Interest is one of the basic concepts encountered in almost every transaction in commercial life. Arising only in respect of monetary debts, interest denotes the sum the debtor is obliged to pay, at a rate deriving from statute or from contract, in return for the creditor’s inability to obtain the receivable for a given period.
The general and special provisions on the subject are scattered across more than one statute. The framework text in this field is Act No. 3095 on Statutory Interest and Default Interest; the cases in which interest must be paid are set out in the Turkish Code of Obligations No. 6098 and the Turkish Commercial Code No. 6102. Taken together, these provisions show that the obligation to pay interest may arise not only from contract but also from cases of non-contractual liability (tort, unjust enrichment and agency without authority).
Below we examine the boundaries of the concept of a commercial transaction, the extent of the freedom to set the interest rate and the obstacles that freedom encounters, the regime applying where no rate has been agreed, the moment from which default interest begins to run, and the exceptional cases in which compound interest is possible.
The Concept of a Commercial Transaction
Because whether a transaction is commercial in nature directly determines the rules applicable to the dispute, this distinction must be drawn at the outset. Transactions that are not commercial are characterised as ordinary transactions and are subject to a different regime.
Which transactions are to be treated as commercial is set out in Articles 3 and 19 of the Turkish Commercial Code No. 6102:
Turkish Commercial Code No. 6102, Art. 3
“All transactions and acts concerning matters regulated in this Code and concerning a commercial enterprise are commercial transactions.”
The provision defines a commercial transaction as all transactions and acts concerning a commercial enterprise. Accordingly, a matter regulated under the Commercial Code is commercial in nature whether it is concluded between merchants or one of the parties is not a merchant. What is decisive is that the transaction is connected with a commercial enterprise.
As regards the transaction’s connection with the commercial enterprise, Article 19 then comes into play:
Turkish Commercial Code No. 6102, Art. 19
“It is the rule that a merchant’s debts are commercial. However, where a merchant who is a natural person expressly notifies the other party, at the moment of concluding the transaction, that it does not concern his commercial enterprise, or where the circumstances are not suited to the transaction being treated as commercial, the debt shall be deemed ordinary.”
Under that provision, all the debts of a merchant, whether a natural or a legal person, arising from contract or from non-contractual liability, are commercial. The rule treats the merchant’s transactions and acts as commercial even where they are not connected with the commercial enterprise. The second sentence of the provision lays down an exception in favour of merchants who are natural persons: where such a merchant expressly notifies the other party, at the time the transaction is concluded, that it has no connection with the enterprise, the debt is deemed an ordinary debt.
The second paragraph of the Article introduces a further extension:
Turkish Commercial Code No. 6102, Art. 19(2)
“Contracts which constitute a commercial transaction for only one of the parties shall, unless the Code provides otherwise, be deemed a commercial transaction for the other party as well.”
As can be seen, the acquisition by the other party of the same character in respect of a transaction that is commercial for one party alone is tied to the existence of a contractual relationship. Turkish Commercial Code Art. 19(2) therefore covers contracts only; relationships arising from tort or from unjust enrichment fall outside the provision.
May the Interest Rate Be Freely Agreed?
In ordinary transactions between persons not bearing the status of merchant, the determination of interest is subject to the limitations laid down in numerous statutes, foremost the Turkish Code of Obligations No. 6098. In commercial transactions, by contrast, the rate may be determined freely. This is settled by an express provision:
Turkish Commercial Code No. 6102, Art. 8(1)
“In commercial transactions the interest rate shall be determined freely.”
The rate limitations contained in other statutes therefore find no application in commercial transactions. It should be noted, nonetheless, that this freedom is not absolute.
Turkish Commercial Code No. 6102, Art. 18(2)
“Every merchant must act as a prudent businessperson in all activities relating to his trade.”
Without disregarding merchants’ duty to act prudently, the rule of good faith laid down in Art. 2 of the Turkish Civil Code No. 4721, together with Turkish Code of Obligations Arts. 26 (freedom of contract), 27 (absolute nullity) and 28 (unfair exploitation), may be regarded as provisions limiting the application of interest in commercial transactions.
Indeed, where the agreed rate is so onerous as to endanger the economic existence of the debtor merchant, or where it constitutes unfair exploitation, the court may order the rate to be reduced.
Thus, in the decision of the 19th Civil Chamber of the Court of Cassation dated 14.07.2005, File No. 2005/4985, Decision No. 2005/7980, the conclusion of a contract of such a nature as to secure a disproportionate benefit was held contrary to morality and to the rule of good faith, and the existence of unfair exploitation was accepted:
“…It is stated in the scholarly opinion submitted and in the court-appointed experts’ reports obtained in other files of a similar nature that the respondent’s conclusion of a contract, at a time when deposits held with banks were under unlimited State guarantee, in such a manner as to secure an excessive benefit by using the power of its deposit, with the claimant bank — whose financial structure had been weakened by the rapid outflow of funds occasioned by the economic crisis then experienced and which was subsequently transferred to the TMSF — constituted a state of financial distress and was contrary both to morality (Code of Obligations Art. 19) and to the rule of good faith (Civil Code Art. 2).
Further, the court-appointed expert’s report dated 26.06.2004 obtained in the action for annulment of objection brought between the same parties stated that the interest rate applied in the case at hand was excessive and that the existence of unfair exploitation ought therefore to be accepted.
That being so, taking advantage of the position of the bank, which was in a state of financial distress on account of the financial crisis that shook the banking system and was unable to meet the withdrawal of deposits, the depositors caused the bank to accept their excessive interest demands. Since it is established by the evidence gathered that there was a manifest disproportion between the performances in the case and that this situation was brought about by taking advantage of the bank’s state of financial distress, the court ought to have allowed the action for negative declaration, and its dismissal on the grounds stated was not correct….”
As the decision shows, although the free determination of the rate in commercial transactions has been adopted as the rule, a limit has been drawn in this respect as a matter of equity.
May Interest Be Claimed Where the Contract Is Silent?
By virtue of the principle that a commercial transaction cannot be regarded as gratuitous, it is accepted that interest may be claimed in respect of work or services performed even where the contract does not expressly so provide. The matter is regulated in the following provision:
Turkish Commercial Code No. 6102, Art. 20
“A merchant who has performed work or a service concerning his commercial enterprise for a person, whether or not a merchant, may claim an appropriate fee. Moreover, the merchant is entitled to interest on the advances he has made and the expenses he has incurred, running from the date of payment.”
Accordingly, a merchant may claim interest under Turkish Commercial Code Art. 20 in respect of the advances made and the expenses borne on account of his commercial transaction, even where the contract contains no stipulation that interest is to be paid.
Which Rate Applies Where No Rate Has Been Agreed?
Where the parties have not determined the rate, contractual and default interest are fixed within the framework of Act No. 3095 on Statutory Interest and Default Interest, pursuant to the reference in Article 9 of the Turkish Commercial Code. Under Article 1 of that Act, the statutory rate of contractual interest is 9% per annum.
Where the rate of default interest has not been agreed, a claim may likewise be made at the annual rate of 9% (Act No. 3095, Art. 2(1)). In commercial transactions, default interest may in addition be claimed on the basis of the interest rate applied by the Central Bank of the Republic of Türkiye to short-term advances as at 31 December of the preceding year. Where the claim is raised in the second half of the year and the rate applied to short-term advances on 30 June differs by ± 5 points or more from the rate in force on 31 December, the rate in force as at 30 June applies (Act No. 3095, Art. 2(2)).
The common result of these provisions is this: although the payment of interest is required by statute, where no rate has been determined by the parties, the statutory interest rate is deemed to have been agreed, irrespective of whether the transaction is ordinary or commercial.
Under Turkish Commercial Code Art. 8(1) the parties may fix the rate freely; nor does Act No. 3095 lay down any ceiling for commercial default interest. Where the contractual interest is higher than the statutory rate, however, the following rule comes into play:
Act No. 3095, Art. 2(3)
“Where the amount of default interest has not been agreed in the contract, if the amount of contractual interest exceeds the amount provided for in the paragraphs above, the default interest may not be less than the amount of the contractual interest.”
From What Moment Does Default Interest Run?
According to the settled approach of the Court of Cassation, a debtor’s default consists in the failure of the debtor to perform in due time a debt capable of performance, notwithstanding the absence of any legal impediment. The Turkish Code of Obligations No. 6098 regulates liability in damages for loss arising from the failure to perform a debt as required; default emerges as a particular manifestation of that situation.
Turkish Code of Obligations No. 6098, Art. 117(1)
“The debtor of a debt that has fallen due is placed in default by the creditor’s formal notice.”
As the provision makes clear, default arises not at the moment the debt falls due but upon the creditor’s formal notice.
Turkish Code of Obligations Art. 120, for its part, provides that a debtor who falls into default in respect of a monetary debt shall pay default interest in the nature of compensation for delay. Unlike liability in damages, default interest is not conditional upon fault; it is required, however, that it has been claimed. Where the debtor has therefore been placed in default by way of an action or enforcement proceedings, interest may be run from the date on which the action was brought or the proceedings were commenced.
The matter was put as follows in the decision of the 15th Civil Chamber of the Court of Cassation dated 21.06.2018, File No. 2018/103, Decision No. 2018/2627:
“Since there was no formal notice of default given before the action and no fixed due date was determined between the parties, interest on the receivable to be allowed ought to have been run from the dates of the action and of the amendment of pleadings; running interest on the whole of the allowed receivable from the date of the action is likewise contrary to procedure and to statute.”
May Compound Interest Be Applied in Commercial Transactions?
Running interest afresh on the new sum formed by adding the accrued interest to a principal is termed compound interest. Under Turkish Code of Obligations Art. 383(3) this practice is prohibited in Turkish law in ordinary transactions. The provisions of the Commercial Code are, by contrast, reserved by Turkish Commercial Code Arts. 3(2) and 726.
The Commercial Code permits interest to be run on interest in three exceptional cases only:
- A recourse debtor who has made payment by exercising the right of recourse under negotiable instruments may, in recovering against those preceding him, claim interest afresh on the interest he has paid (Turkish Commercial Code Arts. 726, 778(1)(d), 818(1)(l)).
- Provided that the parties are merchants and the period is not shorter than three months, interest may be run on interest in current accounts (Turkish Commercial Code Art. 8(2)).
- Again provided that the period is not shorter than three months, compound interest may be applied in loan agreements that constitute a commercial transaction for both parties, where the parties are merchants (Turkish Commercial Code Art. 8(2)).
The way has thus been opened, if only within limits, for interest to be run on interest in commercial transactions; the provision in question cannot, however, be applied to contracts to which neither party is a merchant.
In sum, under Turkish Commercial Code Art. 8(2), compound interest is confined to current accounts and to loan agreements that are commercial transactions for both parties. In both cases a period of not less than three months and the parties’ status as merchants are required; in the case of loan agreements the further condition is imposed that the transaction be commercial in nature.
Independent Legal’s Assessment
In commercial disputes interest can often become a larger item than the principal receivable itself. Despite this, insufficient attention to the rate and to the starting point during contract negotiations leaves the creditor facing a considerable loss later on. Freedom as to the rate is not unlimited either; rates at a level that would endanger the debtor’s economic existence are open to judicial intervention through the rule of good faith and the provisions on unfair exploitation.
When interest is being regulated in a commercial relationship, it is appropriate to bear the following points in mind:
- Determining at the outset, within the framework of Turkish Commercial Code Arts. 3 and 19, whether the transaction is commercial in nature
- Setting out separately in the contract the rates of both contractual interest and default interest
- Keeping the rate at a level that will not remain open to an allegation of unfair exploitation or of breach of the rule of good faith
- Serving the formal notice required for default to arise in due form and in a manner capable of proof
- Observing the minimum three-month period condition where compound interest is to be agreed in current account and loan relationships
- Stating expressly in the relief sought, at the litigation or enforcement stage, the starting date and the type of interest claimed
Independent Legal provides advisory and litigation services across the whole process, from structuring interest provisions in commercial contracts through to recovering the receivable by way of litigation and enforcement.