Corporate and M&A

Author: Att. Fatih Isik from Erdem & Erdem Law Office

Introduction

The parties to a loan agreement may freely set the interest rate to be applied on the amount subject to the agreement. In case the parties did not decide on the interest rates, the interest rates

shall be determined in accordance with the rules set forth under Law no. 3095 on Legal Interest and Default Interest (“Interest Act”). Under the Code of Obligations no. 818 (“CO”), the parties could freely determine the interest rates independent of any limitations. However, the Turkish Code of Obligations no. 6098 (“TCO”) which is in force since July 1, 2012, unlike the CO, introduced usury limits to the freedom of the parties to determine the contractual interest rates.    

Relevant Dispositions

Pursuant to art. 88 of TCO, ―which introduced a cap on the maximum amount of interest ― the capital interest to be determined by the parties may not be %50 more than the rate to be determined in accordance with Interest Act. Art. 120 of the TCO has a similar disposition for default interest.

Pursuant to this article, the default interest rate to be determined by the parties may not be %100 more than the default interest rate to be determined in accordance with Interest Act. On the other hand, art. 8/1 of the Turkish Commercial Code (“TCC”) which is in force since July 1, 2012 stipulates that the parties may freely determine interest rates for business transactions.

Legal Problem

In this case, it is seen that the usury limitations set forth under TCO and the freedom for determination of the interest rates for business transactions stipulated by art. 8/1 of the TCC contradict. Consequently, the problem is to examine whether the limitations set forth under TCO shall be applied to business transactions despite the provision of art. 8/1 of the TCC. In other words, may the interest rates for business transactions be freely determined despite the provision of TCO? Another provision complicating the problem is art. 9 of the TCC. This article stipulates application of relevant legislation to legal, capital and default interests. Since the provisions of TCO are also a part of the legislation on interests, it is possible to defend that the interest rates limitations shall be applied to business transactions.

This legal problem arises from the fact that the TCO does not include any specification regarding the scope of application of the relevant provisions from the point of persons and this problem is discussed in the doctrine . According to an opinion , the TCO does not make any difference between the persons within the scope of application of the article such as merchants or non-merchants. The TCO provisions regarding interest rate limitations aim not only to protect the non-merchants but also the merchants because the excessive interest rates practices which is effective for the occurrence of the idea to limit the contractual interest rates caused negative effects also over the merchants. As a result, it must be accepted that the limitations for interest rates shall be applied also to the merchants.

According to other opinion , the relevant TCC provisions have the nature as “specific provision” which entered into force on the same date as TCO. Because of this fact, the TCC provisions, rather than the TCO, shall apply to the merchants. Within this scope, the interest rate for the business transactions shall be freely determined by the parties. According to this opinion, the reference made to application of legal dispositions concerning the interest is addressed only to conditions of interest, to its calculation, its subsidiary nature and interest rates; so that the reference cannot be accepted as addressed to the limitation of the rates. Another interpretation shall be in contradiction with art. 8/1 of the TCC.

It is also expressed in the doctrine that the interest rates for the business transactions may freely be determined despite the fact that the limitations under TCO are statutory for the non-business transactions .  

Conclusion

Indeed, it must be accepted that the merchants suffered during the economic crises periods because of the excessive interest rates. However, the fact that the TCC which has the nature of specific provision does not limit the freedom of the parties to determine a contractual interest rate, contrarily it stipulates an explicit freedom for determination of them, should be interpreted as the provisions of the TCO provisions regarding interest rate provisions shall not apply to business transactions. Otherwise, existence of art. 8/1 shall be discussed. Within this scope, it is possible that the freedom stipulated under art. 8/1 of the TCC shall be interpreted as the freedom is valid within the limitations stipulated under TCO. However, this idea cannot be defended by the justification of the article or the chronological development of the article. Should the legislator had the idea to limit the interest rates even for business transactions, it would have stipulated it either explicitly or by a reference to TCO. In this case, it is more convenient to accept that the interest rates shall be freely determined for business transactions. However, it should be always reminded that the freedom to determine the interest rates shall be limited with good faith principle, the situation of economic distress of the merchant or the possibility of reduction of the penal clause .