Turkey - Credit and Collections

Originally published: Oct-24-2005

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Overview of Turkish Legal System
and Commercial Law

By Ms. Zeynep Kanra
Turam Baykut and Sayar, Turkey

Brief History

Turkey, as a distinct country, came into existence in the aftermath of World War I, following the collapse and disintegration of the Ottoman Empire. The legal system in the Ottoman Empire was based mainly on Sheria (religious) law (see footnote). Emerging as a secular state from the start, however, the Republic of Turkey needed a brand new set of laws and regulations.

Opting for a practical solution, a selective commission was formed for each major set of statutes. These commissions studied the existing law codes in force in various countries with the task of selecting the best match for their topic. The target was to choose codes of law in their entirety and implement minimal changes. These legal changes took place along with major social changes and were referred to as a “social revolution.”

It is no surprise that codes of law from various Swiss cantons (administrative sections), or in the case of debt recovery and enforcement, the Federal Code of Switzerland, were selected. These codes were independent from Canon Law (Christian) and allowed a lot of room for customs and habits that may vary from canton to canton.

In the course of the decades that followed, many additions and changes were made to the original codes, which had initially been accepted in their entirety. Turkey is now going through yet another set of major reforms in order to meet the requirements set by her quest to become a member of the European Union. All of the main codes, ranging from civil law to the code of commerce and the penal code, are gradually being replaced by new codes compiled by local scholars over the last few years. However, the fiercely secular nature of Turkey, which has deep roots in society, is being maintained. And new laws are still largely based on the original imported codes.

Third Party Collection

The practice of law, strictly reserved to lawyers, is a protected profession in Turkey . Collection is regarded as a legal activity. Therefore, it is mandatory that third party collection activities be carried out exclusively by lawyers recognized by one of the Turkish bar associations. In other words, no collection agencies are permitted.

Fees are generally split with one-half being required as an up-front payment, and one-half as a contingency fee. As in the United States, court costs and other out of pocket expenses are paid by the creditor up-front.

Pre-litigation Collection Procedures

Corporate identity verification can be made through the trade registry records that are available in every jurisdiction and open to the public. However, most information on a debtor remains protected until legal action commences. A financial status investigation is not easy to obtain and is often impossible. This is largely due to the lack of accessible databases in Turkey.

The creditor, or his lawyer, may demand payment from the debtor in writing or verbally. Harassing the debtor is not permitted; however, there is no limitation on the number of letters or calls that can be made. In fact, demand letters prepared by attorneys in the debtor’s area have a tremendous positive impact on the chances of recovery. When a local attorney becomes involved, many debtors choose to make payment rather than get into trouble in their own jurisdiction.

However, if the debtor disputes the debt, ongoing demands which ignore the dispute are not tolerated. Resolution of the dispute must be done in court or by arbitration, if applicable.

The threat of involuntary bankruptcy is commonly used and may be a preferable method of encouraging the debtor to pay up during pre-litigation efforts.

Turkey’s Legal System

The Turkish legal system is completely accessible to everyone. Courts are actually more independent and efficient than they are reputed to be in third world countries. In fact, the efficiency of the courts is close to European standards, and the Turkish legal system is in much better condition than legal systems in the rest of the developing countries.

There is a court in every municipality and the location of the debtor generally determines the appropriate jurisdiction. In some instances, additional jurisdictions or rules may apply, but debtor location is the primary consideration. Parties can also freely choose applicable law and jurisdiction; however, this choice will not cancel the statutory jurisdiction, but introduce an additional one. If the debtor is a firm, the most important factor deciding jurisdiction is the court or enforcement office connected to the main address of the firm as listed in the trade registry.

In cases involving a country with no bilateral or reciprocity treaty with Turkey (e.g. USA), the claimant must place a bond with the Court. The bond can vary from 10% to 30% of the claim amount.

Arbitration

Turkey has signed and ratified the New York Convention on the Enforcement of Foreign Arbitral Awards (a United Nations treaty). The Convention is binding in Turkey in cases in which an arbitration award has been issued in another country that is also a signatory to the Convention.

To have a foreign arbitration award recognized for execution in Turkey, the claimant is required to file a special case in the Turkish courts. The court will not re-examine the merits of the case, but perform a procedural check on the following points:

1. Did a valid Arbitration Clause or Arbitration Agreement exist between the parties?
2. Does reciprocity exist between Turkey and the country in which the decree was issued?
3. Is the Award a breach of the general public order and moral practices in Turkey?
4. Was the dispute resolved by arbitration a dispute that can be arbitrated under Turkish law?
5. Were all parties duly represented during the arbitration process, or if not represented in any part, have they accepted those phases of the process?
6. Was the Turkish party against which the Award is to be executed notified as to the choice of arbitrators and not deprived of any right to press or defend its claims?
7. Were the arbitration rules applied in accordance with the results listed in the arbitration clause or agreement? If there was no appointment of specific rules, were the rules applied those of the place of arbitration?
8. Is the Award limited to the issues stipulated in the arbitration clause or agreement?
9. Is the Arbitration Award final and absolute under the laws and regulations of the place of arbitration?

Filing a Law Suit

Basic commercial documents required to initiate legal action are primarily the signed contract and the invoices issued to the debtor. A voucher or promissory note signed by the debtor or the original signed check will suffice. Because Turkish courts require the presentation of evidence in Turkish, all documents must be translated into Turkish by sworn translators. Notarization and an Apostille Stamp are necessary to authenticate the documents.

If the power of attorney, which gives the Turkish attorney necessary authority to pursue the claim, is prepared outside of Turkey, it must be signed by the proper authorities of the claimant, notarized, and an Apostille stamp must be obtained. It is absolutely necessary to prepare a document authorizing representation by the Turkish attorney. The foreign creditor does not need to be registered in the Turkish jurisdiction.

There are basically two means of claiming unpaid past due receivables in Turkey – haciz and iflas:

1) Haciz is very similar to a default judgment available in European countries. In haciz, an individual claimant seeks payment against the debtor independently of other creditors, and is ultimately able to liquidate individual assets of the debtor in order to obtain payment of the debt.

Specific steps in this method:

1. An order is filed and served on the debtor.
2. If the debtor does not object to the order of payment, the creditor moves to liquidate the assets of the debtor. If the debtor makes an objection, the creditor is compelled to litigate the matter through the courts to prove the debt.
3. If the creditor obtains a Court Decree in its favor, then it continues with liquidation of the debtor’s assets.

2) Iflas means bankruptcy liquidation. In iflas, creditors seek liquidation of all of the debtor’s assets in order to pay all creditors. As the assets are not usually sufficient to meet all debts, creditors are paid a percentage on their receivables on a pro-rated basis. Iflas is often utilized as a threat in order to cause the debtor to yield and pay creditors.

Specific steps in this method:

1. A bankruptcy order of payment is served on the debtor.
2. Regardless of the debtor’s response to the order of payment, the creditor must take the matter to court for adjudication.
3. The proceeding is between the creditor (claimant) that files the iflas and the debtor. However, other creditors that will be impacted by the outcome can request that the judge allow their (limited) participation.
4. The claimant (creditor) has complete control of the case and can decide to continue or abort, right up to the final decision of the court to declare the debtor bankrupt. Once the court decides, the original claimant no longer has sole control and must consult all other creditors on any decisions to be made. Liquidators, appointed by the court, make the decisions from the moment of the court decision for bankruptcy onwards.

Statutes of Limitation

The statute of limitation on claims for payment of invoices is up to ten years, with invoices for shipping charges having a one-year statute of limitation. For checks, it is six months, and for promissory notes and bonds, three years.

Types of Evidence in Turkish Law

There are two categories of evidence in Turkish law.

The first category is “absolute” and must be considered by the court. It includes confession (the debtor admitting the debt), documentary evidence, written evidence, and the defendant’s testimony given under oath. Documentary evidence consists only of original documents; no faxes or photocopies.

The second category is “discretionary” evidence and consists of witness testimony, expert witness testimony and court initiated examination. The judge decides how much weight to give discretionary evidence in his or her decision.

Documentary evidence has the highest importance in Turkish law. During trial, the need for witnesses occurs only if documentary evidence is not enough to prove the claim. However, in some cases, the court may require an expert witness to provide a clear explanation of the documents presented. The testimony of an expert witness is the second most important type of evidence, and will have tremendous impact on the outcome of the case. While the parties may agree on an expert witness, it is the judge who makes the final selection.

In civil cases, witnesses cannot be heard on contractual matters. They can only testify regarding facts, and even that is very limited.

Parties can include an evidence clause in their agreement that will appoint additional evidence. However, such evidence will always be regarded as discretionary.

Other Legal Considerations

If the amount and/or actual existence of a debt is debated or uncertain, the creditor can decide not to file an order of payment, but to go directly to the court to obtain a Court Decree stating the existence and amount of the debt.

In exceptional situations, which are listed in the Turkish statutes, a claimant can have a debtor declared bankrupt by the court without filing an order of payment.

Cautionary attachments of debtor property can only be made if the debtor does not have a definite residence and it is believed the debtor may evade the debt and the creditor. Strong evidence is required to obtain a cautionary attachment decree from the court. Once obtained, the debtor cannot appeal the decree or cancel the attachment. He can, however, file an objection within a limited time period.

It is also possible to obtain an injunction restraining disposition of goods or assets during the legal process. Both the cautionary attachment and injunction require security/ guarantee from the creditor.

Court Costs etc.

Claims for administrative charges or recovery of attorney and collection charges are not allowable under Turkish law. Attorney charges are awarded by the judge and, according to Turkish law, these charges are not high and they are paid directly to the attorney. In practical terms, partial court costs are awarded by the judge, but travel costs of witnesses and other such expenses are not awarded. Exemplary or punitive damages cannot be claimed.

Recognition of Foreign Judgments

Turkey will accept foreign court decrees for execution if there is reciprocity between Turkey and the country in which the decree has been issued. Reciprocity can be based on an international treaty that has been signed and ratified between that country and Turkey, or reciprocity can be available de facto between the two countries.

Reciprocity has to exist for the exact type of case under consideration. For example, there is reciprocity for divorce and family law cases between the United Kingdom and Turkey, but there is no reciprocity for commercial cases between the two countries.

In order to have a foreign court decree recognized for execution in Turkey, the claimant will need to file a special case with the Turkish court. As with foreign arbitration awards, the merits of the case will not be re-examined. A procedural check will be performed on the following six points:

1. Does reciprocity exist between Turkey and the country in which the decree was issued?
2. Is the decree final and absolute according to the laws and regulations of the country in which it was issued?
3. Do the merits of the case concern an issue on which the Turkish courts would have sole jurisdiction?
4. Is the decree clearly in violation of Turkish public order?
5. Was the case served on the defendant and did he have an opportunity to defend himself?
6. In cases relating to family or personal issues, were the statutes applied to the merits chosen in accordance with Turkish laws (in cases where there is a conflict of statutes between the foreign country and Turkey)?

If the Turkish court is satisfied with these points, the foreign court decree will be accepted for execution in Turkey. Foreign judgments that can currently be accepted for execution in Turkey include those from: Italy, Austria, Romania, Tunisia, Northern Cyprus, Poland, Algeria, Iraq, The People’s Republic of China, Azerbaijan, Egypt, Croatia, Germany, Georgia, Uzbekistan, Macedonia, Moldova, Albania, Kuwait and Tajikistan.

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Footnote: Sheria is the sacred law code of Islam and is one of Islam’s foundation documents, along with the Quran and the Hadith (traditions). See http://www.kuwaitiah.net/religion1.html for a brief explanation of Sheria law.

Turam Baykut and Sayar is one of ABC-Amega’s attorney affiliates located in Istanbul, Turkey.

ABC-Amega Inc. provides international receivable management and debt collection services for exporters to Turkey and more than 200 countries worldwide. For further information, email info@abc-amega.com.