Supreme Court’s Critical Decision Concerning Currency Control Laws

The decision of the 12th Civil Chamber of the Supreme Court of Appeals dated October 6, 2022, with File No. 2022/6469 and Decision No. 2022/9954 (the “Decision“), includes essential remarks regarding the legal consequences of the violation of such ban.

What does the Decision signify?

The Decree No. 32 and the Communiqué No. 2008-32/34 on the Decree No. 32 on the Protection of the Value of the Turkish Currency set forth a ban on foreign currency denominated and FX-indexed payments for employment, service, construction, sale and rental agreements between Turkish residents. The Law No. 1567 on the Protection of the Value of the Turkish Currency (the “Currency Protection Law“), which is the basis for the regulations above, clearly stipulates the legal consequence of violating any regulation introduced within the scope of the Currency Protection Law as an administrative fine.

In the subject case of the Decision, there was a rental agreement between the parties where the rental price was determined in Euros. The lessor initiated the enforcement proceedings against the lessee for the payment of the unpaid rental amounts in Euros. Following the objection of the lessee to the enforcement proceedings, the case was brought to the execution court for challenging such objections. In the court hearing, the lessee claimed, among other things, that the rental price cannot be demanded in foreign currency pursuant to the applicable currency control laws. The first instance execution court and the Court of Appeal ruled that the lessee had not paid the rental price and rejected the lessee’s case without evaluating the lessee’s additional objection asserted during the court hearings regarding the ban on foreign currency denominated/indexed payments on the grounds that any objection was not made at the enforcement proceedings cannot be claimed at the court proceedings. Thus, the case was brought by the lessee to the Supreme Court of Appeals.

While evaluating the case, the Supreme Court of Appeals made an important remark regarding the legal consequences of the violation of the ban on foreign currency denominated/indexed payments. Accordingly, the Supreme Court of Appeals referred to Article 27/1 of the Turkish Code of Obligations (“TCO“) which stipulates, “agreements contrary to the mandatory provisions of the law, morality, public policy and personal rights shall be deemed null and void” and stated that the currency control laws are enacted with the aim of protecting the value of the Turkish currency and therefore, they are related to economic public policy and must therefore be considered ex officio by courts.

The Decision is important as it evaluates the results of violatingg the currency control laws. The Decision tells us that at least one chamber of the Supreme Court of Appeals believes that the violation of the currency control laws may result in the partial or full nullification of an agreement.

While this is a controversial topic, the common scholarly opinion is that the legal consequence of violating such ban should be limited to administrative fines since the Currency Protection Law specifically stipulates only administrative fines for violating any provision of any regulation introduced within the scope of the Currency Protection Law which is a special law (lex specialis) repealing the general laws (legi generali). In addition, the scholarly opinion emphasizes that these restrictive regulations are introduced with secondary regulations that rank that are below the laws in the hierarchy of norms and therefore, the superior provisions of the laws must be directly applied. However, this interpretation of one chamber of the Supreme Court of Appeals points at the risk that the courts may, in practice, have differing views.

That being said, the Decision of the Supreme Court of Appeals does not necessarily mean that its various chambers will rule in the same direction in similar cases in future. In case of conflicting decisions on this very subject, the general assembly of the High Court of Appeals may gather and adopt a decision to unify them, in which case all courts will be required to comply. There has not yet been any such unification decision. Therefore, one cannot argue that the court precedent has become established on this issue yet.

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