Default of Non-Payment as regulated under Art. 97 of the TCO
A) CONTENT AND GENERAL ASPECTS OF THE DEFENSE OF NONPAYMENT
1.The Defence of Non-Payment in General
The defense of non-payment is regulated under Article 97 of the TCO under the title of “order of performance”. The said provision specifies the order in which parties shall perform their obligations in contracts imposing mutual obligations. Accordingly, in the case of a contract imposing mutual obligations, the parties are obliged to perform at the same time. Therefore, in full bilateral contracts where the presumption of simultaneous performance applies, one of the parties must have performed or proposed the performance of its own obligation in order to demand the performance of its obligation from the other party.
Indeed, in such contracts, unless there is a contrary custom, law or contractual provision, it is essential that the parties perform their obligations at the same time. The rule of simultaneous performance is based on Article 207/2 of the TCO. Although Article 207 of the TCO is a provision regarding sales contracts, it should be applied to all contracts that impose obligations on both parties.
In contracts that impose mutual obligations, if one of the parties demands the performance of the obligation from the other party without performing or offering to perform its own performance, the party from whom performance is demanded has the right to avoid. This right of the party from whom performance is demanded is called the defense of non-payment.
The defense of non-payment is in the nature of a defense, as can be understood from its expression. Therefore, its use does not result in the termination of the right. Furthermore, Article 97 of the TCO is a regulatory rule of law. Therefore, it is possible for the parties to make an arrangement contrary to Article 97 of the TCO.
2.The Main Purpose of the Defence of Non-Payment
It can be said that the main purpose of the defense of non-payment is to ensure the simultaneous performance of the obligations of the parties. If a party demands performance from the other party without performing or offering to perform its own performance, this party has the right to avoid. Such avoidance does not mean to get rid of being bound by the contract or to act contrary to the contract. The party avoiding performance only states that it will not fulfill its obligation until the other party performs or offers to perform. In this respect, the defense of non-performance has a temporary guarantee function.
The fact that the defense of non-payment has a collateral function does not mean that the defense of non-payment can be eliminated by showing collateral. Indeed, unlike the defense of the debtor’s inability to perform, which is regulated under Art. 98 of the TCO, in the defense of non-payment, collateral cannot be provided instead of performance.
In addition, the party asserting the defense puts pressure on the other party to perform by stating that it will not fulfill its obligation until the other party performs or at least offers to perform its obligation. With this pressure, it forces performance in accordance with the contract. Therefore, it can be said that the defense of non-payment also serves to ensure that the parties adhere to the principle of fidelity.
Finally, the defense of non-payment also has the function of protecting the asserting party against certain risks. The party who performs its own performance without asserting the defense despite the failure to fulfill the counter performance may face certain dangers, although it does not lose its right to claim. Examples of these dangers include not knowing the domicile of the counterparty in the event of a judgment enforcement action, the issuance of a certificate of insolvency, or the time and money to be spent in the claim action. Asserting a defense of non-payment is a more preferable way compared to all these situations.
3.Legal Basis of the Default of Non-Payment: Same Time Performance
The defense of non-payment is based on the principle of simultaneous performance. Even though the parties have the possibility to agree on the obligation with the performance first according to the principle of freedom of contract, the basic rule in contracts imposing mutual obligations is simultaneous performance. Pursuant to Article 97 of the TCO, it is stated that the defense of non-payment may be asserted in contracts where simultaneous performance rules are in question by stating “Unless there is a right to later performance according to the conditions and characteristics of the contract”. As will be emphasized in the next section, the absence of an obligation to perform first is one of the conditions for the assertion of the defense of non-payment.
B) CONDITIONS AND SPECIAL CIRCUMSTANCES FOR ASSERTING THE DEFENSE OF NONPAYMENT
4.What are the Conditions for Asserting the Defence of Non-Payment?
- It must be a contract that imposes mutual obligations
In order to assert the defense of non-payment, first of all, there must be a contract that imposes an obligation on both parties. In such contracts, both parties have the title of both creditor and debtor and the performances are in a cause-and-effect relationship. Therefore, there must be an exchange (synallagma) relationship between the performances. It cannot be said that this exchange relationship exists in every obligation in contracts imposing mutual obligations. Indeed, even if they are in the same contract, the defense of nonpayment cannot be asserted for debts that are not in an exchange relationship with each other. For example, the obligation to account and the obligation to pay a fee in a paid agency agreement are not in an exchange relationship with each other. Therefore, it is not possible to assert the defense of non-payment. Defenses cannot be asserted in contracts that impose incomplete bilateral obligations. However, it is stated that Article 97 of the TCO should be applied by analogy if there is an exchange relationship in incomplete bilateral contracts. For example, in an unpaid agency contract, the obligation of the agent to transfer the ownership of the thing obtained by the agent to the principal (Art. 508 TCO) and the principal’s obligation to pay the expenses to the agent (Art. 510 TCO) are close to the exchange relationship in contracts that impose obligations on two parties. Therefore, in this case, it becomes possible to assert the defense of non-payment by applying Article 97 of the TCO by analogy.
- Existence of Due Performance and Counter Performance
The debt of both parties must have been validly incurred and continue to exist. Declarations that the debt has not been validly incurred or is not continuing are in the nature of objections. In cases of invalidity of one of the obligations under Art. 27 of the TCO or revocation of the contract under Art. 125 of the TCO, the defense of non-payment cannot be asserted. This is because both debts must continue to be valid in order to ensure simultaneous performance, which is the main purpose of the defense of non-payment. In addition, both debts must be due. Otherwise, the defense of non-payment cannot be asserted.
- No Obligation to Perform First
In cases where one of the parties must fulfill its obligation before the other party, it is said that there is an obligation to perform first. In contracts that impose mutual obligations, there is a presumption of simultaneous performance. However, there may be an obligation of prior performance arising from the law. Examples include lease agreements (Art. 317 TCO), work contracts (Art. 479 TCO) and service contracts. Secondly, the parties may obligate one party to perform first within the scope of freedom of contract. For example, in a sales contract, it may be agreed that the goods will be delivered first and the price will be paid after a certain period of time. In this case, the seller is obliged to perform first and cannot demand the price without delivering the goods. If the seller demands the price, the buyer does not need to rely on the defense of non-payment. If the buyer demands the delivery of the goods, it is not possible for the seller to assert the defense of non-payment since the seller is obliged to perform first. However, if it is certain that the party obliged to perform first will not be able to obtain the counter performance, for example, if the other party has stated that it will not perform, in this case, it is accepted that the defense of non-payment can be asserted based on Article 2 of the TCC even if the party is obliged to perform first. Finally, the obligation to perform first may arise from custom. For example, due to the payment of the fee after the meal service in restaurants, the obligation to perform first is on the person who operates the restaurant due to custom.
- The Counter Performance Not Performed or Not Performed Properly or Not Offered to Be Performed
The counterparty may prevent the assertion of a defense of non-payment against itself by properly performing or offering to perform its obligation. Likewise, if performance or an offer of performance is made after the non-payment defense is asserted, the defense shall be null and void. In order for the offer of performance to have this result, the refusal of the offer of performance must cause the default of the creditor within the scope of Article 106 of the TCO. Apart from this, simple preparation for performance does not produce results like an offer of performance. Again, the performance must be performed as required. For example, defective performance or partial performance does not prevent the assertion of the defense of non-payment.
C) SPECIAL CIRCUMSTANCES
5.Transfer of Receivables
The assignment of receivables is regulated under Article 183 of the TCO. Accordingly, “Unless prevented by law, contract or the nature of the business, the creditor may assign his receivable to a third party without seeking the consent of the debtor.” The assignment of the receivable means the change of the party who is the creditor of the contract. In this case, the debtor of the transferred receivable fulfills its obligation to the new creditor who takes over the receivable. As a rule, the change of the creditor is not important for the debtor. Therefore, the consent of the debtor is not required for the transfer of the receivable. Article 188 of the TCO regulates the debtor’s right of defense. Accordingly; “The debtor may assert the defenses that he had against the transferor at the time he learned of the transfer, also against the transferee.” Therefore, in case of transfer of a receivable, the debtor of the transferred receivable may assert a defense of non-payment against the new creditor. The fact that the conditions for the defense of non-payment are met before or after the transfer of the receivable does not make any difference.
6.External Assumption of Debt
External assumption of debt is regulated under Article 196 of the TCO. According to the aforementioned provision; “The debtor may be replaced by a new person and be released from his/her debt by a contract to be concluded between the assumer of the debt and the creditor. The notification of the internal assumption agreement to the creditor by the assumer, or by the debtor with his consent, shall constitute a proposal for the conclusion of an external assumption agreement.
The creditor’s acceptance may be express or implied. The creditor shall be deemed to have accepted the assumption of the obligation if he accepts the performance of the assumption without reservation or consents to any other action taken by him in his capacity as the obligor.” In the case of external assumption of the debt, the party to the contract with the title of debtor changes. While the assignment of the receivable does not create any change in the interest of the debtor, in the external assumption of the debt, situations such as the solvency of the new debtor assuming the debt are important for the creditor. Therefore, the external assumption of debt contract is concluded between the creditor and the third party who assumes the debt. External assumption of the debt does not result in a change in the content of the debt. Therefore, as stated in Article 199/1 of the TCO, the defense rights pass to the new debtor. The defense of non-payment is one of these defenses. The new debtor who assumes the debt may assert a defense of non-payment against the creditor.
7.Limitation of the Assertability of a Defence
As a rule, if the conditions for the defense are met in the current situation, the defense may be asserted. However, in some cases, the defense cannot be asserted even if the conditions necessary for the assertion of the defense are present. First of all, the parties may limit or eliminate the assertion of the defense of non-payment by contract. This is because Article 97 of the TCO is a regulatory rule of law. However, since the rule is simultaneous performance, the ability of the parties to limit or eliminate the assertion of the defense of non-payment depends on whether it is clearly understood from the contract.
Apart from the agreements of the parties, abuse of right also constitutes a limit to the assertion of the defense. Accordingly, if the defense of non-payment is asserted without the purpose of ensuring simultaneous performance, it does not give rise to the provisions and consequences attached to it. The party asserting the defense of non-payment should not have an aim to avoid being bound by the contract and to cause damage to the other party. For example, in nonperformance obligations, a defense of nonpayment cannot be asserted by performing an act contrary to the nonperformance obligation. The reason for this is that the behavior contrary to the nonperformance obligation will eliminate the creditor’s interest. Finally, a limit to the assertion of the defense of non-payment is “disproportionality” within the framework of abuse of right. Accordingly, asserting a defense of non-payment for the entire debt against the performance of the performance with a very low amount of deficiency or an insignificant defect constitutes disproportionality. In this case, the defense of non-payment cannot be asserted in accordance with the prohibition of abuse of right.
8.Relationship with Article 98 of the TCO
There is an important relationship between the defense of non-payment and the defense of the debtor’s inability to perform as set forth in Article 98 of the TCO. Article 98 of the TCO also provides for a defense that may be asserted in contracts imposing mutual obligations. According to Article 98 of the TCO; ““In a contract imposing a mutual obligation, if the right of the other party is jeopardized due to the inability of one of the parties to fulfill its obligation and especially due to its bankruptcy or the failure of the attachment procedure against it, this party may refrain from the performance of its own performance until the performance of the counter performance is secured. The party whose rights are jeopardized may also rescind the contract if the assurance requested is not given within a reasonable time.””
The main issue in Article 98 of the TCO is the inability of the other party to perform. Therefore, unlike Article 97 of the TCO, it is possible to claim even if the performance is not yet due. In addition, the party who is unable to pay the debt may be requested to provide security. If the assurance requested is not given within an appropriate period of time, the party may rescind the contract. In Art. 97 of the TCO, on the other hand, the defect cannot be prevented from becoming effective by providing security.
C) CONSEQUENCES OF ASSERTING A DEFENSE
In a contract that imposes a mutual obligation, if one party demands performance from the other party without fulfilling or offering to fulfill its own performance, the defense of non-payment can be used with a statement of will directed to the other party. Moreover, its use is not limited to any period of time.
The defense of non-payment gives the debtor the right to avoid performance. It is of a delaying nature as it gives the right to avoid until the other party performs or offers to perform. Thanks to this right of avoidance, the debtor is not in default despite not performing. This is because the non-payment defense prevents the debt from becoming due. Even if the debtor’s debt is due and payable, the default status can be eliminated by asserting the non-payment defense. The due date is eliminated not from the moment it is asserted, but from the moment the conditions of the non-payment defense are met.
From the creditor’s side, the creditor is not in default by asserting the non-payment defense. This is because the assertion of the non-payment defense does not constitute a warning.
Eğer borçlu ödemezlik defi ileri sürme imkanına sahip olmasına rağmen ödemezlik defi ileri sürmeden borcunu ifa etmişse ediminin iadesini talep edemez. Zaten borçlu, borcu olmayan bir şeyi ifa etmiş değildir. Borçlu bu durumda sadece karşı taraftan edimini yerine getirmesini isteyebilir.
The burden of proof regarding the defense of non-payment is, as a rule, on the plaintiff. The plaintiff must prove that the conditions for the defense of non-payment are not present in the present case. Accordingly, the plaintiff must prove that the defendant’s debt is due and that the defendant has fulfilled or offered to fulfill its debt. Otherwise, the lawsuit shall be dismissed. If the plaintiff proves that the conditions for the defense of non-payment do not exist, the judge shall simultaneously sentence the plaintiff to performance.
CONCLUSION
As a rule, in contracts imposing mutual obligations, the parties are obliged to perform at the same time. Therefore, in contracts imposing obligations on both parties, where there is a presumption of simultaneous performance, one of the parties must have performed or offered to perform its own obligation in order to be able to claim its obligation from the other party. Otherwise, the party from whom performance is demanded has a right of avoidance. This right of avoidance is called the defense of non-payment.
In order to assert the defense of non-payment, first of all, there must be a contract that imposes an obligation on both parties. In such contracts, the acts of the parties are in an exchange relationship with each other. In incomplete bilateral contracts, the defense of non-payment cannot be asserted since there is no exchange relationship between the performances.
Non-payment defense can be used with a statement of will directed to the other party. The invocation of the non-payment defense prevents the debt from becoming due and payable.
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