The Constitutional Court’s Pilot Decision: The Inadequacy of the Excess Damage Provision in Providing Effective Legal Protection Against Inflation

Excess Damages

Default Interest and Excess Damages

Under the Turkish Code of Obligations No. 6098 (TCO), if monetary debts are not performed on their due date and default occurs, the debtor becomes obliged to pay default interest. Interest constitutes an accessory obligation linked to the principal debt, payable as a legal consequence of default. The debtor’s fault or actual loss is not required for the obligation to pay default interest. In other words, even a debtor who is not at fault for the default is obliged to pay default interest for a monetary debt^[1] . As the creditor is not required to prove any loss, default interest is generally regarded in doctrine as a form of compensation ipso iure^[2] .

If the loss exceeds the default interest, the creditor has the right to claim compensation for the excess (TCO Art. 122). The debtor, however, can escape liability for excess damages by proving the absence of fault. To claim excess damages, the following conditions must be met: (i) the debtor has defaulted; (ii) the subject of the debt is monetary; (iii) there is excess damage; (iv) the debtor is at fault in the default; and (v) there is a causal link between the excess damage and the debtor’s default^[3] . Excess damages concern compensation for losses arising from the default caused by the defaulting debtor. Accordingly, such damages cover the period from the debtor’s default until the date of actual payment.

Proof of Excess Damages

The regulation on excess damages allows the debtor to avoid liability by proving absence of fault. In doctrine, some authors argue that the burden of proving that default interest does not cover the actual loss lies with the creditor under general rules^[4] . The creditor is expected to prove specific circumstances causing excess damage, such as being unable to pay a debt subject to higher interest, being obliged to pay a contractual penalty to their own creditors due to default, incurring credit costs, or losing a planned good or business opportunity^[5]. It is generally accepted that a real value loss due to inflation exceeding the default interest rate constitutes excess damages^[6]. However, scholars note that proving inflation-related excess damages poses significant practical difficulties for creditors, and it has been suggested that judges assess such loss equitably under TCO Article 50(2)^[7] . The issue of proof of excess damages has been subject to differing interpretations in judicial decisions.

Previous Approaches of the CC and the Court of Cassation on Excess Damages

The CC’s Approach

In its decision dated 21 December 2017 with application number 2014/2267, the CC held that requiring a creditor to prove damages arising from the depreciation of money due to inflation until the debt is satisfied imposes an excessive burden and constitutes a violation of the right to property.

The Court of Cassation’s Approach

For many years, the Court of Cassation refrained from recognizing inflation exceeding the statutory interest rate as prima facie damage, insisting that creditors substantiate the alleged loss with concrete evidence^[8] . Following the CC’s finding of a property rights violation, however, the Court of Cassation revised its position. In the aftermath of the CC’s 2017 decision, the 15th Civil Chamber accepted that losses not compensated for by default interest may be presumed, thereby shifting the burden of proof to the debtor to demonstrate the absence of damage^[9] .

Nonetheless, the General Assembly of Civil Chambers, in its decision dated 29 March 2022, reverted to its earlier stance, holding that the creditor must prove the claimed loss through concrete evidence rather than by reference to abstract factors such as inflation or general economic conditions^[10]. Within this framework, excess damages must be established clearly, concretely, and credibly, using legally admissible means of proof. Until 2025, various chambers of the Court of Cassation continued to deliver conflicting judgments on this matter^[11].

In a more recent decision^[12] dated 13 January 2025, the 6th Civil Chamber acknowledged the prevalence of hyperinflation and emphasized the need for distinct evaluative criteria. The Chamber adopted a dual approach: in periods of normal inflation, concrete proof of loss is required, whereas in times of hyperinflation, the creditor’s loss in asset value due to delayed performance should be presumed based on economic indicators such as inflation rates, foreign exchange appreciation, or increases in gold prices.

The CC’s Pilot Decision

The Case Giving Rise to the Individual Application

In the underlying dispute, the applicant-initiated enforcement proceedings on 9 November 2010 against a private bank concerning a residential finance loan, claiming TRY 48,854 in principal debt. The debtor’s objection suspended enforcement, prompting the applicant to file a lawsuit for annulment of the objection before a civil court. Ultimately, the court annulled the objection and ordered continuation of the enforcement with annual 9% default interest until full payment. The judgment became final on 1 July 2020, and the debtor subsequently paid TRY 119,114.76 in total.

The applicant later filed a separate lawsuit seeking compensation for excess damages not covered by default interest, citing the prolonged litigation process and severe inflation that had significantly eroded the real value of the receivable. The Istanbul 10th Consumer Court dismissed the claim, and the dismissal was upheld on appeal. The 3rd Civil Chamber of the Court of Cassation maintained that general economic factors such as inflation or currency fluctuations do not relieve the creditor from the burden of proof. Having exhausted domestic remedies, the applicant lodged an individual application before the CC, alleging violations of the right to property and the right to an effective remedy.

Assessment by the CC

In its Pilot Decision, the CC refrained from addressing how or by whom excess damages should be proven. Instead, it focused on whether the existing legal framework provides an effective mechanism to preserve the real value of receivables against inflation. Upon examining the Law on Legal and Default Interest (No. 3095) and the relevant provisions of the TCO concerning interest and excess damages, the Court concluded that the current legal regime lacks an effective means to safeguard the real value of monetary receivables. In particular, statutory interest rates were found to be insufficient to offset the loss of value during high-inflation periods.

The CC held that, under Articles 35 and 40 of the Constitution, the State bears a positive obligation to establish a legal framework that prevents substantial erosion of receivables’ value between private parties due to inflation (Pilot Decision, para. 56).

Accordingly, the CC determined that the failure to compensate for the loss of value caused by default in payment imposes a disproportionate burden on creditors and upsets the fair balance between the parties. Given the inconsistent case law on the proof of excess damages, the Court found that the current legal and judicial mechanisms neither ensure compensation for inflation-induced losses nor provide an effective domestic remedy (Pilot Decision, para. 65).

The Court therefore regarded the inability to preserve the real value of receivables as an interference with property rights. Furthermore, since existing judicial remedies proved ineffective, it also found a violation of the right to an effective remedy.

Recognizing the systemic and structural nature of the issue, the CC applied the pilot decision procedure. It underscored the need to notify the GNAT and to introduce legislative amendments establishing an effective domestic mechanism to compensate for inflationary value loss. The Court also decided to defer similar pending applications for six months.

Dissenting Opinion

In the dissenting opinion, while concurring with the majority that depreciation of receivables against inflation constitutes a violation of property rights, the dissenters argued that the violation arises not from a structural legislative deficiency but from the judiciary’s misinterpretation of TCO Article 122 in a manner inconsistent with the Constitution. They contended that Article 122 does not impose on creditors a burden to prove excess damages and that this practice stems from erroneous case law of the Court of Cassation. The dissent maintained that the existing statutory framework already enables creditors to seek excess damages; therefore, notification to the GNAT and the application of the pilot decision procedure were unnecessary. Instead, the violation could have been remedied simply by remanding the case for retrial.

Conclusion

The Pilot Decision demonstrates that the real value loss suffered by the creditor due to delayed payment of monetary debts must be assessed not only under private law but also in terms of constitutional guarantees. The CC found that existing remedies are insufficient to protect the creditor’s property rights, highlighting the need for structural regulations ensuring effective protection of receivables against economic conditions. The decision serves as a significant call for reform both to enhance consistency in judicial practice and to prompt the legislature to establish a comprehensive legal framework responsive to economic realities.