Liability Arising from Trust in Corporate Law

Conditions of Liability Pursuant to Article 209 of the TCC

Existence of a Group of Companies within the Meaning of the Turkish Commercial Code

To invoke the parent company's liability arising from trust, the existence of a group of companies within the context of the TCC is required. Under Turkish law, a group of companies arises where a commercial company comes under the dominance of another commercial company or enterprise that is legally independent from it.

The elements of dominance are regulated under Article 195 et seq. of the TCC. Circumstances such as the parent company holding the majority of voting rights in the subsidiary, having a say in its management, the existence of a dominance agreement, or exercising de facto control over the subsidiary indicate the existence of a group of companies. Since the legislator has deliberately confined the scope of the provision to groups of companies, Article 209 of the TCC does not apply in the absence of a group of companies within the meaning of Article 195 of the TCC.

In the context of Article 209 of the TCC, the addressee is the parent company that centralises the group's reputation within itself. Pursuant to Article 195 of the TCC, the provisions on groups of companies apply where the registered office of either the parent company or at least one of the subsidiaries is in Türkiye.

The Group's Reputation Reaching a Level That Inspires Confidence

For Article 209 of the TCC to apply, the group of companies must possess a certain reputation, and this reputation must have reached a level that inspires confidence in the public or consumers. The trust deemed worthy of legal protection is not the abstract inner confidence that the public feels towards reputable groups, but rather the concrete trust that the parent company creates in the counterparty through its own conduct within a specific business context[8].

The explanatory memorandum to Article 209 of the TCC states that not every group of companies falls within the scope of the provision and that the group's reputation must have reached a level that inspires confidence. The wording of the provision emphasises a widespread reputation rather than a merely local one.

To speak of liability, the parent company must inspire a high degree of trust through its own conduct within a specific business context and must cause damage to the counterparty by frustrating that trust in a manner contrary to good faith. The mere fact that the group constitutes a quality symbol is not taken as the basis for liability as an abstract form of trust[9].

In the doctrine, Battal determines the existence of reputation by criteria such as the parent company having an easily memorable name or brand, and the public or consumers turning to the subsidiary in reliance on the group's name. The 22nd Civil Chamber of the Ankara Regional Court of Appeal adopts the same view and states that where the group conducts its activities under a common brand name, persons in the vicinity would assume that they are dealing with one of several enterprises operating under a single umbrella[10].

Use of the Confidence-Inspiring Reputation in a Specific Transaction

For liability to arise under Article 209 of the TCC, it is not sufficient for the group of companies merely to possess a reputation that has reached a confidence-inspiring level. This reputation must have been used in the context of a specific legal transaction or a particular business dealing.

The central condition of liability is the use of reputation. In the absence of such use, mere membership in the group does not give rise to liability. Expressions relating to affiliation such as "a company of X / a subsidiary of X" or the use of the group logo alone are not sufficient. Whether the reputation has been used is determined on a case-by-case basis; where the disclosed tables, information, and quality do not correspond to the trust created, the parent company that has not objected to the use of its name shall be held liable for the resulting damage.

The use of reputation is a fact that inspires trust in the third party regarding the specific situation and influences their actions. This may occur through the parent company's own conduct, as well as through statements made by the subsidiary with the knowledge and approval of the parent company.

The 21st Civil Chamber of the Court of Cassation states that for Article 209 of the TCC to apply, the subsidiary's liability must be contractual in nature and that the parent company cannot be held separately liable in cases of tort liability[11]. This approach is sound, as the use of reputation must result in the formation of a legal act or transaction. Since liability arising from trust is a fault-based liability, the parent company must have known or should have been able to know that a concrete expectation was being created in the counterparty.

In a 2020 decision, the 11th Civil Chamber of the Court of Cassation requires, for a concrete expectation to arise, that the parent company or the group has provided the injured party with an oral or written assurance, a letter of credit or similar support, or a declaration in public announcements and advertisements indicating that the subsidiary is backed by the group[12]. The Chamber emphasises that it must be proven that the group's reputation was used in a manner that creates a concrete expectation on the basis of a specific transaction.

The 22nd Civil Chamber of the Ankara[13] Regional Court of Appeal states that the confidence-inspiring reputation must have been used in a specific or determinable field. The court concluded that the conditions of Article 209 of the TCC were not met in the case at hand, on the ground that there was no evidence that the parent company had provided the plaintiff with any oral or written assurance.

Fault and Damage

For the parent company's liability to arise, it must be at fault. Fault may take the form of intent, as well as negligence manifested by remaining silent in the face of the subsidiary's use of reputational elements. Even slight negligence may constitute fault, and under the contractual liability regime, the burden of proving absence of fault rests on the parent company. The İzmir 3rd Commercial Court of First Instance also expressly stated in its 2021 decision that this liability is a fault-based liability[14].

The other element required alongside fault is damage. Liability arises where the concrete and justified trust that the party in a legal relationship with the subsidiary has placed in the group has been frustrated and has caused damage. The scope of damage consists of the difference between the state in which the assets would have been had the breach of trust not occurred and their current state.

Applicability to Merchants

Whether the trust that merchants, who are subject to the duty of prudent conduct pursuant to Article 18/2 of the TCC, place in a group of companies can be protected under Article 209 of the TCC is assessed separately. Consumers are the group that can benefit most broadly from Article 209 of the TCC; [15]merchants, who are expected to safeguard their own interests with due care by virtue of the duty of prudent conduct, may only fall within the protective scope of the provision under stricter conditions. Indeed, the 22nd Civil Chamber of the Ankara Regional Court of Appeal confirmed this point in its 2021 decision[16].

Conclusion

Article 209 of the TCC is a specific manifestation of liability arising from trust, particular to groups of companies. The provision constitutes a sui generis statutory obligation. Its application requires, first and foremost, the existence of a group of companies within the meaning of Article 195 of the TCC. In the absence of a group relationship, the provision does not apply. It is further required that the group's reputation has reached a level that inspires confidence in the public or consumers. This trust is not an abstract perception of quality. It is the justified expectation that the parent company creates in the counterparty through its concrete conduct.

The central condition of liability is that the reputation has been used in the context of a specific legal transaction or business dealing. The mere indication of group affiliation is not deemed sufficient on its own. In addition, the parent company must be at fault. It is also required that the counterparty has suffered damage because of the frustration of trust.

As regards merchants, the conditions for falling within the protective scope of the provision are held to stricter standards by virtue of the duty of prudent conduct.

In conclusion, Article 209 of the TCC provides an important safeguard for the protection of third parties' trust in the group. However, the emergence of liability is subject to strict conditions. Judicial decisions also demonstrate that these conditions must be rigorously examined.