. The source of the debt may be a tort, unjust enrichment, agency without authority or a contract for work. In this respect, the legal ground of further damage is the unlawfulness that arises when the principal receivable falls into default and that is independent of the principal receivable.

“As a result of the proceedings conducted by the court in compliance with the reversal judgment and the expert report obtained, the court decided to accept the action on the grounds that it was understood that the plaintiff, as a dealer of ... A.Ş., supplied and sold heating fuel to the defendant party; that, considering the sector in which the plaintiff operates, its said allegation was justified; that, had the plaintiff been able to obtain its receivable on time, it would appear consistent with the ordinary course of life for it to purchase the same amount of fuel; in other words, that, had the plaintiff collected its receivable from the defendant on time, it would have been able to purchase as much fuel as the amount it would have obtained, and would ultimately have had the opportunity to procure fuel without being affected by the monetary loss; and that, in this situation, the plaintiff’s claim for further damage was justified; the judgment was appealed on points of law by the defendants’ attorneys.

The plaintiff claimed further damage, stating that the price of the fuel it sold to the defendants had not been paid, that it had been forced to file an action for this, and that the total principal and interest it received as a result of the enforcement of the judgment it obtained at the end of lengthy proceedings did not even cover the price of the fuel it had sold. The plaintiff stated that the cause of its further damage was its inability to replace the fuel it had sold. In this situation, what the court should do is to form a panel of court-appointed experts qualified in the subject and have it first determine what type of fuel the plaintiff sold to the defendants, in what quantity, and when the sale price should have been paid, have it find out at what price in lira the plaintiff could have procured new fuel of the type and quantity it had sold from its own supplier on the date on which the sale price should have been paid, and then have it determine the total principal and interest the plaintiff collected in the action it filed for the price of the fuel.

It then consists of comparing the total principal and interest collected by the plaintiff from the defendants with the price the plaintiff would have to pay to procure the goods it sold once again and, if there is a difference to the plaintiff’s detriment, accepting that this is the plaintiff’s further damage and deciding according to the result. However, the expert report on which the judgment was based was not prepared in accordance with these principles. A judgment cannot be rendered on the basis of an incomplete investigation; for this reason, the judgment had to be reversed.” (Court of Cassation, 19th Civil Chamber, Docket No. 2017/5217, Decision No. 2019/5474, 9.12.2019)

If the debtor has not paid its debt on time and the creditor has incurred certain expenses in order to obtain its receivable, and if those expenses cannot be covered by default interest, the portion exceeding the delay interest may be claimed as further damage. Or, had the creditor been able to receive its money on time, it could have made a profit by directing its capital to various investments, but it may have been unable to take advantage of this opportunity because its receivable was not paid on time. In all these situations, if the amount of profit it has been deprived of cannot be covered by default interest, the portion exceeding default interest may be claimed as further damage.

In addition, if the creditor who could not receive its receivable on time because of the default has borrowed money from other sources, taken out a loan or been forced to provide security, the expenses incurred for these, as well as the interest and commission it was compelled to pay, may also be claimed as further damage. For example, a contractor being forced to take out a loan because its progress payments were paid late, and having to bear certain expenses and costs for this loan (the interest and other expenses it paid because of the loan), falls within this scope.

Or, the damage arising from the default adversely affecting the legal relationship between the creditor and its own creditor may also be considered within the scope of further damage. For example, a creditor who cannot obtain its matured receivable from the debtor and, as a result, cannot perform the obligations it has undertaken toward third parties may claim as further damage the resulting damage if, for this reason, it has become insolvent and been subjected to actions or enforcement proceedings (it has been unable to pay the wages of the workers it employs or the price of the materials it used, etc.).

In light of these explanations, we can set out the main conditions of further damage as follows: the existence of a monetary debt, the money debtor’s falling into default, the existence of damage suffered by the creditor that cannot be covered by default interest, the debtor’s failure to prove that it was not at fault, and the existence of a causal link between the further damage and the debtor’s default.

3. Who bears the burden of proving further damage in monetary debts? How is further damage proved? Can the conditions of proof change from period to period?

Article 122/1 of the TBK, titled “Excess damage”, provides:

“If the creditor has suffered damage exceeding default interest, the debtor is also obliged to compensate this damage unless it proves that it bears no fault whatsoever.

Under this provision, if the creditor has suffered damage that cannot be covered by the interest provided for late payment, the debtor must compensate this damage unless it proves that it bears no fault whatsoever for the late payment. Here, as a condition of further damage, it is accepted that the debtor was at fault in falling into default, and the burden of proving the contrary is left on the debtor. In other words, if the creditor of further damage, who has received its receivable late, has also asserted, alongside its principal receivable, that excess damage exists, the debtor will also be obliged to compensate the further damage unless it proves that there is no fault attributable to it in falling into default.

Let us note at once that abstract proof of the existence of the further damage asserted by the creditor is accepted as sufficient. As regards the problem of proving further damage, in the dispute that was the subject of the Constitutional Court’s decision of December 21, 2017, Application No. 2014/2267, rendered on an individual application, it was found that the applicant’s receivable, which fell within the scope of the right to property, had been paid after losing significant value against inflation, so that a personal and extraordinary burden had been imposed on the applicant; it was held that, despite this finding, because of the lower courts’ strict interpretation that the applicant also had to prove that it had suffered damage, the fair balance that must be struck between the public interest and the protection of the applicant’s right to property had been weighed against the applicant in the present case, that the right to property had been violated and that a retrial should be held; and an assessment was made to the effect that abstract proof of further damage is sufficient.

Accordingly, the creditor of further damage does not need to prove item by item its damage exceeding default interest caused by receiving its receivable late; it is sufficient for the actual/excess damage to be determined by obtaining from official institutions the documents relating to the inflation rate realized each year, the interest rates applied to deposits and government bonds, exchange rates and other investment instruments, and by obtaining a report from a qualified court-appointed expert. Indeed, a recent decision of the Court of Cassation stated that an obligation of concrete proof is not required for the existence of further damage.

“Although for many years this Chamber accepted and applied the view that the plaintiff creditor had to prove the existence of further damage with concrete evidence, in view of the fact that, in the dispute that was the subject of the Constitutional Court’s decision dated 21.12.2017, Application No. 2014/2267, rendered on an individual application, it was decided that, since it was understood that the applicant’s receivable, which fell within the scope of the right to property, had been paid after losing significant value against inflation, a personal and extraordinary burden had been imposed on the applicant, and that, despite this finding, because of the lower courts’ strict interpretation that the applicant also had to prove that it had suffered damage, the fair balance that must be struck between the public interest and the protection of the applicant’s right to property had been weighed against the applicant in the present case, the right to property had been violated and a retrial was to be held, the practice requiring further damage to be proved with concrete evidence has been abandoned with a view to not causing a violation of rights, and, taking into account the developing economic conditions, the protection of the fair balance between the right to property and the public interest, and the binding nature of the Constitutional Court’s decisions finding violations, the view has been adopted that the existence of further damage must be accepted as a presumption where inflation and, in connection with it, exchange rates, deposit interest, and the interest rates of government bonds and other investment instruments, together with their returns, exceed default interest.

Turning to the present case in light of these explanations: although the plaintiff asserted that, because its receivable was not paid on time despite the default, it paid its tax, … premium debts, rent and bills with delay interest and at a loss, that the shop belonging to the company had to be handed over to creditors in return for its debts, and that the company could not complete the other jobs it had taken on, it has not been proved with concrete evidence that the payments allegedly made and the enforcement proceedings to which it was subjected arose because the plaintiff company could not collect its receivable from the defendant on time, that there is a causal link between the alleged damage and the late payment, or that further damage exists. However, the defendant party, for its part, has not asserted and proved the contrary of the presumption that damage not covered by interest exists owing to high inflation and the decrease in the purchasing power of money.

In this situation, given that, owing to the phenomenon of inflation experienced in our country and known to everyone, it will not always be possible for the creditor’s damage to be covered by default interest, that the existence of damage not covered by interest in the event of delay is accepted as a presumption, and that the contrary of this presumption has not been asserted and proved by the defendant debtor, the court should first have requested from official institutions and established the wholesale, consumer and producer price index rates (TEFE, TÜFE-ÜFE) showing the inflation data at the dates of default and the dates of collection, the deposit interest rates from banks, exchange rates, government bond interest rates, workers’ wages and the information on other investment instruments, and then should have had calculated the amount that the receivable awarded could have reached on the dates of collection if it had been collected and invested, as of the date of default, in a basket made up of these investment instruments, and, from this amount so found, the amount that the receivable accepted in the action reached on the date of collection, should have obtained a reasoned report capable of review on the damage not covered by interest and its amount from a newly formed panel of court-appointed experts, and should have rendered a decision in accordance with the result, whereas (...)” (Court of Cassation, 15th Civil Chamber, Docket No. 2018/3765, Decision No. 2018/4907, 6.12.2018)

In this respect, the creditor of further damage is released from the burden of proving its claim for further damage by asserting high inflation and the decrease in the purchasing power of money. There are also recent decisions of the Court of Cassation to the contrary:

“The present action concerns a claim for the collection of further damage not covered by interest, relating to the sum paid in return for the issuance of a title allocation certificate and later refunded with its statutory interest upon the cancellation of the allocation.

According to the content of the file, the court, basing its judgment on the expert report, calculated the damage for the period from 1988, when the payment was made by the plaintiffs’ decedent, until the date of the action by taking the average of various economic data, also taking into account the value of the immovable property on the date of the action. First of all, the legal issue to be resolved in the present case that is the subject of the action is whether there is damage exceeding default interest. High inflation, the rise in the dollar exchange rate and the high interest rates in the free market do not release the plaintiff from the burden of proof. The plaintiff must prove how it would have used its money receivable had it received it on time, and that the damage it suffered exceeds the default interest paid to it.

In this situation, the court should collect the parties’ evidence in full and, if the plaintiff proves the existence of further damage, should determine the scope of the damage on the basis of the updated value of the sum paid as at the date of refund, taking into account that the 2,322,000 TL paid into the defendant’s account by the plaintiffs’ decedent on April 19, 1988 was refunded by the defendant as 8,479,147 TL on August 21, 2000. For the reasons explained, the decision, being based on an incomplete examination, had to be reversed.” (Court of Cassation, 4th Civil Chamber, Docket No. 2017/154, Decision No. 2019/5415, 20.11.2019)

There are also recent decisions of the Court of Cassation holding that, in calculating further damage, the condition of proof will change depending on the period.

“Under Article 122 of TBK No. 6098 (Article 105 of the former Code of Obligations, BK), if the creditor has suffered damage exceeding default interest, the debtor is also obliged to compensate this damage unless it proves that it bears no fault whatsoever. The legislator has, as a rule, accepted that damage exists where a monetary debt is paid late, and has conceived of the compensation of this damage in two parts. The first part is the amount of damage whose collection may be claimed without being proved, and it has been accepted that this damage is covered by default interest. Apart from this, there is no legal possibility for the creditor to benefit from any presumption. For this reason, a creditor claiming further damage must first prove that the damage it suffered because the debtor paid its debt late could not be covered by default interest, and that it suffered damage exceeding default interest. The creditor will be able to claim its further damage for the period from the date on which the debtor first fell into default until the date on which it collected its receivable together with interest. The legal ground of the debt of further damage is the unlawfulness arising from the principal receivable falling into default. For this reason, the debtor’s obligation to compensate further damage (TBK Article 122) is a new debt that is entirely different from the obligations of the principal debt and default interest, that begins to arise with the default and continues to increase over time until the principal debt is performed, and that is entirely independent of the principal debt. Liability for further damage is based on fault-based liability. Article 122 of the TBK (Article 105 of the former BK) has adopted a presumption of fault. The fault required for the debt of compensation arising from further damage to come into being is the debtor’s fault in falling into default. In other words, a relationship of fault giving rise to the damage is neither required nor discussed here. For liability, what is essential is the existence of the debtor’s fault in falling into default. As a rule, the creditor of further damage is obliged to prove, first, the existence of its principal receivable that has fallen into default, its damage not covered by default interest as a result of this receivable being performed late or not at all, and the adequate causal link between the damage and the debtor’s default. The creditor is not obliged to prove that the debtor was at fault in falling into default. The debtor can be released from liability only on condition that it proves that it was not at fault in its default. Accordingly, in actions for further damage, the creditor’s (plaintiff’s) burden of proof should not be made subject to very strict rules, and, as with the general methods of proof, each case should be assessed within its own structure and characteristics.

It is very clear that it is an indisputable and lived reality that the inflation persisting in our country hovered around one hundred percent in certain years, that time deposits yielded income at least at these rates, that the value of foreign currency (exchange rates) always exceeded default interest rates, that bank loan interest rates reached two hundred percent, and that the domestic purchasing (selling) power of money decreased to a great extent. In such an inflationary environment, it must necessarily be accepted, as a presumption consistent with the normal course of events and with life experience, that an individual will make efforts and undertake initiatives to keep the value of his or her money stable and to make a gain, for example by placing it, at the very least, in time deposits or in foreign currency investments whose exchange rates are constantly rising. Indeed, it is also a natural consequence of human nature and of the instinct to protect one’s interests that a reasonable, ordinary person living in the inflationary environment described will not keep his or her money idle but will convert it into an income-generating investment. This being the case, the adverse effects and consequences of an inflationary economy must be accepted as facts that are publicly known, to a greater or lesser extent, by everyone, that, most importantly, can easily be ascertained where necessary, and that are also within the knowledge of the courts.

Where the further damage arose in periods when inflation was not on the agenda and exchange rates had also stabilized, however, the situation is different in terms of the burden of proof, and this Chamber’s practice in this regard is that the creditor must prove its further damage concretely. In the present case, it is understood that the money in dispute was deposited with Egeabank A.Ş. on December 9, 1999 and collected together with default interest on May 9, 2016, and that the period in which the further damage allegedly arose covers a span of 16 years. Accordingly, the court’s reaching a conclusion on the written grounds, requiring concrete proof for the entire period without taking into account the differences in the economic conditions of the time segments in which the further damage arose, was not found to be correct.

In this situation, whereas the court of first instance should have, taking into account the principles explained above regarding the proof of further damage, calculated the further damage according to the basket formula as set out in the settled case law of this Chamber; accordingly, in order for the further damage to be determined, requested from the plaintiff the annual rate of increase in inflation realized as of each year during the period from the date on which the debtor fell into default until the day on which payment was made, the extent to which this rate was reflected in the prices of goods, the interest rates paid on deposits and government bonds, and the lists of changes in exchange rates against the Turkish lira, and, where necessary, researched these with the relevant official institutions or organizations; determined, also making use of the opinion of a court-appointed expert in this field, the amount of damage suffered by the creditor owing to the fall in the value of money and the decrease in purchasing power during this period by adding up the elements mentioned above and finding their averages; determined the amount so found by also subjecting it to assessment within the framework of Articles 50 and 51 of the TBK (Articles 42 and 43 of the former BK), taking into account that, owing to its basic legal structure, the receivable claimed is in the nature of a claim for compensation, that the economic and social environment in which the country finds itself was also influential in the occurrence of this damage, that natural or legal persons living in the country cannot avoid being affected by this, and, finally, the particular features of each case; and thereafter determined and established whether the plaintiff has further damage, and its amount, on the basis of the result obtained by deducting from this amount of damage the amount of default interest the plaintiff received when collecting its receivable, the rendering of a judgment based on an incomplete examination was not found to be correct and required reversal.” ( Court of Cassation, 11th Civil Chamber, Docket No. 2018/1512, Decision No. 2019/3201, 29.4.2019)

4. Can further damage in monetary debts be asserted in a separate action, apart from the principal receivable? What is the limitation period?

Article 123/2 of the TBK, titled “Excess damage”, sets out the following provision:

“If the amount of damage exceeding default interest can be determined in the pending action, the judge, at the plaintiff’s request, also rules on the amount of this damage when deciding on the merits.”

Under this provision, the creditor may assert its further damage in the pending action concerning the principal receivable, and it may also assert it as a separate action. Moreover, in order for the creditor to be able to assert its further damage in a separate action, it is not necessary for it to have reserved its rights to the excess in the action concerning the principal receivable. Indeed, in its decision dated May 16, 2002, Docket No. 7994/5671, the 13th Civil Chamber of the Court of Cassation held: “ (...) the debtor’s obligation to compensate further damage is a new debt that is entirely different from the principal debt and from the obligation to pay default interest, that begins to arise with the default and continues to increase over time until the principal debt is performed, and that is entirely independent of the principal debt. Owing to this legal nature and character, further damage cannot be regarded as a debt included in the subject of the enforcement proceedings or the action, even where it has not been claimed together with the principal receivable and default interest. This being the case, there is also no need to raise a reservation showing that the right to further damage has been reserved in the enforcement proceedings or action for the collection of the principal receivable together with its interest.” In this way, it stated that, owing to its legal nature, further damage is a separate debt independent of the principal receivable and may be sued for on its own.

In light of the explanations above, since a claim for compensation for further damage is essentially a right to a receivable and does not end with the initiation of enforcement proceedings or the filing of an action with respect to the principal receivable and its interest, it is subject to the general 10-year limitation period regulated in the TBK. Indeed, the said Code contains no exceptional provision on this point. In addition, owing to the legal nature of further damage, the limitation period will start, under the general provision, on the date on which the principal receivable became due. In other words, the limitation period provided for further damage will begin to run from the date on which the debtor fell into default and, accordingly, from the date on which default interest can be claimed.

In conclusion, further damage is a type of compensation that applies to monetary debts and that, unlike default interest, is based on fault-based liability. In this respect, a creditor whose damage due to the default exceeds even the delay interest should assert this damage within the general 10-year limitation period, either in the action it has filed concerning the principal receivable or in a separate action, and should prove its damage exceeding default interest with concrete evidence or, depending on the situation, in some cases with abstract evidence.

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

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.

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