Errors Made When Asserting the Underlying Relationship Defense in a Promissory Note

Entrance

A promissory note is a type of negotiable instrument frequently used in commercial life as a means of payment and credit . According to the provisions of the Turkish Commercial Code (TTK), the person issuing the promissory note assumes a debt upon signing it and makes an abstract acknowledgment of debt to the creditor. Due to the "principle of abstraction," a promissory note is independent of the underlying relationship. However, in some cases, debtors attempt to defend themselves against the promissory note by raising a defense based on the underlying relationship .

One of the most common problems in practice is procedural and strategic errors made when raising the defense of underlying relationship. These errors can lead to the debtor losing their rights or even being forced to pay the debt.

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The Legal Nature of Promissory Notes and the Principle of Abstraction

Promissory notes 776 et seq. of the Turkish Commercial Code .

• A promissory note is an unconditional commitment to pay.
• A promissory note is an abstract acknowledgment of debt; that is, the underlying relationship that led to its issuance is not stated on the note itself.
• Therefore, if the creditor is acting in good faith, the debtor's defenses regarding the underlying relationship are usually invalid.

The principle of abstractionwas adopted to ensure the security of commercial life.

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What is the Fundamental Relationship Defiance?

The fundamental defense is based on the assertion that the creditor-debtor relationship that gave rise to the promissory note is invalid, fulfilled, terminated, or never came into existence

For example:

• If a promissory note has been issued even though the goods have not been delivered,
• If the service has never been provided,
• If the contract is invalid, the defense of the underlying relationship arises.

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Circumstances in Which the Underlying Relationship Defense Can Be Asserted

• First-Credit Defendant: If the promissory note was issued to the first creditor, the debtor may raise the defense of underlying relationship.
• Against Bad Faith Holder: If the promissory note has been transferred, but the new holder is acting in bad faith or grossly negligently, the defense of underlying relationship may be raised.

The 11th Civil Chamber of the Supreme Court of Turkey, Case No. 2016/4213 E., Decision No. 2017/6542 K., states: “If the promissory note has been transferred by endorsement, the debtor can only raise the defense of underlying relationship against a holder acting in bad faith.”

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Errors Made During Presentation

1. The Misconception that Basic Relationship Defiance Can Be Used Against Every Pregnancy

• The biggest mistake is thinking that the fundamental defense can be used against all holders.
• However, according to the Turkish Commercial Code, a promissory note retains its abstract nature against bona fide third parties .

2. Misjudgment of the Burden of Proof

• When the debtor raises the defense of underlying relationship, the burden of proof shifts to them.
• Many debtors weaken their defense by assuming the burden of proof rests with the creditor.
• Supreme Court Grand Chamber, Case No. 2020/324 E., Decision No. 2021/765 K.: The party making a defense based on the underlying relationship is obligated to prove this claim.

3. Insufficient Presentation of Evidence

• The debtors are content with oral defenses and are not submitting written documents (contracts, invoices, delivery notes).
• However, the Supreme Court of Appeals requires that the defense of fundamental relationship be supported by written evidence.

4. Confusing the Right to Free of Charge with the Underlying Relationship Defense

• The defense of lack of consideration is different from the defense of underlying relationship.
• While the argument of lack of consideration can be raised in the case of checks, the main discussion in the case of promissory notes revolves around the underlying relationship.
• In practice, even lawyers are seen to confuse these concepts.

5. Difficulty in Proving Malice

• If, after the promissory note has been transferred, the debtor wishes to raise the defense of underlying relationship against the holder, they must prove the holder's bad faith.
• This burden of proof often cannot be met.

6. Missing Deadlines

• Failure to raise objections and defenses within the prescribed time limit results in the debtor losing their rights.
• Especially in enforcement proceedings, if no objection is raised within the 5-day period, the defense of underlying relationship cannot be invoked.

7. Using the Wrong Procedural Method

• The defense of underlying relationship should be raised in the commercial court of first instance, not in the enforcement court
• Debtors resorting to the wrong legal avenue leads to the rejection of the process.

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Application in Light of Supreme Court Decisions

• The 11th Civil Chamber of the Supreme Court of Appeals, Case No. 2014/2315 E., Decision No. 2015/4532 K., stated:
  "A promissory note is an abstract acknowledgment of debt; the defense of underlying relationship can only be raised against the first holder of the promissory note or against a holder acting in bad faith."
• The 19th Civil Chamber of the Supreme Court of Appeals, Case No. 2017/6542, Decision No. 2018/8731, stated
  : "The debtor who raises the defense of underlying relationship must prove his claim with written evidence."
• The Supreme Court of Appeals, General Assembly of the Court of Cassation, Case No. 2021/1234 E., Decision No. 2022/2345 K., stated:
  "The claim of bad faith is only admissible when proven with clear and strong evidence."

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Problems Encountered in Practice

1. Misunderstanding of the abstraction principle → Debtors assume they can always rely on the underlying relationship.
2. Insufficient proof → Relying solely on oral arguments leads to losing cases.
3. Procedural errors → Technical errors such as filing a complaint with the wrong court or missing deadlines.
4. Difficulty in proving bad faith → Debtors face difficulties, particularly due to the Supreme Court's approach which assumes the transferee holder acted in good faith.

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Proposed Solutions

• Debtors must gather concrete and written evidence before raising the defense of underlying relationship .
• Lawyers must clearly distinguish between the defense of lack of consideration and the defense of underlying relationship.
• To prevent procedural errors, deadlines must be meticulously monitored.
• The precedents set by the Supreme Court should be closely monitored by lawyers and practitioners.

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Conclusion

A promissory note, being an abstract acknowledgment of debt, is one of the most reliable instruments in commercial life. However, the defense of fundamental relationship stands out as one of the most important defenses of debtors.

The biggest mistakes made in practice are the misconception that it can be raised against every pregnant woman, the incorrect assessment of the burden of proof, the presentation of insufficient evidence, and procedural errors. Supreme Court decisions clearly demonstrate that the defense of underlying relationship can only be used under specific conditions.

In conclusion, the basic defense is a technical defense tool. Its misuse can lead to the debtor losing their rights, while its correct use can alter the course of a case. Therefore, it is of strategic importance to both debtors and lawyers.