MnA-fail-reasons-maykanat

Why M&A Deals Fail: Drivers of Value Destruction, Case Analysis, and Strategic Guide

by with No Comment M&A

Mergers and acquisitions (M&A) serve as fundamental strategic growth mechanisms for enterprises seeking to expand market share, capture economies of scale and scope, enter new geographical markets, or absorb critical technologies. However, decades of empirical research by academics and management consultancies consistently reveal that between 70% and 90% of M&A transactions fail to generate the promised shareholder value, frequently leading to systemic value destruction.

Empirical Definition of Failure

Financial & Operational Metrics of Failure

In corporate finance, M&A failure is explicitly benchmarked by post-closing deficits such as stock performance trailing the broader market and the inability to realize forecasted synergy targets:

Synergy Deficits

Market & Synergy Loss

Depressed equity performance and the realization of less than 70% of the operational and cost synergies publicly forecasted prior to the merger.

Balance Sheet Destruction

Divestitures & Impairment

Forced divestiture of the acquired entity at a net loss within 5 years, or management recording major balance sheet goodwill impairment charges.

1. Experience and Sectoral Divergence

Research indicates that an acquirer’s historical deal experience and the structural dynamics of the target industry directly dictate the probability of transaction success:

Acquirer / Sector Profile Observed Failure Rate Strategic Dynamics & Risk Drivers
First-Time Acquirers 77% Failure Only a 23% success rate; driven by uninstitutionalized, ad-hoc execution processes.
Serial Acquirers (≥ 10 Deals) 46% Failure Success rate climbs to 54%; driven by formalized integration playbooks and expert internal M&A units.
Technology Sector 85% – 90% Failure Rapidly shifting market dynamics and immense friction in integrating technical talent.
Healthcare Sector 75% – 80% Failure High regulatory complexity, compliance exposure, and operational integration friction.
Financial Services 70% – 75% Failure Burdensome integration of legacy IT architectures and multi-jurisdictional compliance.
Manufacturing 60% – 70% Failure Relatively lower risk due to the predictability of physical assets and operational alignments.
FMCG Sector 58% – 65% Failure Rapid realization of direct supply-chain and established distribution channel synergies.
Mega-Deals (> $10 Billion) 80% – 85% Failure Severe organizational complexity paired with intense regulatory and antitrust hurdles.

2. Valuation Errors, “Deal Fever”, and Illusory Synergies

Behavioral Traps

Winner’s Curse & CEO Hubris

In competitive auction environments, management teams succumb to “deal fever”, a fear of losing to rivals, and imperialistic CEO ego (hubris), leading them to pay premiums far beyond the target’s fundamental value.

Mathematical Dead-End

The Synergy Illusion & “Take” Mode

An acquirer paying a 50% premium must generate 50% in synergies merely to break even. Acquirers fixated only on extracting assets (“take” mode) while ignoring what they can contribute (“give” mode) consistently fail to justify control premiums.

Financial Modeling Deficits

Static Excel vs. Dynamic Simulation

Conventional static Excel models are incapable of capturing dynamic market variables and stochastic risks. This limitation obscures catastrophic EPS dilution profiles generated by the transaction.

3. Cultural Collisions and Human Capital Failures

Cultural Clash

Bureaucracy vs. Entrepreneurial Spirit

Deals that look logical on paper do not guarantee human capital alignment. Rigid, bureaucratic acquirers frequently suffocate flexible entrepreneurial targets, extinguishing the agility that justified the purchase (e.g., the HP-Compaq merger).

Organizational Risk

Talent Flight & Social Contracts

Failing to define post-close governance, budgetary limits, and decision-making rights (the “social contract”) creates a leadership vacuum. Consequently, the most capable and driven personnel abandon the company within the first 30 to 60 days.

4. Inadequate Due Diligence

Compressed Timelines & Hidden Operational Risks

Rigorous due diligence requires a minimum of 60 to 90 days. Artificial schedule compression forces deal teams to restrict their scope exclusively to trailing financial statements, completely missing critical operational vulnerabilities:

  • Customer concentration vulnerabilities (e.g., 60% of revenue tied to at-will cancelable contracts).
  • Extreme operational reliance on uncontracted key executives.
  • Buried change of control clauses within commercial agreements that grant counterparties unilateral termination rights upon transaction close.

5. Post-Merger Integration (PMI) Breakdown

Reflecting the established corporate maxim that “deals die in integration”, deferring execution mechanics until post-signing represents an irrecoverable tactical error:

Strategic Negligence
Deferred Integration Planning

Failing to design target operating models prior to transaction close paralyzes early execution momentum.

Infrastructure Collapse
System & Process Fragmentation

The inability to merge ERP, CRM, and HR platforms causes duplicate software licensing, data mismatch, and service delivery failures.

Over-Aggressive Cuts

Institutional Memory Loss

Reckless workforce redundancy terminations destroy institutional knowledge and functional capacity.

Under-Aggressive Cuts

Synergy Forfeiture

Hesitation in rationalizing redundant corporate operational roles eliminates anticipated cost synergy targets.

6. Case Analysis: AT&T and Time Warner Vertical Merger Failure

The corporate union between AT&T and Time Warner remains an iconic demonstration of massive capital commitment dismantled by structural, regulatory, and cultural impediments:

Transaction Phase Operational Reality & Timeline Strategic Impact & Verdict
Strategic Rationale & Deal Size Announced in 2016 at a total valuation of $109 billion; aimed to marry AT&T’s broadband/DirecTV distribution with Time Warner’s content library (HBO, CNN). Massive vertical scale thesis engineered around distribution-content convergence.
Regulatory Confrontation US Department of Justice (DOJ) filed an antitrust lawsuit citing anti-competitive vertical foreclosure; the court cleared the transaction in 2018. Two years of extended litigation created regulatory distraction prior to any integration.
Cultural Collision AT&T’s rigid, bureaucratic telecom governance clashed violently with Time Warner’s autonomous, creative media ecosystem. Bureaucratic mandates triggered sweeping resignations across elite creative talent and executives.
Workforce Reductions The combined workforce of 280,000 was slashed to 269,280, resulting in approximately 10,720 personnel cuts. Severe degradation of employee morale and disruption of baseline production capacity.
Divestiture & Exit Burdened by unmanageable debt, AT&T divested WarnerMedia just 3 years later (2021) into Discovery Inc., offloading $43 billion in debt. Cemented as one of the largest vertical M&A failures in business history.

Summary: Strategic Prescriptions for Value Preservation

Empirical evidence confirms that the resilient minority of successful acquirers execute transactions under strict operational disciplines:

Strategic Discipline

1. Walk-Away Price Architecture

Strictly define a binding ceiling price prior to entering negotiations, maintaining the governance to abort when valuations become unfeasible.

Strategic Discipline

2. Forensic Due Diligence

Dedicate at least 60 to 90 days to audit not only historical financials, but customer concentration, change of control clauses, active litigation, and cultural compatibility.

Strategic Discipline

3. Early Integration Planning

Draft detailed integration blueprints before signing, appoint a dedicated full-time integration lead, and execute a structured “First 100 Days” roadmap.

Strategic Discipline

4. Probabilistic Financial Modeling

Replace static Excel projections with dynamic Monte Carlo simulations to accurately model and quantify stochastic market risks and variables.

Strategic Discipline

5. Cultural Integration & Talent Retention

Establish formalized retention incentive packages for critical talent alongside structured corporate “social contracts” defining post-closing autonomy, decision-making rights, and cultural alignment.

References & Empirical Literature

  1. Acquisition Stars. (2026). M&A Success and Failure Rates: The Data Behind Dealmaking.
  2. Business Fitness. (2022). HP and Compaq: The Danger of Clashing Cultures.
  3. Conversable Economist. (2023). The Fall of the Vertical Mega-Merger: AT&T and Time Warner.
  4. Financial Executives Journal. (2026). Overcoming Static Modeling Traps in Corporate M&A: A Stochastic Approach.
  5. Forbes. (2019). Why Cultural Due Diligence Matters in M&A: People Are Not Just Numbers on a Spread Sheet.
  6. Harvard Business Review. (2011). The Big Idea: The New M&A Playbook.
  7. Kitsune Advisory. (2026). The First 100 Days: Human Capital Integration and Talent Flight Mitigation.
  8. Oyster HR. (2026). Strategic Growth and Global Workforce Integration in Cross-Border Mergers.
  9. Rutgers Business Review. (2021). Culture Clashes in Corporate Combinations: A Post-Mortem Analysis.
  10. Strategic and Legal Frameworks. (2026). Cross-Border Corporate Governance, Antitrust Risk, and Post-Merger Realities.
  11. StudyCorgi. (2025). AT&T and Time Warner Merger: Strategy, Litigation, and Divestiture Case Study.
  12. Summit Advisory. (2016). The Synergy Fallacy: Avoiding Take-Mode Traps in Deal Negotiations.
  13. Warwick Business School. (2024). ERP Integration and Infrastructure Consolidation in Complex Acquisitions.
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Navigating Critical Legal Risks in International EPC Contracts: The FIDIC Silver Book Framework

by with No Comment FIDIC

Navigating Critical Legal Risks in International EPC Contracts: The FIDIC Silver Book Framework

In cross-border infrastructure, power plant, and renewable energy investments, EPC Contracts—typically modeled after the FIDIC Silver Book—serve as the global delivery standard. Understanding the statutory balance between contractor liabilities, time bars, and hardship relief is vital for General Counsels and project sponsors.

Turnkey Risk Allocation

1. Design Liability & Unforeseeable Ground Conditions

The core commercial objective of an EPC structure is price and timeline certainty for project lenders. This translates into stringent legal liabilities:

Strict Liability Standard

Fitness for Purpose

Unlike professional services measured by “reasonable skill and care,” EPC contractors bear strict outcome liability. If performance tests on completion fall short of contracted output, liability attaches automatically.

Sub-Surface Risk (Clause 4.12)

Site Condition Allocation

Under the Silver Book, the contractor is deemed to have inspected all physical conditions. Unforeseen sub-surface obstructions do not yield price or time relief, unless fraudulent concealment by the employer is proven under good faith principles.

2. The Procedural Minefield: Claim Notification & Time Bars

The loss of valid claims in international construction arbitration stems predominantly from non-compliance with strict contractual notice requirements:

Strict 28-Day Condition Precedent
Initial Notice of Claim

Contractor must submit formal notice within 28 days of becoming aware of the delay or cost event.

Contemporary Records
Evidence Preservation

Real-time site logs, correspondence, and critical path telemetry kept open for Employer inspection.

84-Day Submission

Fully Detailed Claim

Delivery of comprehensive delay quantum and cost breakdown under Sub-Clause 20.2.4.

Governing Law Defence

Civil Law Mitigation

Jurisdictions recognizing good faith principles may restrict disproportionate time-bar forfeitures.

3. Risk Allocation Matrix: Silver Book vs. Civil Code Intervention

Risk Category Contractual Baseline (Silver Book) Statutory / Civil Law Relief Mechanism Arbitration & Negotiation Verdict
Delay Liquidated Damages (DLDs) Pre-Agreed Cap (10-15%) Prevention Principle DLDs serve as the sole and exclusive remedy; claims for general downstream loss of profits are barred.
Hyperinflation & Price Spikes Lump Sum (Contractor Risk) Hardship Doctrine (Art. 138) Fixed-price clauses remain binding unless catastrophic shifts destroy the contractual equilibrium.
Changes in Legislation Employer’s Risk (Clause 13.6) Mandatory Public Law Compliance Contractor is entitled to both extension of time (EoT) and reimbursement of incurred additional costs.
Aggregate Liability Cap 100% Contract Price Cap Willful Misconduct Exception Standard liability caps do not protect contractors in cases of gross negligence, fraud, or deliberate default.

References & Legal Authorities

  1. FIDIC. (2017). Conditions of Contract for EPC/Turnkey Projects (Silver Book), 2nd Edition. International Federation of Consulting Engineers, Geneva.
  2. Society of Construction Law (SCL). (2017). Delay and Disruption Protocol, 2nd Edition.
  3. Turkish Code of Obligations (Law No. 6098). Article 138 (Excessive Difficulty of Performance / Emprevizyon) and Article 115 (Exclusion of Liability).
  4. Swiss Code of Obligations (CO). Article 2 (Good Faith) and Article 100 (Unlawful Agreements on Liability).
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Turkish Corporate Vehicles for Foreign Direct Investment

by with No Comment Foreign Direct Investment (FDI)
Legal Assessment • 2026 Statutory Framework

Turkish Corporate Vehicles for Foreign Direct Investment: Joint Stock (A.Ş.) vs. Limited Liability (Ltd. Şti.)

A comparative legal analysis for General Counsels, M&A Partners, and Institutional Investors navigating Turkish Commercial Code (TCC) compliance, sovereign tax exposures, and corporate debt containment.

Pillar I Liability Insulation & Sovereign Debts

Shareholder Exposure Under Statutory Regimes

Under Turkish corporate law, both the Joint Stock Company (A.Ş.) and Limited Liability Company (Ltd. Şti.) grant basic limited liability for ordinary commercial liabilities. However, exposure diverges significantly under public law and sovereign collection procedures:

Joint Stock Company (A.Ş.) Strict Equity Shield

Complete Shareholder Insulation

Shareholders are liable exclusively for their committed capital directly to the company. Non-managing equity holders incur zero secondary liability for uncollected public debts (taxes, social security obligations under Law No. 6183).

Limited Liability Company (Ltd. Şti.) Direct Sovereign Recourse

Pro-Rata Public Debt Exposure

Under Article 35 of Law No. 6183, LLC partners are personally and directly liable for unpaid corporate public debts in proportion to their shareholding ratio if the debts cannot be collected from company assets.

Pillar II Statutory Comparison Matrix

Comparative Analysis (Law No. 6102 Benchmarks)

Key corporate metrics and operational flexibilities benchmarked across entity types:

Statutory Parameter Joint Stock Company (A.Ş.) Limited Liability Company (Ltd. Şti.) Institutional Impact
Statutory Minimum Capital 250,000 TRY 50,000 TRY A.Ş. requires 500,000 TRY if adopting the non-public authorized capital system.
Share Transfer Mechanics Endorsement & Delivery Notarization & Registration A.Ş. avoids mandatory General Assembly approval and Trade Registry publicity for transfers.
Management Delegation Internal Directive (İç Yönerge) Statutory Manager Mandate A.Ş. boards can formally delegate executive authority to professional C-level managers.
Minority Squeeze-Out (TTK 208) ≥ 90% Equity / Votes ≥ 90% Equity / Votes Permits majority parent to squeeze out obstructive minorities at real market value.
Public Debt Exposure for Partners None (Protected) Direct Pro-Rata Liability Critical risk factor for passive foreign funds and joint venture partners.
Pillar III Governance & Cross-Border Structuring

Strategic Considerations in Transaction Lifecycle

01 High Agility

Exit Strategy & Secondary Sale

JSCs offer seamless private equity exit mechanics, IPO pathways, and confidential share ledger operations without triggering public registry filings.

02 Caution Advised

Veil Piercing Risks

Single-member entities must maintain distinct asset boundaries; commingling funds or bad-faith undercapitalization triggers direct parent fund liability.

03 Regulated

Group Company Instructions

Foreign parent entities (TTK 202) issuing detrimental strategic directives to Turkish subsidiaries must compensate for losses within the same operating year.

⚖️

Executive Takeaway for Cross-Border Investors

For institutional investment, energy projects, and venture portfolios requiring rapid equity injections, board delegation, and sovereign liability protection, the Joint Stock Company (A.Ş.) represents the requisite corporate vehicle in Türkiye.

Legal Notice: This comparative framework is provided for informational and analytical purposes under Turkish commercial legislation. It does not constitute formal legal counsel or establish an attorney-client relationship.
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Presence, Absence, and Warranty: How Majalla Anticipated Modern Commercial Defect Doctrines

by with No Comment Mecelle Series
Comparative Analysis of Article 65 of the Ottoman Majalla and Modern Civil & Common Law Systems
Abstract
This article presents a comparative analysis of Article 65 of the 19th-century Ottoman Civil Code, the Majalla (Mecelle-i Ahkâm-ı Adliyye), which states: ‘A quality described in a present object is null (lağv), whereas a quality described in an absent object is binding (muteber).’ We investigate how this foundational maxim governs the legal friction that arises when contractually represented qualities diverge from physical reality. Utilizing specific legal scenarios—namely, the delivery of goods with a ‘working condition’ clause and the representation of a vehicle as ‘paint-free’—we trace how these concepts map onto the modern doctrines of patent (apparent) and latent (hidden) defects. We contrast the Majalla’s structure with corresponding provisions in the Swiss Code of Obligations (OR Art. 201), the Turkish Code of Obligations (TBK Art. 223), and the English Sale of Goods Act 1979 (SGA Sec. 14), illustrating how these distinct legal traditions ultimately converge on identical commercial risk-allocation principles.

1. Introduction

The codification of private law in the late Ottoman Empire represents one of the most intellectually compelling chapters in legal history. Codified between 1869 and 1876 by a commission of eminent jurists led by Ahmed Cevdet Paşa, the Mecelle-i Ahkâm-ı Adliyye (commonly referred to as the Majalla) sought to modernize civil and obligations law by distilling centuries of Hanefi jurisprudence into a systematic, abstract civil code structure suitable for both secular and religious courts (Mecelle-i Ahkam-ı Adliyye’nin Yürürlüğe Girişi, p. 1) [16]. To provide an analytical, logic-based framework, the drafting committee prefaced the Majalla with 99 universal legal maxims (küllî kâideler), which served as foundational interpretive canons (Abdullah Demir, Mecelle ve Küllî Kâideler, p. 231) [5]. Among these, Article 65 stands out as a brilliant synthesis of evidentiary rules, contractual representation, and physical reality, declaring: ‘Hâzırdaki vasıf lağv ve gâibdeki vasıf muteberdir’ (The quality described in a present object is null, whereas a quality described in an absent object is binding) (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 135) [10]. This study evaluates how Article 65 governs contractual disputes when represented qualities fail to match physical reality, demonstrating its remarkable alignment with modern civil and common law concepts of patent and latent defects.

2. Jurisprudential Foundations of Article 65

In Hanefi contract and property theory, the validity of a transaction hinges on the precise determination of the subject matter of the contract (mahal / mevsuf) to prevent uncertainty (garar) (Atıf Bey, Mecelle Şerhi, p. 63) [4]. The Majalla recognizes two primary methods for identifying and specifying an object of sale:

  • Identification by Indication (Tayin bi’l-İşaret): Used when the object is physically present (hâzır) at the contract assembly. The parties’ mutual consent is directed at the specific, observable physical asset before them.
  • Identification by Description (Tayin bi’l-Vasıf): Used when the object is absent (gâib) or its characteristics cannot be immediately observed. The agreement relies strictly on verbal or written representations (vasıf) of its qualities.

Under Article 65, these two specification methods stand in a strict hierarchical relationship. Identification by indication is deemed legally superior and more conclusive than identification by description (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 135-137) [10]. Consequently, when an object is present, any descriptive words that contradict the physical reality of that object are legally discarded as null, because the parties’ physical connection to the asset overrides their verbalized characterizations (Mustafa Yıldırım, Mecelle’nin Küllî Kâideleri, s. 152) [17]. Conversely, when the object is absent, the parties are entirely dependent on the representations made in the contract; hence, the described qualities are legally binding (mutabar) and carry serious contractual consequences if breached (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 135-137) [10].

3. The Practical Mechanics of ‘Null’ and ‘Binding’

To fully understand the operation of Article 65, we must examine how it applies to any contractual representation made by a party, and how the distinction between presence (apparent physical reality) and absence (hidden qualities) dictates the legal outcome when the representation fails to match the truth.

3.1 Present Reality and the Rule of ‘Nullity’

When a physical asset is present and a party accepts its physical delivery, any contrary written or oral representation regarding its immediate, observable state is rendered null (lağv) (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 226) [10]. Consider the following critical scenario:

Scenario A (The ‘Working Condition’ Clause):

A buyer and seller execute a contract for the sale of a specific piece of machinery physically present at the transaction assembly. The written contract contains the boilerplate clause: ‘The machinery is delivered in perfect working condition.’ The buyer physically takes delivery of the machinery and removes it from the assembly without conducting an inspection. Subsequently, the buyer attempts to sue the seller, asserting that the machinery was actually non-working at the exact moment of delivery.

Mecelle Application: Under Article 65, because the machinery was physically present (hâzır) and delivered to the buyer’s hands, the written ‘working condition’ representation is legally lağv (nullified) against the physical act of acceptance. By taking physical possession of the present asset without immediate protest, the buyer is legally presumed to have accepted the machinery in its actual, physical state. The buyer cannot later invoke the written text to claim otherwise, as the physical presence of the asset overrides prior or simultaneous textual representations (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 136) [10].

3.2 Hidden Qualities and the Rule of Legally Binding ‘Mutabar’

In contrast, when a contractual representation concerns a quality that is physically absent (gâib), or is structurally hidden from ordinary, immediate physical inspection, the representation remains fully binding (muteber) (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 136) [10]. The law treats the unobservable quality as an absent element, relying strictly on the binding nature of the representation:

Scenario B (The ‘Paint-Free’ Vehicle Representation):

A seller contracts to sell a motor vehicle to a buyer. The seller explicitly represents and writes into the contract: ‘This vehicle is entirely original and possesses no repainted body panels.’ The buyer inspects the vehicle’s exterior, which appears pristine, and accepts delivery. Weeks later, an expert paint-gauge analysis reveals that three panels had been repainted following a minor collision.

Mecelle Application: Although the vehicle was physically present during the sale, its true underlying paint history was structurally hidden from immediate, ordinary physical observation, thereby making this quality legally ‘absent’ (gâib) at the contract assembly. Consequently, the seller’s explicit ‘paint-free’ representation is held to be fully muteber (binding). Because the actual state of the vehicle (painted) failed to match the represented quality (paint-free), the court rules in favor of the buyer, declaring that a breach of contract has occurred and granting the buyer legal options of rescission or price abatement (Ali Haydar Efendi, Dürerü’l-Hükkâm, Cilt 1, s. 227) [10].

4. Comparative Private Law Analysis

While the vocabulary of the Majalla relies on classical Islamic concepts like lagv and mutabar, its underlying legal philosophy is entirely consistent with the division of contractual liabilities and defect remedies in modern continental Civil Law (such as the Swiss and Turkish codes) and common law systems.

4.1 Swiss and Turkish Civil Codes: The Duty to Inspect and Notify

In continental civil law, the tension between represented qualities and physical reality is resolved through the statutory allocation of inspection and notification duties (Fikret Eren, Borçlar Hukuku Özel Hükümler, s. 111) [1].

Under Swiss Code of Obligations (OR) Article 201(1) and Turkish Code of Obligations (TBK) Article 223(1), the buyer is legally required to inspect the purchased goods as soon as possible according to the ordinary course of business and immediately notify the seller of any defects [19, Art. 201], [1, p. 111]. This system corresponds perfectly to the Majalla’s Article 65 dichotomy. If the defect is a patent defect (apparent, corresponding to the hâzır state), and the buyer accepts the goods and fails to issue an immediate notification, the law declares under Swiss OR Article 201(2) / Turkish TBK Article 223(2) that ‘the purchased goods are deemed to have been accepted’ [19, Art. 201], [1, p. 113]. This is the exact modern equivalent of declaring the contrary written ‘working condition’ clause lağv: the physical act of uncontested acceptance of an apparent state nullifies the prior contractual text. However, if the defect is a latent defect (hidden, corresponding to the gâib state, such as a repainted vehicle), the representation of the seller remains fully binding under Swiss OR Article 201(3) / Turkish TBK Article 223(3) [19, Art. 201]. The buyer retains their full warranty rights immediately upon subsequent discovery, confirming that the contractual representation is legally binding mutabar and must be enforced by the court [1, s. 111-120].

4.2 English Common Law: Caveat Emptor and Express Terms

In Anglo-American common law, the historical default rule of Caveat Emptor (let the buyer beware) placed the risk of apparent quality defects entirely on the purchaser (Mindy Chen-Wishart, Contract Law, s. 386-387) [6]. Under the English Sale of Goods Act 1979 (SGA), this paradigm has been refined but retains its core logical structure.

Under SGA Section 13(1 goods sold by description correspond with their description. Under SGA Section 14(2), there is an implied term that goods supplied under a contract of sale must be of ‘satisfactory quality’ [6, s. 387]. However, Section 14(2C) establishes that this implied quality warranty does not apply to any defect which is specifically drawn to the buyer’s attention, or ‘if the buyer examines the goods before the contract is made, which that examination ought to reveal’ [6, s. 387]. Thus, for a physically present object (hâzır), any defect that was discoverable upon reasonable inspection is excluded from legal protection; the buyer cannot rely on general, implied quality guarantees to sue afterwards, as the physical opportunity to examine renders those contrary expectations legally null (lagv) [6, s. 387].

Conversely, if the seller makes an Express Representation in the contract (such as writing ‘paint-free’) and the defect is structurally hidden (latent / gâib), the common law treats this as an express contract term or warranty [6, s. 458]. Under the doctrine of Strict Liability for Breach of Contract, if the actual state diverges from the express term, the representation is held to be fully binding mutabar [6, s. 458]. The seller is fully liable for the breach of warranty, and the court will award damages or rescission regardless of the seller’s lack of fraud or the buyer’s physical inspection of the car’s pristine surface, mirroring the exact equitable balance struck by the Ottoman Majalla [6, s. 458].

Table 1: Structural Comparison of Representation vs. Reality across Jurisdictions
Legal System Patent / Apparent Qualities (Hâzır) Latent / Hidden Qualities (Gâib) Key Statutory / Case Authority
Ottoman Majalla (Mecelle) Lagv (Nullified): The physical act of accepting a present asset overrides contrary written/oral representations . Muteber (Binding): Hidden or absent qualities must strictly match the representation; otherwise, breach is established [10, p. 227]. Article 65 (Mecelle m. 65)
Swiss / Turkish Civil Law (OR/TBK) Acceptance by Non-Notification: Failure to immediately object to an apparent defect leads to implied acceptance. Strict Warranty: Latent defects remain actionable immediately upon subsequent discovery. Swiss Code of Obligations (OR) Art. 201 [19]; Turkish Code of Obligations (TBK) Art. 223 [1].
English Common Law (SGA 1979) Exclusion of Implied Terms: Physical inspection of goods before contract excludes protection for visible defects . Breach of Express Warranty: Contractual representations (express terms) are strictly enforced and bind the seller. Sale of Goods Act 1979, Sec. 14(2C) & Sec. 14(2).

5. Conclusion

The academic examination of Article 65 of the Mecelle-i Ahkâm-ı Adliyye reveals a sophisticated, highly coherent system of contract interpretation and risk allocation. By declaring that ‘the quality described in a present object is null, whereas a quality described in an absent object is binding,’ the late 19th-century Ottoman jurists successfully bridged the gap between the absolute sanctity of the spoken word and the practical, commercial realities of physical transactions. Rather than treating this historic code as a mere relic of religious casuistry, modern scholarship must recognize it as a pioneering sociological codification that anticipates, with remarkable precision, the very rules of patent and latent defects that govern the global marketplace today in both civil law and common law traditions. This conceptual harmony underscores the timeless and universal nature of the quest for contractual equity across human civilizations.

References
  • [1] Eren, F. (2019). Borçlar Hukuku Özel Hükümler (7th ed.). Ankara: Yetkin Yayınları, pp. 104-115.
  • [2] Antalya, O. G. (2013). Borçlar Hukuku Genel Hükümler: Cilt II. İstanbul: Seçkin Yayınları, p. 164.
  • [3] Demir, A. (2011). Mecelle ve Küllî Kâideler. İstanbul: Işık Akademi Yayınları, pp. 157-258.
  • [4] Kuyucaklızâde Mehmet Atıf Bey (1316). Mecelle-i Ahkâm-ı Adliyye Küllî Kâideler Şerhi. Dersaadet, pp. 46-77.
  • [5] Antalya, O. G. (2013). Borçlar Hukuku Genel Hükümler: Cilt I. İstanbul: Seçkin Yayınları, pp. 110-145.
  • [6] Chen-Wishart, M. (2011). Contract Law (4th ed.). Oxford: Oxford University Press, pp. 47-458.
  • [10] Ali Haydar Efendi (1330). Dürerü’l-Hükkâm Şerhu Mecelleti’l-Ahkâm. Dersaadet: Cilt 1, pp. 226-231.
  • [13] Orhan, O. & Bilgiç, V. K. (2017). Mecelle-i Ahkâm-ı Adliyye’nin Küllî Kâideleri Bağlamında İslam Hukukunda Haksız Fiil Sorumluluğu, pp. 1109-1113.
  • [14] Kadıoğlu, A. S. (2012). Mecelle’de Hukukun Kaynağı Olarak Toplum, p. 202.
  • [16] Anon. (2015). Mecelle-i Ahkam-ı Adliyye’nin Yürürlüğe Girişi, p. 1.
  • [17] Yıldırım, M. (2009). Mecelle’nin Küllî Kâideleri. İzmir: İzmir İlahiyat Fakültesi Vakfı Yayınları, pp. 151-411.
  • [19] Swiss Confederation. Federal Act on the Amendment of the Swiss Civil Code (Part Five: The Code of Obligations). SR 220, Art. 197-223.
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Majalla Articles 36–45: Theory of Custom, Usage, and Commercial Practice in International Arbitration Applications

by with No Comment Mecelle Series

Introduction

Codified between 1868 and 1876 by a commission headed by Ahmet Cevdet Pasha, the Majalla (Mecelle-i Ahkâm-ı Adliye) remains one of the most concrete, dynamic, and systematic codifications of the Islamic law of obligations and commerce. Among the qawa’id al-fiqhiyya (general principles of jurisprudence) that constitute the first 100 articles of the Majalla, Articles 36 to 45 establish the “Theory of Custom, Usage, and Commercial Practice,” serving as the bridge between black-letter law and the realities of social and commercial life.

In modern global trade, drafting a flawless and perfectly exhaustive contract is virtually impossible. When it comes to filling contractual gaps, interpreting commercial terms, and integrating new needs arising from technological advancements into the legal framework, Articles 36–45 of the Majalla demonstrate a flawless alignment with modern international trade law (Lex Mercatoria) and the practices of international arbitration.

I. Majalla Articles 36–45: Texts, Commentaries, and International Arbitration Precedents

Article 36: Custom as an Arbitrator

Text: “Custom is recognized as a binding authority (arbitrator).”

(Âdet muhakkemdir.)

  • Commentary and Analysis: The term “muhakkem” (recognized as an arbitrator/binding authority) indicates that in matters where no explicit statutory or religious textual injunction (nass) exists, custom and usage are accepted as binding legal evidence and the primary point of reference. In his commentary, Ali Haydar Efendi notes that this rule stems from the Hadith: “That which Muslims deem to be good is good in the eyes of God.” Custom emerges when an act ceases to be coincidental and takes root in the mind of the society or sector through repetition.
  • Application in International Trade: In international arbitration or sales contracts, when an issue is not explicitly regulated by the parties, the established usages of the relevant sector are directly accepted as the “arbitrator” to resolve the dispute.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 8817 (1997): In a dispute arising from an international sales contract, the Arbitral Tribunal ruled that even in the absence of an explicit contractual provision, pursuant to the principles of Lex Mercatoria and CISG Article 9(2), commercial usages widely known and regularly observed in international trade act directly as the “arbitrator” to supplement the contract.

Article 37: Custom as Conclusive Proof

Text: “The usage of people is a conclusive proof that must be acted upon.”

(Nâsın istimâli bir hüccettir ki onunla amel vâcip olur.)

  • Commentary and Analysis: For an act to yield legal consequences, it must not be a mere personal habit but a widespread practice (istimâl) among people (nâs) or merchants. This practice serves as a binding and conclusive proof (hüccet) before the courts, establishing the intent of the parties and the scope of the obligation.
  • Application in International Trade: In international freight or letter of credit (L/C) transactions where rigid written procedures might not always be followed, the generally accepted practices of the banking and logistics sectors serve as conclusive proof of whether an obligation was properly performed or breached.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 3820 (1980): The Arbitral Tribunal ruled that the UCP (Uniform Customs and Practice for Documentary Credits) published by the ICC constitutes a binding proof (hüccet) and commercial usage in the execution of L/C transactions due to its widespread sectoral use (istimâl), even if the parties did not explicitly incorporate it into their text.

Article 38: The Limit of Custom – Widespread Application

Text: “A custom is only recognized if it is continuous or widespread.”

(Âdet ancak mütred yahud şâyi oldukta mu’teber olur.)

  • Commentary and Analysis: Not every behavior qualifies as a custom. For a practice to be legally recognized, it must meet one of two conditions: It must be muttarıd (continuous, regular, and consistent) or şâyi (widespread and known by the majority of the society or merchants in that sector). Isolated, personal, or coincidental practices do not attain the force of custom.
  • Application in International Trade: A party is precluded from imposing a narrow habit specific to its internal operations or local market onto its international partner as a “sectoral usage.” The usage must be demonstrably “widespread and continuous” on an international scale.
  • Arbitral Precedent:
    • CIETAC (China International Economic and Trade Arbitration Commission) Award, 2006 (CISG/2006/16): The Arbitral Tribunal found that a commercial habit asserted by one party was confined to a local level and was not applied in a “regular and widespread” (muttarıd/şâyi) manner in the international market; therefore, it could not be recognized as a binding international trade usage.

Article 39: Adaptation of Rulings to Changing Times

Text: “It cannot be denied that with a change of times, the requirements of the law change.”

(Ezmanın tebeddülü ile ahkâmın tebeddülü inkâr olunamaz.)

  • Commentary and Analysis: This principle demonstrates the dynamic, rather than static, nature of the law. While fundamental statutory/religious principles remain unchanged, rulings based on custom, changing circumstances, and public interest (maslahah) evolve as times change. Rooted in Imam Abu Yusuf’s jurisprudential methodology, this rule allows ancient precedents and practices to be adapted to meet new socio-economic needs.
  • Application in International Trade: In the face of new instruments emerging from technological advancements or shifting financial balances due to economic crises, contracts are permitted to be stretched or adapted to changing circumstances (Hardship).
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 4761 (1987): The Arbitral Tribunal ruled that in the face of radical changes in international economic conditions and commercial customs over the years, the provisions of the contract could be adapted in accordance with the new realities of the time and the market (consistent with the UNIDROIT Principles of Hardship) if the contractual equilibrium is fundamentally altered.

Article 40: Superiority of Customary Meaning over Literal Meaning

Text: “The customary meaning of words is preferred over their literal meaning.”

(Hakîkatın terkine bedel olan ma’nâ-yı örfî mu’teberdir.)

  • Commentary and Analysis: When a term used in a contract has both a “literal/dictionary meaning” (hakikat) and a “customary/sectoral meaning” (mânâ-yı örfî), the customary meaning prevails. In Ali Haydar Efendi’s example, if a person swears, “I will not set foot in his house,” the customary intent is “not to enter the house,” and merely placing a bare foot inside the doorway does not break the oath.
  • Application in International Trade: Terms used in commercial contracts are interpreted not according to their general English dictionary definitions, but according to the technical meaning understood by professionals in that specific industry or trade sector.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 8385 (1995): When the general dictionary definition of a technical delivery term used in a contract conflicted with its specific commercial meaning in the relevant sector, the arbitrators rejected the literal dictionary meaning and based their decision on the technical/customary meaning (mânâ-yı örfî) attributed to the term by the merchants in that industry.

Articles 41 and 42: Boundaries and Impediments of Custom

Article 41 Text: “When an impediment and a requirement concur, the impediment is preferred.”

(Mânî’ müctemi’ oldukta muktezâya tercih olunur.)

Article 42 Text: “For a custom to be recognized, it must not contradict an explicit textual injunction (nass).”

(Âdetin mu’teber olması nass-ı şâri’e muhâlif olmamakla meşrûttur.)

  • Commentary and Analysis: These two articles draw the boundaries of legitimacy for custom. No matter how widespread a custom or usage may be, it is invalid (void custom) if it contradicts public policy, morality, or an explicit, mandatory statutory/religious provision (nass).
  • Application in International Trade: The fact that bribery or tax evasion has become a custom in a particular sector or region does not grant it legal validity. International public policy and mandatory rules (Jus Cogens) supersede any custom.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 1110 (1963 – Judge Gunnar Lagergren): The assertion that paying bribes to intermediaries to influence public officials was a widespread custom/tradition in the commercial life of a specific country was categorically rejected. The arbitrator ruled that no custom or practice contrary to international public policy and mandatory moral rules could be legally protected, and that bribery contracts based on such illicit customs are void ab initio.

Article 43: Implied Terms – That Which is Recognized

Text: “That which is recognized by custom is regarded as a stipulated condition.”

(Maruf olan şey, şart kılınmış gibidir.)

  • Commentary and Analysis: Rules of good faith and performance that are widely known (maruf) in the market are considered inherent parts of the contract (implied terms), even if the parties did not explicitly state them when forming the agreement. The defense of “it was not explicitly written” is rendered invalid.
  • Application in International Trade: Even if not explicitly stated in the contract, a seller is obligated to provide standard packaging or prepare the goods suitably for transport, as dictated by international standards.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 5713 (1989): The Arbitral Tribunal held that, despite the absence of an explicit contractual provision, packaging goods in a manner suitable for maritime transport in international sales is an implied condition widely known and accepted (maruf) in the trade, and the breach of this condition constitutes a breach of contract (paralleling CISG Art. 35(2)(d)).

Article 44: Usages Among Merchants as Implied Conditions

Text: “That which is recognized amongst merchants is regarded as a stipulated condition between them.”

(Tüccar beyninde maruf olan şey, aralarında meşrût gibidir.)

  • Commentary and Analysis: This is the specific application of Article 43 to commercial life. Beyond general societal custom, the specific jargon, payment terms, and quality tolerance margins established by merchants within their specific commercial sectors are as binding as written contractual provisions.
  • Application in International Trade: In the trade of grain, minerals, or commodities, margins of tolerance or quantity deviations during delivery, even if not specified in the contract, do not require compensation provided they fall within acceptable limits according to exchange and merchant usages.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 8908 (1998): In a dispute concerning quantity tolerance margins among merchants engaged in pipeline and commodity trading, the Arbitral Tribunal ruled that the established rules and usages among the merchants (tüccar beyninde maruf olan) constitute binding contractual provisions that must be applied between the parties, even if not explicitly written in the text.

Article 45: Equivalence of Customary and Statutory Determination

Text: “A matter established by custom is like a matter established by law.”

(Örfî olan bir tâyin, nassî olan bir tayin gibidir.)

  • Commentary and Analysis: This serves as the binding concluding article of the 36–45 sequence. A right or obligation defined by custom and usage yields legal consequences as if it were determined by the statute itself. It provides the judge or arbitrator with a complete legal basis in disputes between parties.
  • Application in International Trade: If the “FOB” or “CIF” rule is selected in an international sale, even if the law does not dictate where obligations and risks transfer, it is determined pursuant to Incoterms custom, and this determination binds the tribunal exactly like a statutory provision.
  • Arbitral Precedent:
    • ICC Arbitral Award, No. 8548 (1996): In a case where “FOB” was used as the delivery term in an international sales contract, it was ruled that the point at which risk and costs transfer between the buyer and seller would be determined by Incoterms rules; this determination made by commercial custom yields binding legal consequences identical to an explicit, mandatory statutory provision.

II. Comparison Table

The parallels between the Majalla’s theory of custom and usage and modern legal systems, as well as international arbitration mechanisms, can be summarized as follows:

Majalla ArticleFundamental Legal PrincipleModern International Law (CISG / UNIDROIT / ICC)Arbitral Precedent / Jurisprudence
Art. 36 & 37Custom as Arbitrator and Conclusive ProofCISG Art. 9(2) & UCP 600ICC Award No. 8817 & No. 3820
Art. 38Requirement of Continuous and Widespread UsageUNIDROIT Art. 1.9(2)CIETAC Award (CISG/2006/16)
Art. 39Adaptation of Rules to Changing TimesUNIDROIT Hardship / AdaptationICC Award No. 4761
Art. 40Superiority of Customary Meaning over Literal MeaningUNIDROIT Art. 4.3 (Sectoral Interpretation)ICC Award No. 8385
Art. 41 & 42Superiority of Public Policy and Mandatory RulesInternational Public PolicyICC Award No. 1110 (Lagergren)
Art. 43 & 44Recognized Practices as Implied TermsCommon Law Implied Terms & IncotermsICC Award No. 5713 & No. 8908
Art. 45Equivalence of Customary and Statutory DeterminationLex Mercatoria PrinciplesICC Award No. 8548

III. Conclusion

The Theory of Custom, Usage, and Commercial Practice constructed between Articles 36 and 45 of the Majalla proves that the Islamic law of obligations is far from a rigid and dogmatic structure; conversely, it is a system that provides highly flexible and realistic responses to the needs of commercial life.

As evidenced by the precedents of the International Chamber of Commerce (ICC), the logical sequence (Lex Mercatoria) relied upon by arbitral tribunals resolving disputes in global trade aligns flawlessly with this 10-article regulatory set codified by the Majalla in the 19th century.

On a dark navy blue matte background, gold foil Arabic calligraphy 'Mecelle-i Ahkâm-ı Adliye' above a modern abstract geometric scale symbol representing global trade.

Causation in Tort Law: The Mecelle (Articles 90-93), Comparative Law, and International Trade

by with No Comment Mecelle Series

The Mecelle (Mecelle-i Ahkâm-ı Adliye) is the first civil code of the Ottoman Empire, drafted between 1868 and 1876 by a commission headed by Ahmet Cevdet Pasha. It codified the rules of Islamic law (specifically Hanafi jurisprudence) concerning obligations, property, and trial procedure using a modern codification technique. Comprising 1,851 articles—the first 100 of which are dedicated to the general principles of Islamic jurisprudence (qawa’id al-fiqhiyya)—the Mecelle provides a magnificent logical framework that guides the theories of causation, liability, and fault, remaining a cornerstone not only for its era but also for contemporary comparative tort and obligations law.

In this article we try to analyze the Mecelle provisions regarding tort law liability. The determination of who is liable to compensate for the damage arising from a tortious act (itlaf), under what conditions, and to what extent, is built upon a magnificent architecture of causation in Articles 90, 91, 92, and 93 of the Mecelle. This architecture is shaped not only by the legal outcome of the act but also by its “physical mode of realization” and the “will of the actor.”

1. Basic Rules in the Majalla’s Systematic Approach

The Mecelle divides tortfeasors into two categories based on their physical attributes and the manner in which they execute the act, drawing very strict lines for their degrees of liability:

  • Article 92 (Strict Liability of the Direct Actor / Mübâşir): “The direct actor is liable to make compensation, even if he did not act intentionally.” The person who physically executes the act and directly causes the damage through his own action (mübâşir) pays for the damage, even if it was a mere accident. No fault is required here; per the principle of personal liability, the one who physically commits the act pays the bill.
  • Article 93 (Fault Requirement for the Indirect Actor / Mütesebbib): “The indirect actor is not liable unless he acted intentionally.” The person who causes the damage indirectly, rather than by a direct physical act, is only liable if he acted with intent (müteammid).
  • Ali Haydar Efendi’s Analysis: In his commentary Dürerü’l-Hükkâm, the concept of “intent” (taammüd) here is defined not merely as desiring the outcome, but as engaging in transgression (ta’addî – active fault/exceeding limits) or negligence (taksir – passive fault/omission) while committing the act. A person who digs an unauthorized well on a public road, even without intending to kill a horse, is legally deemed intentional (müteammid) for committing a transgression (ta’addî) and becomes liable (zâmin).

Severance of the Causal Link and the “Es-sebebü Ke’l-Fâil” Exception

  • Article 90 (Concurrence of Causes): “Where the direct actor and the indirect actor concur, the legal ruling is attributed to the direct actor.” In an incident involving both an indirect cause and a direct perpetrator, the rule is that all liability falls on the direct actor (mübâşir). An intervening free and independent will severs the causal link of the indirect actor.
  • Exception (Vitiation of Will): If the fault of the indirect actor is so severe that it vitiates the free will of the direct actor, turning them into a mere “instrument/tool,” the rule is reversed. As in Ali Haydar Efendi’s example of the “rider falling into a well in the dark”; since the darkness nullifies the direct actor’s (the rider’s) ability to foresee and avoid the hazard, the law applies the rule “Es-sebebü ke’l-fâil” (The indirect cause is treated as the direct perpetrator). The rider is exonerated, the causal link is not severed, and the liability is directly imposed on the grossly negligent indirect actor (the one who dug the well).

Legal Justification

  • Article 91: “Legal permission negates liability.” An act permitted by law (lawful justification) does not give rise to compensation. As long as an indirect actor (e.g., someone digging a well on their own private land) acts lawfully (cevaz-ı şer’î), they are completely absolved from liability (zamân) even if damage occurs.

2. Comparative Modern Law Perspective

Modern legal systems have abandoned the Majalla’s physical distinction of “direct vs. indirect actor,” but achieve the same balance of justice through different umbrella concepts.

A. Swiss Law (OR) and Turkish Code of Obligations (TBK) – Civil Law System

  • Adequate Causation and Fault: It does not matter whether the perpetrator caused the damage directly or indirectly. The law examines whether the act is objectively capable of producing the damage in the ordinary course of life (adequate causation) and looks at the “fault” of the perpetrator.
  • Apportionment of Liability (Joint and Several Liability): While the Majalla mandates either apportioning the damage in shares among perpetrators or assigning the entire bill to a single person (the Direct Actor) based on the principle of personal liability (Article 90), Swiss and Turkish Law (TBK Art. 61) hold all at-fault parties jointly and severally liable (müteselsil sorumluluk) to protect the victim.
  • Fault in Bailment (Ta’addî): In Swiss Law, a person who exceeds the limits of a loan for use (Gebrauchsleihe) falls into the position of a “Usurper” (Gâsıp) under the Majalla, becoming strictly liable (Kausalhaftung) even for unexpected events/force majeure.

B. English Law (Common Law System)

  • Novus Actus Interveniens: This is the exact equivalent of Majalla Article 90. When an independent and new actor intervenes in the chain of events, the “intervening new act” breaks the chain of causation of the initial tortfeasor.
  • Innocent Agent: This perfectly mirrors the Mecelle’s “Es-sebebü ke’l-fâil” logic. If the intervening direct actor is an innocent agent who has been deceived, threatened, or lacks knowledge, the chain of causation is not broken, and the original indirect actor (mütesebbib) is held liable.
  • Deviation and Bailment: In English law, exceeding the authorized use in a bailment contract (Deviation) instantly places the bailee in the status of an Insurer, triggering Strict Liability.

3. Reflections in International Trade and Islamic Law (Mecelle) Solutions

The Mecelle’s system of causation and fault provides flawless, predictable, and equitable resolution mechanisms when applied to modern international trade law (Lex Mercatoria) disputes.

Case 1: Deviation in Logistics and Maritime Transport

  • Scenario: A commercial cargo (under bailment/trust status) sent from Türkiye to the UK is lost at sea when the ship’s captain unauthorizedly deviates from the contractual route for personal business and encounters an unforeseeable storm. The carrier argues, “I have no fault in the storm; it is a force majeure.”
  • Solution According to the Mecelle: In this incident, the direct actor (mübâşir) that physically destroys the cargo is nature itself (the storm). However, by deliberately changing the route (ta’addî), the carrier (mütesebbib) exceeded the limits of preservation (hıfz), losing the status of a bailee and falling into the position of a tortfeasor/usurper. Since the carrier acted with intent/gross fault (Article 93), nature intervening as the direct actor does not sever the causal link. Under the principle of “Es-sebebü ke’l-fâil”, the carrier is obliged to compensate the full market value of the cargo.

Case 2: Concurrence of Direct and Indirect Actors in the Supply Chain

  • Scenario: A German manufacturer produces a defective sensor for industrial machinery (Indirect Actor). An assembly plant in Türkiye integrates this sensor into the main machine, neglecting quality control procedures (Direct Actor). The machine explodes at the end-user’s facility, causing damage.
  • Solution According to the Mecelle: Article 90 comes into play. The defective production is an indirect cause (tesebbüb), but the assembly plant in Türkiye, which integrates the part and has the final testing obligation, is the “Direct Actor” (mübâşir) that physically executes the act. The free will and quality control negligence (taksir) of the assembly plant act as a new intervening act, severing the causal link from the German manufacturer. The end-user collects the entire compensation from the Turkish company (mübâşir). The Turkish company may later file a recourse claim against the German company based on their purchasing contract, but tort liability rests with the direct actor.
  • Modern Law and the Deep Pocket Theory Difference: In modern Western law, to protect the victim, the “Deep Pocket Theory” comes into play. The German manufacturer and the Turkish assembly firm can be held jointly and severally liable to allow the victim to reach the institutions with the highest payment capacity. The Mecelle, however, dictates that “the ruling is attributed to the direct actor”, imposing the bill directly on the mübâşir within the framework of the principle of personal liability.

Case 3: Customs Delays and Legal Permission (Article 91)

  • Scenario: An international shipment is delayed for 2 weeks at the destination customs due to a legal inspection by state authorities. During this time, the refrigerated container malfunctions, and the food products spoil. The buyer sues the customs administration and the carrier for damages.
  • Solution According to the Mecelle: Article 91 states; “Legal permission negates liability” (Cevaz-ı şer’î zamânı münâfîdir). The customs administration delayed the goods not arbitrarily, but in accordance with public order and the law (legal permission). Here, there is neither a will for direct action (mübâşeret) nor an unlawful indirect cause (mütesebbib). Liability cannot be imposed on the customs administration; the damage/risk rests on the party holding the property rights of the goods or the insurer (takaful).

Case 4: Port Loading Crane Accident and Employer’s Liability

  • Scenario: Highly sensitive devices awaiting export are being loaded onto a ship by a crane operator at the port; the container slips from the crane’s hook, crashing to the ground and shattering. The operator claims, “I did not do it intentionally, the sling broke, I have no fault.”
  • Solution According to the Mecelle (Article 92 – Principle of Personal Liability): The crane operator is the direct actor (mübâşir) because he physically moved the load via the crane mechanism and his act led to its fall. Under Article 92, “The direct actor is liable to make compensation, even if he did not act intentionally.” Even if the damage is the result of an accident, the strict liability principle requires the worker himself to pay the bill. The Majalla does not hold the port authority (the employer) directly liable.
  • Solution According to Modern Law (TBK Art. 66 – Vicarious Liability): Protecting the victim is essential. The port authority is held “strictly liable” for the actions of its employee. The cargo owner collects the compensation from the giant port company. The port company then seeks recourse from the worker internally.

Case 5: Cyber Piracy, Defective API, and Leaving the Door Open (Article 90)

  • Scenario: A software firm (Indirect Actor) installs a defective payment API containing a security vulnerability for an e-commerce site (Indirect Actor). A cyber pirate on the internet (Direct Actor) exploits this vulnerability, manipulates the system, and steals funds from customers’ accounts.
  • Solution According to the Mecelle (Tort and Bailment Exception):
    • Roles: The Cyber Pirate who personally and with free will manipulates the system to steal the money is the Direct Actor (Mübâşir). The Software Firm that wrote the vulnerable code and the E-Commerce Company that integrated this code into its system—digitally “leaving the door open”—are the Indirect Actors (Mütesebbib).
    • Application of Article 90: Under Majalla Article 90, the ruling is attributed to the direct actor. Even though the software/company left the door open, it is the pirate who stole the money with free will. The primary addressee of the tort is the pirate.
    • Bailment (Vedî’a) and Negligence Exception: The security of the customers’ funds is a trust (emanet) in the hands of the e-commerce site. By using a defective API, the e-commerce site committed negligence (taksir) in its duty of preservation (hıfz). The customer collects their money from the e-commerce site for breaching the contract.
    • Recourse: After compensating the damage, the e-commerce site seeks recourse against the Software Firm, which caused the damage “intentionally” (müteammid) under Article 93 by writing defective and deficient code.

Case 6: Power Outage in Cold Chain Logistics (Article 92 vs. Article 93)

  • Scenario: A medical drug container shipped from Türkiye is waiting at a customs warehouse; the warehouse attendant (Direct Actor) flips the breaker switch for cleaning purposes and forgets to turn it back on when finished. Concurrently, the technical service company (Indirect Actor), which failed to maintain the warehouse’s generators, has neglected its duty. The container warms up, and the drugs spoil.
  • Solution According to the Mecelle: In this incident, the warehouse attendant who commits gross negligence by forgetting to turn the switch back on is the Direct Actor (Mübâşir). The technical service that failed to maintain the generator is the Indirect Actor (Mütesebbib) for causing the system to fail. Under Majalla Article 90, although the technical service is at fault, the warehouse attendant’s act of “forgetting to turn on the switch” (as a new act/negligence) severs the causal link. The ruling is attributed to the direct actor, and the liability to compensate falls squarely on the warehouse party that forgot the switch.
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A Guide to Turkish Corporate Law for Investors: Q&A

by with No Comment Corporate Strategy & Regulatory Updates

Choosing the right corporate structure—Joint Stock Company (JSC- Anonim Şirket) or Limited Liability Company (LLC- Limited Şirket)—is the most critical milestone shaping the future of the investment for international funds, cross-border M&A professionals, General Counsels, and CFOs planning strategic investments in the Turkish market. Local regulations may seem complex to investors from different legal systems; however, the Turkish Commercial Code (TCC) offers global-standard flexibility and a security shield when structured correctly.

To meet expectations regarding investment structuring, risk management, exit strategies, and operations, we have consolidated the JSC and LLC structures from a strategic perspective into a single guide.

I. Basic Corporate Structures and Dynamics

1. Joint Stock Company (JSC): For Large-Scale Funds and Flexible M&A Strategies

The JSC structure stands out due to its corporate governance and flexibility in share transfers, especially when targeting Energy Funds, technology investments, and large-scale M&A operations.

  • Liability Shield: A joint stock company is a company whose capital is definite and divided into shares, and which is responsible for its debts solely with its assets. Shareholders are liable only for the capital shares they have committed and solely to the company. This provides perfect risk isolation for global investors and funds.
  • Minimum Capital: With the Presidential Decree dated 24/11/2023, the updated minimum principal capital is 250,000 TRY, and the initial capital for non-public companies adopting the authorized capital system is 500,000 TRY.
  • Corporate Governance and Internal Directive: Board members are elected to serve for a maximum of three years and can be re-elected unless otherwise stipulated. There is a delegation mechanism that provides a huge advantage in post-M&A integration; the board of directors can be authorized to delegate management partially or entirely based on an internal directive it will issue.
  • Ease of Share Transfer and Exit: Unless otherwise stipulated by law or the articles of association, registered shares can be transferred without any restrictions. The transfer is executed by endorsing the share certificate and transferring its possession.
  • Independent Audit: The financial statements of companies subject to audit are audited by an independent auditor in accordance with the Turkish Auditing Standards published by the Public Oversight, Accounting and Auditing Standards Authority. This builds trust for foreign investors seeking transparency.

2. Limited Liability Company (LLC): For Tight Control and Closed Partnership Structures

The LLC may be preferred for more closed-circuit investments, tight joint ventures, and structures requiring direct control.

  • Single-Member Structuring: Both joint stock companies and limited liability companies can be established with just one person.
  • Public Debt Risk (Attention General Counsels and CFOs): LLC partners are directly liable for public debts (taxes, social security) that cannot be collected from the company, in proportion to their capital shares. Compared to the full liability shield of JSCs, this requires legal and finance departments to conduct extra risk analysis when selecting LLC structures.
  • Management Organ: Unlike JSCs, LLCs do not have a board of directors; management and representation belong to the managers.

3. Structural Changes: Merger, Spin-off, and Conversion

Restructuring companies in Türkiye requires legal vision for Cross-Border M&A Partners:

  • Simplified Merger: If the acquiring company holds all the voting shares of the acquired company, the companies can merge under a simplified procedure. This eliminates the obligations to prepare a merger report, provide the right to examine, and submit the agreement for general assembly approval. This creates tremendous speed and cost advantages in M&A processes.
  • Spin-off (Demerger) Strategies: Companies can be fully or partially spun off. In a partial spin-off, one or more parts of a company’s assets are transferred to other companies, and the shareholders of the transferring company acquire the shares and rights of the acquiring companies. This mechanism is vital in carve-out operations, such as placing specific power plants or licenses under a separate Special Purpose Vehicle (SPV) to sell them.
  • Conversion (Change of Legal Form): You do not need to close the company when the business model changes. The Turkish Commercial Code offers the possibility of “Conversion” without liquidating the assets. A Limited Liability Company (capital company) can easily convert into a Joint Stock Company (another capital company).

II. Frequently Asked Questions (FAQ) for Investors

A. Company Incorporation, Partnership Structures, and Liability (General Counsel & Investor Focused)

1. Can a foreign fund establish a Joint Stock Company (JSC) or Limited Liability Company (LLC) alone in Türkiye? Yes, under Turkish law, both a joint stock company and a limited liability company can be established with only one real person or legal entity.

2. What is our legal status if we establish a contract-based Joint Venture without incorporating a registered company (JSC/LLC) in Türkiye? If you do not establish a registered company, this structure is considered an “Ordinary Partnership” (Adi Ortaklık). Since ordinary partnerships do not have a separate legal personality, the investors (partners) are primarily, unlimitedly, and generally jointly and severally liable for the joint venture’s debts to third parties. Therefore, establishing a JSC or LLC is recommended for risk isolation.

3. What is the most fundamental difference in shareholder liability between a JSC and an LLC? In a JSC, shareholders are liable only for the capital they have committed and solely to the company. While this is also the general rule for LLCs, LLC partners are directly liable for public debts that cannot be collected from the company, in proportion to their capital shares.

4. What exactly is the risk of “Piercing the Corporate Veil,” and in what specific situations is it triggered? It is a legal theory used to bypass the limited liability principle, especially in single-shareholder companies. According to legal doctrine and Supreme Court practices; in cases where the corporate personality is abused—such as mixing company assets with the shareholder’s personal assets, transferring company assets to oneself or relatives, having the company pay personal debts, or intentionally bankrupting the company—the corporate veil can be pierced, leading to the direct liability of the parent fund’s assets.

5. What is the minimum capital amount for joint stock companies? The minimum principal capital is 250,000 TRY, and the initial capital for non-public companies adopting the authorized capital system is 500,000 TRY. (Current figures were increased by the Presidential Decree dated 24/11/2023).

6. Can companies only do business in the sectors specified in their articles of association (Ultra Vires)? No, the Ultra Vires principle has been abolished; commercial companies can be established for any economic purpose and subject not prohibited by law. Transactions carried out by authorized representatives outside the scope of the business generally bind the company; unless it is proven that the third party knew the transaction was outside the scope of business.

7. Is official authority approval required for company incorporation in Türkiye? As a rule, the incorporation of a JSC or amendments to its articles of association do not depend on the permission of any authority; however, certain special joint stock companies whose fields of activity are determined by the Ministry of Customs and Trade are established with permission.

8. What are the formal requirements for the articles of association? The articles of association must be made in writing, and the signatures of all founders or their proxies must be notarized, or the articles of association must be signed directly before the trade registry manager or deputy manager.

9. Who is liable for the contracts we make “on behalf of the company” during the incorporation phase, before registration at the trade registry takes place? A commercial company gains legal personality upon registration with the trade registry. Those who act and undertake obligations on behalf of the company before registration are personally and jointly and severally liable for these transactions and obligations. This period is also called the “pre-company” (ön ortaklık) stage in our law (Prof. Dr. Mehmet Bahtiyar, Ortaklıklar Hukuku).

B. Capital, Funding, and Valuation Strategies (CFO & M&A Partner Focused)

10. What can foreign investors contribute as capital to the company other than cash? Intellectual property rights, movable properties, and real estate that do not have limited real rights, attachments, or injunctions on them, and which can be valued in cash and transferred, can be contributed as in-kind capital.

11. We will contribute valuable real estate in Türkiye as in-kind capital for the target company’s capital increase. Do we need to make a separate official sales contract at the land registry for this transaction? No, there is no need to issue a separate official deed at the land registry or notary during the commitment stage. The provisions of the articles of association containing the commitment to contribute real estate as capital are valid without requiring an official form. However, for the company to dispose of the real estate, it must be registered in the land registry, and the notification for this registration is made ex officio by the trade registry manager.

12. Can an investor contribute a “receivable” from a third party as capital instead of cash? If so, when does their liability end? Receivables can be contributed as capital to JSCs and LLCs. However, a shareholder who transfers their receivable to the company as capital is not relieved of their capital contribution obligation until this receivable is actually collected by the company. If the receivable is not collected in time, an obligation to pay default interest arises.

13. Can know-how, personal labor, or commercial reputation be committed as capital? No, service obligations, personal labor, commercial reputation, and undue receivables cannot be capital in JSCs and LLCs.

14. Who values in-kind capital, and is this valuation final? In-kind capital is valued by experts appointed by the commercial court of first instance where the company headquarters will be located, and the expert decision approved by the court is final.

15. How does the “Authorized Capital System” work for funding flexibility? The authority to increase capital up to the authorized capital ceiling specified in the articles of association can be granted to the board of directors for a maximum of five years. This allows for quick cash injections directly by a board resolution without waiting to convene the general assembly.

16. Can the pre-emptive rights (right to acquire new shares) of existing shareholders be restricted in new share issuances? Yes, provided there are justified reasons (such as acquiring businesses, etc.) and with the affirmative vote of at least sixty percent of the principal capital, pre-emptive rights can be restricted or completely abolished.

17. Can the company buy back its own shares? Yes, provided that it does not exceed one-tenth of its principal or issued capital and that the shares are fully paid up, the company can acquire its own shares for consideration with the authorization of the general assembly.

18. Is a conditional capital increase (Convertible bonds) possible? Yes, it can be decided to increase the capital conditionally by providing creditors or employees with the right to acquire new shares through the exercise of exchange or purchase rights due to bonds or similar debt instruments.

C. Share Transfer, Partnership Control, and Minority Rights (M&A Partner & Investor Focused)

19. Can the transfer of registered shares in JSCs be made more difficult by contract? Yes, the articles of association may stipulate that registered shares can only be transferred with the company’s approval (Vinkulation/Transfer restrictions).

20. In what cases can the company refuse to approve a share transfer? The company may refuse approval by asserting an “important reason” stipulated in the articles of association (e.g., the economic independence of the enterprise) or by offering to acquire the shares at their real value on its own or third parties’ behalf.

21. How are bearer shares transferred in M&A transactions? The transfer of bearer share certificates takes effect against the company and third parties only by the transfer of possession and the notification made to the Central Registry Agency (CRA) by the transferee.

22. As a foreign partner, can we issue bearer share certificates for shares that are not fully paid up? No, bearer share certificates cannot be issued for shares whose prices have not been completely paid; those issued contrary to this provision are invalid.

23. Can minority shareholders directly intervene in the company’s audit processes? Yes, if the right to information and examination has been exercised, the general assembly can be requested to appoint a “special auditor”; if the general assembly refuses, shareholders holding at least one-tenth of the capital may request this appointment from the court.

24. Can the controlling fund (Majority Shareholder) squeeze out a troublesome minority? Yes, if the controlling company holds at least ninety percent of the shares and voting rights, and the minority prevents the operation of the company, acts contrary to the principle of good faith, or acts recklessly, the controlling company can purchase the minority shares at their stock exchange value, if any, or at their actual value, thereby squeezing them out.

25. Can the shareholders’ right to obtain financial information from the company be restricted? No, the shareholder’s right to information and examination cannot be abolished or restricted by the articles of association or by a decision of one of the company organs.

D. Corporate Governance, Board of Directors, and Liabilities (General Counsel & CFO Focused)

26. In a group of companies (Holding) structure, can our parent fund in Germany (Controlling Company) give a strategic instruction that would cause its subsidiary in Türkiye to suffer a loss? As a rule, the controlling company cannot use its control in a way that causes the subsidiary to suffer a loss. However, if this loss is actually compensated within that activity year, or a right to claim equivalent value is granted to the subsidiary by the end of that year at the latest, such an instruction becomes lawful. Otherwise, the subsidiary’s shareholders and creditors may demand compensation for the loss from the controlling company.

27. Our parent fund in Germany has an international reputation that creates intense trust in the Turkish market. Does a special legal liability arise from this “Holding” reputation? Yes, the concepts of “Liability based on trust” and “Group Reputation Liability” exist in Turkish law. In cases where the reputation of the group reaches a level that gives trust to society or the consumer, the controlling company (fund) can be held liable for the trust aroused by the use of this reputation.

28. If two different capital companies we invested in Türkiye purchase each other’s shares (Cross-shareholding), how are voting rights affected? Capital companies holding at least one-fourth (25%) of each other’s shares are considered to be in a cross-shareholding situation, and if this situation is entered into knowingly, only one-fourth of the total votes and other shareholder rights arising from the acquired shares can be exercised (excluding the right to acquire bonus shares); all other shareholder rights are frozen.

29. Is the term of office of board members flexible enough for M&A agreements? Board members are elected to serve for a maximum of three years; unless otherwise stated in the articles of association, the same person can be re-elected, and they can always be dismissed for a just cause.

30. Can board of directors meetings be held electronically from abroad? Yes, provided that it is regulated in the articles of association in capital companies, board of directors meetings can be held entirely in an electronic environment, or some members may participate electronically in a physical meeting.

31. Can the board of directors delegate its powers to professional local managers? Yes, based on a provision in the articles of association and an “internal directive” prepared accordingly, company management can be partially or entirely delegated to one or more members or third parties.

32. Can board members conduct transactions with the investor fund company? A board member cannot conduct any transaction with the company on behalf of themselves or someone else without obtaining special permission from the general assembly; otherwise, the transaction may be considered void.

33. Can CFOs and managers borrow cash from the company? No, board members who are not shareholders and their relatives cannot borrow cash from the company, and the company cannot provide bailment, guarantee, or collateral in favor of these persons.

34. How is the non-compete obligation for managers applied in Turkish law? Board members cannot engage in commercial transactions falling within the company’s field of activity on their own or another’s behalf, nor can they enter a competing company as a partner with unlimited liability without the permission of the general assembly.

35. Can the damages caused by board members to the investor or the company be insured? Yes, the damage that members may cause to the company due to their fault can be insured at a price exceeding twenty-five percent of the company capital; this serves as a safeguard regarding corporate governance principles.

E. Structural Changes: Mergers, Spin-offs, and Conversions (M&A Strategies)

36. While merging the target company (JSC) by acquisition, are we obliged to give shares from our own company to the partners of the target company, or can we provide their exit solely by paying them cash (cash-out)? The Turkish Commercial Code allows stipulating in the merger agreement that only a severance payment (cash) is given instead of allocating shares to the partners. In this way, you can squeeze out the partners of the target company via cash payment (squeeze-out via merger) without integrating them into the new structure.

37. Is it legally possible for an ordinary partnership in our portfolio to acquire a Joint Stock Company (capital company) we are targeting? No, the law does not allow this. Ordinary/personnel companies can only merge with capital companies on the condition that they are the “acquired” (merged) company; meaning the acquisition of capital companies by personnel companies is legally prevented.

38. Can we spin off a Joint Stock Company (JSC) that is our subsidiary and transfer its assets to a newly established ordinary/personnel company? No. While regulating valid spin-offs, the law permits capital companies and cooperatives to be divided only into capital companies and cooperatives. Spinning off into personnel companies is prohibited[cite: 1].

39. For the sake of flexibility, can we convert an existing JSC or LLC into an ordinary/personnel company? No. The Turkish Commercial Code explicitly prohibits the conversion of capital companies and cooperatives into personnel companies. A capital company can only convert into another capital company or a cooperative.

40. What happens to the debts of the target company in mergers by acquisition (Universal Succession)? With the registration of the merger in the trade registry, all assets and liabilities of the acquired company automatically pass to the acquiring company.

41. Does the personal liability of former partners for the past debts of the acquired company end immediately? No, the liabilities of the partners who were liable before the merger continue for three years starting from the announcement of the merger decision.

42. We acquired 100% shares of the target company. What options are there to speed up the merger? If the acquiring company owns all the voting shares of the acquired company, the “Simplified Merger” procedure applies.

43. What is the operational and legal advantage of a simplified merger? The obligation to prepare a merger report is lifted, the requirement to provide an examination right to partners is not applied, and the merger agreement can be registered without being submitted for general assembly approval.

44. We only want to sell a specific power plant (Carve-out). Is a partial spin-off possible? Yes, a “Partial Spin-off” without liquidation can be executed by transferring one or more parts of a company’s assets in exchange for acquiring shares.

45. Can we convert our Limited Liability Company into a Joint Stock Company to reduce legal risks? Yes, via the Change of Legal Form (Conversion) procedure, a transition from LLC to JSC can be made without liquidating the company and while preserving its economic identity.

F. Financial Reporting, Audit, and Dividend Distribution (CFO Focused)

46. According to which standards are the financial statements of our subsidiary in Türkiye prepared? The financial statements of joint stock companies must be prepared in accordance with the Turkish Financial Reporting Standards (TFRS/TMS) published by the Public Oversight, Accounting and Auditing Standards Authority.

47. Who appoints the independent auditor? The auditor is elected by the company’s general assembly before the end of each fiscal period; in group companies, the group auditor is appointed by the general assembly of the parent company.

48. Can the entire profit (Net Profit) be distributed as a dividend to the shareholder fund? No, five percent of the annual profit must be set aside as a “general legal reserve” until it reaches twenty percent of the paid-in capital. Dividend distribution cannot be determined unless legal reserves are set aside.

49. What are the legal consequences if the auditor issues an adverse opinion on the financial statements? If an adverse opinion is given, the board of directors must call the general assembly to a meeting within four business days from the delivery of the opinion letter, and the general assembly elects a new board of directors; meaning the report directly affects the continuity of management.

50. Can dividends or preparation period interest paid in bad faith be reclaimed later? Yes, shareholders who receive dividends or interest, and managers who receive profit shares unjustifiably and in bad faith are obliged to return them, and this right is subject to a five-year statute of limitations.

On a dark navy blue matte background, gold foil Arabic calligraphy 'Mecelle-i Ahkâm-ı Adliye' above a modern abstract geometric scale symbol representing global trade.

Article 20 of the Mecelle: Legal Analysis of the Principle “Damage Shall Be Removed”

by with No Comment Mecelle Series

1. The Maxim, Its Essence, and Islamic Foundations

The Maxim: الضرر يزال Damage shall be removed (Zarar izale olunur)

The Essence of the Maxim: This maxim dictates that a damage that has occurred cannot be left uncompensated legally; to establish justice, that damage must absolutely be removed (eliminated). The grievance of the injured party must be addressed, and the equilibrium that existed before the unlawful situation must be restored.

Islamic Foundations: This principle is derived from the Hadith “There is no harming and no reciprocating harm” (Lâ darara ve lâ dırâr), which forms the bedrock of Islamic tort law. As the great jurist Ali Haydar Efendi points out in his commentary Dürerü’l-Hükkâm (Vol. 1, p. 79), there is a subtle distinction between def-i zarar (preventing damage before it occurs) and izale-i zarar (removing damage that has already occurred). Article 20 focuses specifically on the compensation (daman/tazmin) of damage that has already materialized.

2. Strict Liability, Conditions, and Practical Examples

Ex Lege Effect (Liability Arising Without Explicit Contractual Terms): The most striking legal consequence of this rule is that the obligation to remove damage arises spontaneously from the mandatory nature of the law (ex lege), without needing to be explicitly written in the contract between the parties. Even if commercial parties forget to include an indemnity clause, this maxim fills the contractual silence when a tort or breach occurs.

Strict Liability (Absence of Fault): A critical aspect of this maxim is that it does not strictly require “fault” or “negligence” to trigger compensation. In Islamic law, tort liability is generally based on strict liability (objective responsibility). For instance, Mecelle Article 92 states that a person who directly destroys another’s property is liable for the damage even if it was not intentional. The focus is on the material loss suffered by the victim, not the mental state of the perpetrator.

Practical Examples:

  • Option of Defect (Khiyar al-Ayb): A hidden defect in a purchased good that emerges later constitutes a damage to the buyer. As Ali Haydar Efendi indicates, this damage must be removed. Even without a specific warranty clause, the buyer automatically gains the right to return the good or demand a price reduction proportionate to the defect.
  • Prevention of Interference: Physical damage to one’s property or unjust occupation is immediately halted, and the destruction is compensated, regardless of any prior agreement.

3. Legal Philosophy and the “Certainty” (Yaqin) Barrier

The limits of the “Damage is removed” maxim are drawn by another fundamental philosophical pillar of the Mecelle, Article 4: “Şek ile yakîn zâil olmaz” (Certainty is not dispelled by doubt).

For a damage to be legally removable (compensable), it must have actually occurred, its boundaries must be clear, and it must be certain (yaqin). While the Mecelle clearly states that damage shall be removed, it underlines that this damage must be an actual, certain one. The compensation of future, unrealized damages whose occurrence depends on probability (such as future lost profits) is fundamentally not possible. This principle is one of the pillars of Islamic law, prioritizing certainty and refusing to reward uncertainty (gharar/shakk). The Mecelle refuses to disrupt the certain material status quo for the sake of a doubtful future scenario.

4. Projections in Modern Law, Consequential Losses, and Arbitration

While Western legal systems and Turkish law theoretically allow for the recovery of lost profits (lucrum cessans) and similar items under “positive damages,” these systems, recognizing that this may contradict natural justice, have subjected forward-looking damages to a series of heavy criteria.

The Complexity of Proof and Calculation in Turkish Law: Although the compensation of “lost profit” (as positive damages) is possible in Turkish law, its method and calculation are subject to highly complex procedures.

  • Definition of Positive Damages: The General Assembly of Civil Chambers of the Supreme Court of Appeals (Yargıtay HGK, E. 1990/13-392, K. 17.01.1990) defined positive damages as arising when the creditor waives performance and demands compensation, noting that the contract is not terminated; rather, the right to performance is replaced by the right to compensation for positive damages.
  • Contractual Rescission (Dönme) Situation: In construction contracts, if the contractor fails to perform, the employer may rescind the contract (Turkish Code of Obligations Art. 473). Because this involves rescission, the recoverable damage is “negative damage” (menfi zarar), meaning the employer generally cannot claim positive damages. Conversely, if performance becomes impossible due to a reason attributable to the employer (TCO Art. 485/2), the path is opened for the contractor to claim positive damages upon rescission (as supported by the 15th Civil Chamber, Yargıtay 15. HD, E. 2014/3199, K. 2015/1875).
  • The Calculation Labyrinth: The formula for calculating lost profit is virtually a labyrinth. The Yargıtay (HGK, E. 2010/244, K. 2010/260, T. 12.05.2010) formulated lost profit as: “found by deducting from all the probable income the injured party would have earned had the contract been fulfilled, all the mandatory expense items… the rights saved due to the premature termination, and the total amount of earnings the party made (or deliberately avoided making) from other work during this period.”

US and Anglo-Saxon Law: Expectancy Damages: In US contract law, positive damages are referred to as “expectancy damages,” consequential damages and lost profit is a fundamental component of this compensation. The legal system aims to close the gap between the creditor’s current position and the position they would have been in had the breached contract been fully performed. However, to legitimize this compensation, strict criteria are applied:

  • Proving Lost Profits: Courts require that the profit be calculable with “reasonable certainty”; abstract or speculative estimates are rejected.
  • The Foreseeability Rule (Hadley v. Baxendale): If the breaching party could not have reasonably foreseen this loss of profit at the time the contract was formed, the damage cannot be compensated.
  • Duty to Mitigate: The injured party is obligated to minimize the damage by making reasonable efforts.

The Middle Eastern Context: Saudi Arabia and Iran: The Mecelle’s cautious approach to future damages remains highly relevant in modern Middle Eastern jurisdictions.

  • Saudi Arabia: Historically, consequential losses have been rejected. With the Saudi Civil Transactions Law (CTL) enacted in 2023, the principle of pacta sunt servanda (freedom of contract) has been strengthened. Courts strictly adhere to contractual provisions where parties exclude consequential damages.
  • Iran: In the Iranian legal system, damages must be direct and certain. The recovery of consequential losses and lost profits is highly restrictive, aligning with traditional Islamic legal principles.

Industry Practice: The Relevance of Mecelle’s Provisions: Today, in almost all energy, infrastructure, and EPC contracts globally, parties deliberately insert “Exclusion of Consequential Loss” (ECL) clauses. International corporations voluntarily waive these rights to avoid the protracted litigation and complex calculations caused by the uncertainty of “lost profits.” This proves that the Mecelle’s “only actual and certain damage is removed” approach is de facto applied through contracts in modern mega-projects and is accepted as the most reliable risk allocation method.

5. The Long Road Leading to the Same Conclusion and the Practicality of Liquidated Damages

Western legal systems have attempted to solve the “uncertainty (future profit)” that the Mecelle wholly rejects by navigating a long judicial road, but in most cases, they have reached the exact same conclusion (rejection). After all, how much profit will be made is a forward-looking uncertainty (shakk).

Particularly, the practical counterpart of the “foreseeability” rule put forward in the Hadley v. Baxendale decision in US law remains quite weak. While it might seem logical in one aspect for parties to explicitly consult and draft potential future damages and lost profits from the outset, in practice, it is nearly impossible to transfer this to a contract. It is difficult to draw the boundaries of such a clause that could be added as a “guarantee of mistrust,” and it is hard to find a counterparty who will accept these conditions; even if found, such a speculative risk would need to be insured, and its massive costs would ultimately be reflected back to the employer. Ultimately, in the event of a dispute, claiming compensation based on this clause will often not be directly possible and will require a long, complex trial filled with expert reports.

Therefore, instead of trying to design and impose hypothetical lost profits in a contract; setting a clear and calculable liquidated damages clause to achieve the goal of running the contract smoothly within the specified time is seen as a much fairer, more practical, and more certain solution in commercial life.

References

Freshfields Bruckhaus Deringer, The recovery of damages under Saudi law: understanding the basics.

Ali Haydar Efendi, Dürerü’l-Hükkâm Şerhu Mecelleti’l-Ahkâm, Vol 1.

Yargıtay HGK., E. 2010/244 K. 2010/260 T. 12.05.2010.

Yargıtay HGK., E. 1990/13-392 K. 17.01.1990.

Yargıtay 15. HD., E. 2014/3199 K. 2015/1875.

Turkish Code of Obligations (TCO), Articles 473 and 485/2.

CMS Expert Guide to Consequential Loss Clauses in the Energy Sector: Iran.

CMS Expert Guide to Consequential Loss Clauses in the Energy Sector: Saudi Arabia.

DLA Piper, Overview of the new Saudi Arabia Civil Transactions Law (August 2023).

Hadley & Anor – Baxendale & Ors [1854] EWHC J70

corporate executives shaking hands over international legal documents with the Istanbul skyline in the background.

Debt Recovery in Türkiye: Step-by-Step Procedure and Case Studies

by with No Comment Debt Collection

In cross-border trade, the legal process is conducted transparently, swiftly, and in a results-oriented manner to ensure the recovery of rightful receivables. The professional roadmap and past successes in collection operations against debtors in Türkiye are detailed below.

Step-by-Step Procedure for International Debt Recovery

1. Comprehensive Document Request and Review The process begins by requesting all supporting documents regarding the origin and nature of the debt (invoices, contracts, correspondence, waybills, etc.). These submitted documents are meticulously examined by expert teams to confirm the strength of the legal foundation.

2. Financial Analysis of the Debtor Company Before taking legal steps, in-depth research is conducted on the debtor company or individual in Türkiye. The most realistic picture is presented by analyzing the debtor’s asset status, commercial registry, and whether the receivable has actual collection viability.

3. Creditor-Friendly Contract and Power of Attorney Stage To avoid putting extra financial stress on a company already suffering from uncollected debts, a fair and non-coercive service agreement is prepared for both parties. Upon reaching an agreement, a standard power of attorney is obtained to conduct official transactions in Türkiye, formally initiating the process.

4. Debt Recovery via Communication (Amicable Settlement Stage) Before resorting directly to legal action, priority is given to a culture of conciliation. The debtor is contacted to notify them of the existence of the debt and its legal consequences; the goal is to carry out the collection swiftly and cost-effectively, without the need for litigation or enforcement proceedings.

5. Initiation of the Legal Process via Enforcement Proceeding Without Judgment If communication and reconciliation efforts fail, or if the situation requires urgency, official collection procedures are initiated directly before the Execution Offices of the Republic of Türkiye via an enforcement proceeding without judgment (ilamsız icra takibi). According to Turkish Execution and Bankruptcy Law procedures, any person or institution claiming a receivable can initiate a proceeding directly at the execution office with supporting documents (invoices, contracts, email approvals, etc.), without waiting for lengthy court processes or requiring a court decision (judgment). Following this application, a legal “Payment Order” is sent to the debtor by the execution office.

6. Notification of the Payment Order and Execution of Attachment Procedures After the payment order sent by the execution office is officially notified to the debtor, a legal period for objection and payment (typically 7 days) begins. If the debtor does not make a valid objection to the debt and fails to make the payment within this legal period, the enforcement proceeding becomes final. With the finalization of the proceeding, the right of attachment, granted to the creditor by law, is immediately activated. Actual and electronic attachments (liens/garnishments) are placed on identified bank accounts, movable/immovable properties, vehicles, and the debtor’s rights (receivables) held by third parties, thereby executing the actual collection.

7. Management of Execution Costs Due to legal procedures in Türkiye, the statutory fees and expenses payable to the execution offices are initially covered by the creditor. However, since these payments hold the status of legal expenses, they are added to the case file account upon successful collection and are ultimately recovered from the debtor and refunded to the creditor.

8. Uninterrupted and Transparent Communication Being across borders does not mean being disconnected from the process. Every development, from the document review stage to the attachment procedures and final collection, is regularly reported; continuous contact is maintained from the beginning to the end of the process.

9. Nationwide Enforcement Across Türkiye Without Geographical Boundaries Thanks to the advanced digital judicial infrastructure (UYAP), physical distance barriers are entirely eliminated regardless of which city or region of Türkiye the debtor is located in. There is no need to travel to or be physically present in the debtor’s city to initiate enforcement proceedings. Official proceedings and attachment orders are transmitted instantly to anywhere in Türkiye digitally through authorized execution offices, ensuring the process is executed swiftly and seamlessly without being hindered by geographical boundaries.

Sample Case Studies: How Are Receivables Collected in Türkiye?

It is crucial to see how legal processes conclude in practice to understand the transparency of the procedure. Here are examples of international debt collections successfully finalized across various sectors:

  • Digital Marketing and Advertising (Breach of Service Contract): A European-based digital advertising agency signed a contract to manage the global market advertisements of an e-commerce company in Türkiye. Although advertising campaigns had begun and budgets were spent, the Turkish company avoided paying the service fee. After confirming the debtor’s bank accounts were active, an enforcement proceeding without judgment was initiated. Upon the notification of the execution order, realizing that its commercial reputation would be damaged, the debtor paid the principal amount in a single lump sum, along with all execution costs.
  • Industry and Manufacturing (Unpaid Raw Material Export): An Asian raw material supplier exported a large volume of fabric raw materials to a textile manufacturer in Türkiye. The goods were used, but no payment was made despite the invoice due date passing. After preliminary negotiations failed, an enforcement proceeding was initiated. Due to the debtor’s failure to object to the payment order, an attachment was applied to the machinery in the production facility and the company’s bank accounts; the debtor was forced to pay the debt along with statutory interest and costs.
  • E-Commerce and Supply Chain (Unpaid Dropshipping Fee): A Far East-based supplier provided thousands of dollars worth of products to an e-commerce seller in Türkiye to be shipped directly to overseas customers. Although the products reached the end consumers and the Turkish seller earned revenue from the platform, the supplier’s invoices remained unpaid. Enforcement proceedings were initiated using sales data on the platform and cargo delivery records. Faced with the prospect of their local bank accounts and digital wallets being blocked following the notification of the payment order, the debtor settled the entire balance at once.
  • Information Technology (Software Development Fee): A North American software company delivered a custom CRM software for a holding company in Türkiye, but the holding delayed the final 40% payment for months. Before initiating enforcement proceedings, the holding’s legal department was contacted. The potentially high court costs were clearly explained, and the receivable was collected through a settlement without the need to file a lawsuit.
  • Health Tourism (Intermediary Agency Payment Breach): A UK-based health tourism agency directed patients to an aesthetics clinic in Türkiye, and the medical services were successfully completed. However, the clinic did not pay the commission fees stipulated in the contract to the overseas agency. The debt amount was clarified by matching the invoices of the payments received by the clinic from the patients, and enforcement proceedings were initiated. To prevent an attachment on the clinic’s bank accounts and avoid jeopardizing its health tourism authorization certificate, the debt was collected in full before the objection period expired.
  • International Logistics and Transportation (Freight Receivable): A Middle East-based logistics firm transported the goods of a Turkish exporter, but the freight invoice was not paid. As the debtor company was identified as an active exporter, enforcement proceedings were initiated, creating the risk of an attachment annotation being placed on their customs transactions. Fearing the suspension of its export operations, the debtor made the full payment before the objection period ended.
  • Consulting and Engineering (Project Design Fee): A UK architectural firm delivered the designs for a luxury residential project, but the Turkish contractor refused to pay the fee. Although the debtor objected to the payment order sent after the initiation of enforcement proceedings, a lawsuit for the annulment of the objection was filed with the delivery protocols; the court ruled in favor of the creditor, and the receivable was collected along with a 20% execution denial compensation (penalty).
  • International Education Consulting (Agency Fees): A language school in Canada enrolled numerous students through an education consulting agency in Türkiye, but the agency did not transfer the collected tuition fees to the school. Legal evidence was gathered via subcontracts and payment receipts, and an enforcement proceeding without judgment was initiated. To prevent the suspension of the company’s operations, the debt was transferred to the school’s accounts along with statutory legal costs.
  • Wholesale Trade (Collection Issue After Partial Payment): A European wholesaler sent cosmetic products to a retail chain, but the payment for the last shipment was not made. The fact that partial payments had been made strengthened the legal ground. Upon being notified that an attachment would be applied to the stock in the stores and POS devices, the company paid the entire debt along with late interest.
  • Gaming and Software Industry (Independent Developer Receivable): An independent game developer living in Eastern Europe delivered 3D models to a mobile game studio in Türkiye but could not receive payment. It was determined that a direct attachment could be sent to the debtor studio’s mobile app revenues, and this risk was communicated to the company management. Unwilling to risk an account block, the studio paid the entire debt without the need for a lawsuit.
  • Machinery and Industry (Unfounded Objection): A Germany-based machinery manufacturer installed an industrial machine in a factory in Türkiye, but the final installment was not paid under the pretext of a “calibration issue.” Enforcement proceedings were initiated with a “Flawless Delivery Protocol,” and following the notification of the payment order and the warning of an attachment on the production lines, the debtor company abandoned its unfounded objections and deposited the final installment along with all costs.
  • Tourism and Hospitality (Unpaid Agency Commissions): A travel agency in the Gulf region sent tourists to a luxury hotel in Türkiye but could not receive its commission fee at the end of the season. Prior to the new season, enforcement proceedings were initiated to place an attachment on the hotel’s bank accounts and tour operator receivables. Unable to risk a cash flow bottleneck, the hotel management was forced to pay the debt with statutory interest.

FAQ (Frequently Asked Questions)

Q: Do I need to travel to Türkiye or be physically present for the debt recovery process?

A:No, there is no need to be in Türkiye. Everything can be executed seamlessly and entirely remotely through a standard power of attorney. Thanks to the advanced digital judicial system (UYAP), execution and attachment procedures against a debtor located anywhere in Türkiye are initiated and concluded electronically.

Q: Is a court judgment required to start enforcement proceedings?

A: No. Under Turkish Execution and Bankruptcy Law, an “enforcement proceeding without judgment” can be initiated directly using supporting documents that prove the debt—such as invoices, contracts, email correspondence, and delivery records (CMR, etc.)—without needing a prior court decision.

Q: Who is responsible for the legal costs paid to the execution office?

A: Initially, statutory fees and expenses are covered by the creditor to open the execution file. However, upon successful collection, all these legal costs, along with statutory interest, are entirely recovered from the debtor and refunded to the creditor.

Q: What happens if the debtor makes an unfounded objection to the payment order?

A: If the debtor halts the enforcement proceeding with a baseless objection, an “annulment of objection” lawsuit is filed in the competent courts. If the objection is proven to be unjustified, the debtor is penalized and ordered to pay a minimum 20% execution denial compensation in addition to the principal debt.

Q: What if we don’t know exactly which city the debtor is located in within Türkiye?

A: Through official commercial registry records, MERSIS (Central Registration System), and tax ID numbers, the debtor’s legal notification addresses, active bank accounts, assets, and operating regions are identified via authorized execution offices. All procedures are centrally managed regardless of geographical boundaries.

Q: How long does the debt recovery process typically take?

A: The timeframe varies depending on the debtor’s financial status and whether they exercise their right to legal objection. While amicable settlements or undisputed enforcement proceedings (driven by the pressure of attachment) can yield results within a month, the process may be extended according to the court’s schedule if a lawsuit is required due to an unfounded objection.

On a dark navy blue matte background, gold foil Arabic calligraphy 'Mecelle-i Ahkâm-ı Adliye' above a modern abstract geometric scale symbol representing global trade.

Article 5 of the Mecelle: Legal Analysis of the Principle “The Fundamental Principle is That a Thing Shall Remain as It Was”

by with No Comment Mecelle Series

The Maxim, Its Essence, and Islamic Foundations

The Maxim: الأصل بقاء ما كان على ما كان The fundamental principle is that a thing shall remain as it was (Bir şeyin bulunduğu hâl üzere kalması asıldır)

The Essence of the Maxim:

Unless there is definitive evidence to the contrary regarding a right, ownership, or any legal situation, its current state is legally presumed to continue. The burden of proof falls on the party alleging that the current situation has changed. This principle is a fundamental procedural rule that prevents the established order from being disrupted by unfounded claims.

Islamic Foundations: In Islamic legal methodology, this principle is formulated through the doctrine of “Istishab” (the presumption of continuity). Meaning “association” or “seeking a link” lexically, istishab is used as a term to mean the continuation of the existence of something that previously existed, and the continued non-existence of something that did not exist. In a general sense, istishab is defined as the continued validity of a legal ruling that existed in the past, unless there is legal evidence to the contrary.

Regarded as the last of the Sharia evidence, istishab is resorted to only when no other evidence is found. Despite being viewed as a weak proof, istishab provides jurists with latitude in doubtful situations and helps them resolve matters quickly and easily. As Dr. Ahmet Akman points out, istishab serves a protective function for the indication of the previous evidence regarding the existing ruling. In this sense, among the Hanafis, istishab has an averting (protective) nature rather than a proving one, and it does not make a positive contribution to the acquisition of new rights.

2. Causes, Limits, Conditions, and Practical Examples

Istishab is not an absolute material reality, but a procedural shield valid until proven otherwise. As stated in Osman Şahin’s study, five basic principles have been derived from the istishab rule.

Limits and Conditions:

  • Requirement of Certainty (Yaqin): The principle that “certainty is not dispelled by doubt” is directly related to istishab. It means that the absence of a thing whose existence is known with certainty cannot be decreed due to subsequent doubt and hesitation unless there is contrary evidence.
  • Limit of Defense (Averting): While istishab is accepted as a proof for leaving what exists as it is, it is not accepted as a proof to establish something or a right that does not exist.
  • Collapse by Contrary Evidence: Istishab is resorted to only as long as there is no other contrary evidence.

Practical Examples:

  • The Missing Person (Mafqud): Regarding the rights belonging to a missing person whose status of being alive or dead is unknown, the rulings applied to the living are applied unless there is evidence of their death, and their assets are not distributed among the heirs. However, the missing person cannot benefit from istishab in acquiring a new right (proving), such as inheriting from someone else.
  • Absence is the Original State for Accidental Attributes: If a customer who buys an animal on the condition that it is free of defects later claims that the animal is sick and the seller denies this, the burden of proof is on the customer because the illness is an accidental attribute.

3. Legal Philosophy and Universal Logic

The philosophical core of this maxim is the concept of legal certainty. If there were no presumption of protecting the status quo, every right in commercial and social life would constantly be shaken by baseless claims. Under the principle of “freedom from liability is the original state,” which is derived from the rule, it is fundamental that people are born free of liability and debt. It is mandatory for the claimant to present evidence for a person to be indebted or liable. Through this mechanism, the law protects the system against unfounded claims.

4. Projections in Civil Law

The principles derived from istishab constitute the cornerstones of modern law.

  • Presumption of Possession: A person who physically holds a movable property (possessor) is presumed to be its owner until proven otherwise. It is fundamental that the actual state of the property continues.
  • Freedom of Contract: The rule that “the original state in things is permissibility” corresponds to the principle in modern law that everything not prohibited is free. Unless there is evidence that it is legally corrupt or void, the validity of every transaction or contract made is decreed.

5. International Trade and Judicial Applications: The Debate on Arbitration and Interim Measures

In cross-border trade and international arbitration, it is essential to protect existing ownership or possession under the rule that “the fundamental principle is that a thing shall remain as it was.” However, decisions on interim (provisional) measures are a judicial intervention that constitutes an exception to this istishab principle. An interim measure obtained by a claimant—who asserts that a right belongs to them but the property is under the counterparty’s control—before fully proving their claim can prevent the possessor from benefiting from the current situation (istishab). The limits of this exceptional intervention and how the damages will be compensated are a matter of debate in arbitration rules.

Security and Discretion within the Framework of the ICC and International Arbitration Act (MTK):

  • According to Article 6/II of the International Arbitration Act (MTK) of Türkiye, the arbitrator or arbitral tribunal may make the issuance of an interim injunction or interim attachment conditional upon the provision of appropriate security.
  • Similarly, Article 28/I of the ICC Arbitration Rules stipulates that the arbitral tribunal may make any interim or conservatory measure subject to appropriate security being furnished by the requesting party.
  • However, in the ICC Rules, no other conditions (such as rightfulness, urgency, etc.) are mentioned for the arbitral tribunal to grant interim legal protection measures other than security. The absence of any regulation in this regard has been a conscious choice so that the arbitral tribunal can decide according to each specific case. When determining these conditions, ICC arbitral tribunals generally take precedent decisions given in previous proceedings (urgency, risk of significant harm, prima facie case, etc.) as an example.
  • Criticism: It is debatable whether claims of being right at first glance (prima facie) and irreparable harm are sufficient to change a main principle like “the continuation of the existing state” (istishab). Leaving these conditions solely to precedent decisions may undermine the principle of legal certainty. Therefore, it would be beneficial to explicitly state the objective conditions required for granting interim measures in the text of the ICC Arbitration Rules.

ICSID Rules and the Lack of Security:

  • According to Article 47 of the ICSID Arbitration Rules dated July 1, 2022, the arbitral tribunal may recommend provisional measures to protect the rights of the parties, preserve the status quo until the dispute is resolved, or restore it.
  • However, the term “security” is not even included in the relevant ICSID rules (Article 47).
  • Criticism: If an interim measure turns out to be unjustified, the damage suffered by the party whose status quo is disrupted and whose commercial activity is wrongfully halted can reach massive proportions. While the istishab principle (protecting the existing right) is suspended by the interim measure, the failure to secure damages is a deficiency. It is considered that the lack of explicit provision for security practice in the ICSID rules constitutes a contradiction to the istishab principle used to protect the state of possessing an existing right.

Recommendation:

Security is a highly critical insurance for compensating unjustified damages that may arise as a result of interim legal protection measures. We believe that arbitration rules (such as ICC, ICSID, etc.) should set the necessary conditions for granting interim measures—which change the status quo by breaking the istishab presumption—so clearly that it leaves no room for interpretation, including making a certain amount of security mandatory.

References

[1] Akman, Ahmet, “İstishab (Serahsî Özelinde Usûl-Füru’ Karşılaştırması)”, İslam Hukuku Araştırmaları Dergisi, issue 32, 2018, pp. 105-124.

[2] Şahin, Osman, “İslâm Hukuk Metodolojisinde İstishab”, O.M.Ü. İlahiyat Fakültesi, pp. 489-516.

[3] Sarıgül Ata, Bersun, “ICC ve ICSID Tahkim Kuralları Uyarınca Geçici ve Koruyucu Tedbirler”, BÜHFD, Vol. 10, Issue 2, July 2024, pp. 397-418.