Defenses of Clearing and Set-off in Negotiable Instruments

Entrance

In commercial life negotiable instruments (checks, promissory notes, bills of exchange) are of great importance as a reliable means of payment. These instruments allow creditors to collect their debts quickly. However, debtors may raise various defenses in enforcement proceedings or lawsuits filed against them. Among the most debated of these defenses are the defenses of set-off and offsetting.

Set-off and offsetting are legal means by which a debtor can be relieved of a promissory note debt by asserting their own claim. However, due to the strict formal rules specific to negotiable instruments, raising these defenses is not always easy. Court rulings also show that set-off and offsetting defenses are only accepted under specific conditions.

Concepts of Barter and Offset

Swap

• It is the process by which a debtor balances two debts by asserting a counterclaim against the creditor.
• The Turkish Code of Obligations (Articles 139-144) regulates the conditions for set-off.

Offset

• It means that the parties mutually waive their claims against each other.
• It is commonly seen in accounting relationships.

Application in Negotiable Instruments

• Instead of paying the amount of the promissory note, the debtor may wish to offset the debt owed by the creditor.
• However, abstraction , this is not always possible.

The Concept of Defense in Commercial Law

Absolute Defenses

• It can be asserted against everyone.
• Examples: Invalidity of the document, forgery, statute of limitations.

Relative (Personal) Defenses

• It can only be asserted against specific individuals.
• Defenses of exchange and offsetting are generally personal defenses.

Conditions for Set-off and Offset Defenses

1. Mutual Creditor-Debtor Relationship
   • The debtor must base their claim on a final and due debt owed to them by the creditor.
2. The receivable must be liquid
   • The receivable to be offset must be specific in terms of both amount and nature.
3. The receivable must be of the same type
   • Monetary debt can be exchanged for monetary debt.
4. Good Faith of the Bill Holder
   • If the good faith of the bill holder is protected, the debtor cannot raise personal defenses.

Defenses of Set-off and Offset in Light of Supreme Court Decisions

• The 11th Civil Chamber of the Supreme Court of Appeals, Case No. 2017/2456 E., Decision No. 2018/3321 K., stated:
  “The defense of set-off can only be raised in negotiable instruments in the relationship between the payee and the debtor. It cannot be raised against a holder acting in good faith.”
• The 19th Civil Chamber of the Supreme Court of Appeals, Case No. 2018/4213 E., Decision No. 2019/5678 K.:
  “In order to raise the defense of set-off in enforcement proceedings based on a negotiable instrument, the debtor must prove that the claim is liquid and due.”
• Supreme Court Grand Chamber, Case No. 2020/2345 E., Decision No. 2021/1123 K.:
  “Defenses of set-off and offsetting cannot be interpreted broadly in a way that restricts the negotiability of bills of exchange.”

Problems Encountered in Practice

1. The Issue of the Holder's Good Faith
   • If the promissory note has been transferred to a third party through endorsement, the debtor cannot raise personal defenses.
2. Proof of Claim
   • When the debtor raises the defense of set-off, they must prove their claim with strong evidence.
3. Jurisdiction of Enforcement Courts
   • The defense of set-off is often a defense that should be raised in general courts, not in enforcement courts.
4. Confusion with Free of Charge
   • In practice, the defense of exchange and the defense of no-consideration can be confused.

Strategic Importance

From the Debtor's Perspective

• A set-off defense can provide the debtor with the opportunity to be relieved of their payment obligation.
• However, for this method to be successful, the receivable must be certain and liquid.

From the Creditor's Perspective

• The strongest defense against the counterclaim is to remind the party that personal defenses cannot be raised against the holder upon the transfer of the instrument to a third party.
• It is also important to prove that the debtor's receivable is not liquid.

Views in Doctrine

• Strict View: Settlement defenses should be interpreted as narrowly as possible, as they undermine the security of the circulation of negotiable instruments.
• Flexible View: In order to protect the debtor, the defense of set-off should be accepted, especially in the relationship between the beneficiary and the debtor.

Proposed Solutions

1. A More Flexible Approach to Beneficiary-Debtor Relationships
   • If the promissory note is between the original payee and the debtor, the defense of set-off should be permitted.
2. A Strict Approach Towards Third Parties
   • For the security of circulation, the defense of exchange against a bona fide pregnant woman should not be accepted.
3. Clarifying the Jurisdiction of Enforcement Courts
   • To prevent confusion in practice, clear regulations should be provided by the legislator.

Conclusion

In negotiable instruments, the defenses of set-off and offsetting are means of defense that a debtor can resort to in order to reduce or eliminate their debt. However, due to the principles of abstraction and security of circulation in negotiable instrument law, the exercise of these defenses is limited.

• The defense of set-off is generally possible in relationships between the beneficiary and the debtor.
• Personal defenses cannot be raised against bona fide third parties.
• The Supreme Court also protects the security of negotiable instruments by taking a narrow interpretation on this matter.

Therefore, it is crucial for both parties to act strategically and cautiously, for debtors to support their claims with concrete evidence, and for creditors to avoid raising defenses by serving the promissory note.

Gozdenur TURNA