ABSTRACT
Generally, compensation of damages by reflection, which are evaluated as damages on any person except for person being affected by damage arising from an illegal act is regulated explicitly in Turkish legislation. Both Turkish Code of Obligations (“TCO”) and Turkish Commercial Code (“TCC”) enable the compensation of the damages by reflection with respect to the cases which are explicitly regulated in legislation for both real persons and legal entities. It is a matter of debate whether these counted cases can be expanded through interpretation or not.
I. INTRODUCTION
Damage in general can be defined as a decrement in property or immaterial availability of a person. Damage by reflection is damage on any person except for person being directly affected by damage arising from an illegal act. The term of damage by reflection is generally confused with the terms of direct damage and indirect damage. This confusion arises out of the fact that injured parties of direct and indirect damages are accepted as direct victims and indirect victims, respectively. However, direct victim is a person who is affected from a direct or an indirect damage whereas; an indirect victim is a person who sustains a loss due to damage by reflection. It is commonly accepted that the damage by reflection is limited with the cases which are regulated in Turkish legislation and they cannot be widen by any interpretation. It has been argued by the advocates of this view that if the concept of damages by reflection is extended by interpretation, it may be the result in the use of this concept as an unjust enrichment source by malicious people. Legal regulations concerning damage by reflection in Turkish Law, the justifications giving rise to these regulations and different opinions in the doctrine regarding the compensation for damages by reflection are referred in this piece of work.
II. REFLECTION DAMAGES IN TURKISH LAW
A. Differences between Direct Damage Indirect Damage and Damage by Reflection
The aim of the legal order and the liability law is to ensure the compensation of the decrements that occurs in property or immaterial availability of a person without his/her own will in other words all types of damages. As mentioned above, direct, indirect and damage by reflection are usually confused with each other. However, distinction between direct and indirect damages is closely related to the casual connection. Direct damage includes the damage suffered by a person who has been directly affected by the illegal act. Direct damages are the direct consequences of these illegal acts. On the other hand, indirect damages previously were considered as a rule which is to be outside the scope of liability law. However, in the course of time, it is accepted that such damages should be compensated in exceptional circumstances, provided that they have the appropriate causal connection with the illegal act. Oğuzman and Öz explain the distinction between direct and indirect damages as follows; “Direct damages are the damages on a person who is directly subjected to an illegal act without any further reason. Indirect damages are damages which arise out as a result of direct damages due to an illegal act with an additional reason." While, indirect damages are the damages on a person to whom the illegal act is directly directed; indirectly injured parties are the third parties except the ones to whom the illegal act is directly directed, in other words the parties injured by the damage by reflection.
B. Definition of Damage by Reflection
The person who is the target of an illegal act is accepted as the directly injured party, whereas, the third party who is not targeted by the illegal act, is accepted as the indirectly injured party. Whether in a contractual liability or a non-contractual (wrongful act) liability, there may be indirectly injured parties due to the damages by the reflection of an act on third parties’ legal environment. Both directly and indirectly injured parties are the concepts developed with the idea of holding an individual liable for all the potential results of his/her act may be too grave. These terms serve for the purpose of restriction of such liability. As a general rule, offender of an illegal act cannot be held responsible for the damages of indirectly injured parties. According to the generally agreed remark, liability for damages by reflection can be born only if the situation is of those which are regulated in the legislation exceptionally.
C. Components of Damage by Reflection
1. Illegal Act
To claim compensation for any damage some components are always required. Existence of an illegal act is the foremost among these components. Therefore, to claim liability for damage by reflection, there must be an act that contradicts the law, fault and an appropriate causal link between damage and the illegal act. In damages by reflection, this component arises out of the violation of an absolute right of a person who is subject to a direct damage.
2. Damage
Damage by reflection is the damage suffered by third parties other than the person or persons directly affected from an illegal act. Hence, damage is another essential component for the creation of liability from an illegal act. Damage by reflection may occur in the in property or immaterial availability of a person as a material or moral damage; in the form of actual loss, loss of profits or the direct or indirect damage on people who are not related with the illegal act but affected by a damage by reflection.
3. Fault
Compensation of damages as a result of an illegal act is only possible if the person liable for illegal act is in fault.10 Fault as a component required for the liability for compensation of damages is also required in reflection damages. Therefore, fault required in terms of reflection damages does not differ from negligence in general liability law. The reason for that the damage by reflection is compensated only in the exceptional situations regulated in the law is not the lack of fault but the lack of casual connection.
4. Third Party
To be able to refer to damage by reflection, the existence of a third party other than the person who is responsible for the illegal act and the person to whom the illegal act is directed, and damage on a third party are necessary. In this case, when damage by reflection occurs, it can be said that there should be three different parties. The first one is the person who is liable for the illegal act, the second one is the person to whom the illegal act is targeted or directed, and the third is the person who is indirectly injured, in other words who is injured by reflection. The third party injured by reflection might be a real person or a legal entity. In this respect, the type of person does not matter. An illegal act may affect persons other than the ones who are injured directly because of the illegal act. However, accepting damages by reflection as damage on “any third party“ except the ones who are directly affected form the illegal act, may result in extending the scope of liability uncertainly. In such a case, the liable person has to compensate any and all kind of damages without any limitation. For this reason, it is obligatory to restrict the concept of third persons who are damaged by reflection.12 This limitation is mostly achieved by the causality which can be defined as the causal connection between illegal act and damage. In order to solve the problem, the condition of “being in a close relationship with the directly injured party” should be considered to limit the frame and the number of “third parties who may suffer from a damage by reflection”.13 The relationship between directly injured party and the party damaged by reflection may be a contractual relationship, consanguinity or another social connection.
5. Causal Link
The aim of this component is not only to limit the scope of the third party but also to limit the liability. Causal link can only determine the illegal act and parties who are directly affected by this act. It is also necessary to limit the frame of those who will be held liable for illegal act with those who are in cause and effect relation with this act. The dominant opinion in the doctrine argues that the legislator has limitedly defined when damage by reflection will lead to liability by virtue of casual connection, in order not to always cause liability.14 There are two different views in the doctrine in relation to whether the damages by reflection are limited with the ones regulated in the legislation or not. The dominant view in the doctrine argues that the legislators regulate the instances of the damages by reflection constrictedly; therefore, they cannot be widened by interpretation. If this view is accepted, even if it can be claimed that there is a casual connection in the concrete event, they will not be accepted as damage by reflection except the cases regulated in the legislation. By the supporters of this view, it is claimed that extending such legal limitation through interpretation may lead the claim for compensation for damages by reflection may become a rule. In this case, the tort-feasor of wrongful act feasor may face with uncertain liabilities. On the other hand, the opposing view argues that the legislator does not limit the cases of damage by reflection; legislator regulates some cases due to the importance of some personal properties, so that in some additional cases, if the conditions are satisfied in the actual case, liability for damage by reflection can be accepted. Although this view is not widely accepted in the Turkish doctrine, this is not the case in the Swiss Law which is accepted as an origin of Turkish Law. In some of its decisions the Swiss Federal Court defends this opinion by acting on “the theory of protection for the purpose of norms”, by awarding compensation for damages that are not regulated in the legislation.
III. DAMAGES BY REFLECTION UNDER TURKISH OBLIGATION CODE
In cases where the damage by reflection is in the form of material damage, the conditions for compensation of this kind of damages differ in the areas of contractual liability and wrongful act liability. In the broad sense, breach of a contract is included in the notion of contradiction to law. The concept of damage covers damages arising from both contractual and wrongful act liability. As a result, damage by reflection can be born from a breach of a contract or a wrongful act. However, parties injured by damages by reflection are out of the contractual relationship. For this reason, even if the directly injured party has a contractual relationship with the liable person, the injured parties by reflection damages is not in such a relationship. Consequently, it can be said that damages by reflection are always based on wrongful act. Nevertheless with regard to directly injured party, the main source of damages by reflection can be based on both a contractual relationship and a wrongful act.17
A. Damages by Reflection Arise From Wrongful Acts
Damages by reflection may be born as a result of wrongful act. To be able to speak of such damage and liability, all elements of a wrongful act must have taken place. In this sense, the conditions in TCO Article 49, namely illegal act, casual link, fault and damage must be in existence.18 As a result of a wrongful act, the person to whom the the wrongful act is directed, in other words who is directly affected by this act, must be damaged. If there is nobody who is directly affected by the reason of the wrongful act, there shall not be any damage by inflection. Hereunder, damages by inflection depend on the existence of direct damages, in other words existence of directly injured party. Hence, damages by reflection do not arise from wrongful acts independently. This damage always requires existence of the directly injured party.19 Transportation costs of directly injured party’s family from another city to the hospital to visit the injured party and moral damages because of the damage on directly injured party20 are examples of damages by reflection arise out of a wrongful act. Legal entities are commodities or persons communities which, are deemed to have a legal right to act like real persons.21 Article 48 of Turkish Civil Code reads as follows; “The legal entities are entitled to use all the rights vested upon and the capacity to undertake all kinds of obligations other than the characteristics related to real persons such as sex, age, kinship etc.” In accordance with this provision, legal entities have property and immaterial rights like real persons. They may suffer damages because of wrongful acts against their property and immaterial rights and ask for compensation for pecuniary loss and intangible damages as a directly injured party. If people connected to the directly injured legal entity suffer from damages by reflection due to the direct damages on the legal entity and also if these damages are one of those cases regulated in the legislation, it can be accepted that these damages by reflection shall be compensated.
B. Reflection Damages Arise From Breach of a Contract
Within the scope of contractual liability, as a general rule, compensation of material damages on a third party, who is not a party to the contract, is not possible.22 Contractual relationship establishes a relationship only between debtor and creditor and as a general rule; rights and obligations risen from this relationship will be applicable only to the parties to the contract.23 It is generally accepted that in consequence of the principle called relativity of contract, third persons who are not party to the contract cannot demand anything arises out of the contract. If this opinion is defended, the third party who is not a party to the contract, suffers damages because of the breach of this contract, the third party has to put up with these damages by virtue of the principle relativity of the contract. However, there are some exceptions to this principle by which existence and compensation of the reflections damages are accepted in the field of contractual liability. Pursuant to the rules of contractual liability, if the contractual party has right to claim compensation for damages even if the party has not damaged, whereas, the non-contractual third party is not entitled to claim damages even if it has been damaged, this may result in an advantageous benefit of the damaging party. This approach is also one of the reasons for the compensation of the third person’s damages, in other words, damages by reflection.25 The essence of this idea of equity is complemented by the fact that the third party’s compensation for damages by reflection is based on the principles of good faith. Damages by reflection may arise as a consequence of a breach of a contract by debtor. The most common example of this type of damage is the liability of the employer, who does not take the necessary safety precautions in accordance with the employment contract and cause damages on the employee’s relatives. In this case, these relatives who are deprived of their support in the event of the death of the employee may demand compensation for material damages by reflection by virtue of Article 53/b-3 of TCO (Damages suffered by the persons who are deprived of the support of the deceased). If the employee is injured or disabled in the same case, the relatives of the employee due to heavy physical damage may be able to ask for compensation for damages by reflection by virtue of Article 56/2 of TCO (A reasonable payment as a compensation for immaterial damages on relatives of the injured or dead party in case of a heavy physical damage or a death).
IV. DAMAGES BY REFLECTION UNDER TURKISH COMMERCIAL CODE
Regulations concerning the damages by reflection in relation to the companies are located in the Article 553 of TCC. Referred article reads as follows; “In case of breach of contractual obligations by the founders, members of Board of Directors, managers and liquidators bound to their negligence, they shall be held responsible against both the shareholders and company’s creditors for the damage caused thereof.” Interms of this responsibility, it has been regulated in the first paragraph of Article 555 of the TCC that the company and its shareholders may demand compensation for damages suffered by the company. It is stated that compensation payment can only be made to the company upon request of shareholders. Aforementioned regulation becomes more important especially in case of damages caused by the founders, members of Board of Directors, auditors and in case of compensation of these damages. The company suffers a direct damage as a result of illegal acts of the directors. Shareholders and creditors of the company are the ones who suffer damages by reflection due to the direct damage on the company.26 If damages by reflection on shareholders and creditors of the company arise out of illegal acts of the members of Board of Directors, it is accepted that the legal characteristic of this liability is based on the breach of contract.27 Therefore, it can be said that in this case there will be a damage by reflection arising out of a breach of a contract. The legislation which is explained above regulates the right of shareholders to claim damages not directly suffered but damages by reflection suffered due to direct damages on the company. There is a typical “damage by reflection” regarding the shareholders and creditors of the company, since it is the company that is directly damaged. Moreover, shareholders are the third persons who have a close relationship with the company from the point of tort feasors. However, the law recognizes that damages on these persons are caused by the company, the profit and loss belongs to the legal entity of the company and therefore, compensation payment shall be made to the company instead of the shareholders.28 Even if the liability against the creditors of the company is regulated by law, unlike the old version of Turkish Commercial Code numbered 6762, with the regulation of the new Turkish Commercial Code numbered 6102 only shareholders have right to claim damages by reflection. For this reason, shareholders who do not have shares on the date of the lawsuit are not accepted as injured party by damages by reflection and they do not have right to claim damages.29 If a shareholder who is also a shareholder at the date of the lawsuit, suffers a damage by reflection, this shareholder may file a lawsuit in order to compensate the reduction in the value of his/her shares on the condition that the compensation payment shall be made to the company by the reason of that all wrongful acts reducing the value of the company will harm the shareholders according to the proportion of their shares.30 In consequence, legislator hereby gives right to shareholders to file a lawsuit in person in order to protect their rights and claims against the company. It is accepted that the shareholders can claim the entire amount for compensation of damages suffered by the company not only for the proportion of their shares. With the judgment at the end of the lawsuit filed by the shareholders, the compensation payment will be made to the company and shareholders will get their proportion from this payment from the company. At the same time, if the creditors do not get the payment for the entire amount as a result of the wrongful act against the company, it is clear that the creditors will suffer damages by reflection due to the direct damages on the company. However, according to the generally accepted opinion, compensation of damages by reflection is only possible in the cases regulated by law exceptionally. Relevant article of TCC only entitles shareholders to file a lawsuit for the compensation of damages by reflection which makes it difficult to compensate the damages on the creditors.
V. CONCLUSION
Damages by reflection are regulated by the legislators peculiarly. In line with the explanations above, damages by reflection can be defined as damages on the third parties in exceptional cases regulated by law which may arise as a result of a breach of a contract or a illegal act. It should be noted that compensation of damages by reflection not only in the cases regulated by law but also in the cases which can prove the connection between the injured party and the illegal act serves the aim of protection of the rights of the third parties, by taking into consideration the origin of Turkish Law in other words, the theory of protection for the purpose of norms
