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I. Introduction
Negotiable instruments—comprising bills of exchange, promissory notes, and checks—are a type of valuable document that plays a significant role in commercial life. These instruments serve a major function in securing claims, expediting commercial transactions, and facilitating economic circulation. Under Turkish law, negotiable instruments are regulated under three separate headings—promissory notes, bills of exchange, and checks—in the Turkish Commercial Code No. 6102 (“TCC”).
One of the most important characteristics of negotiable instruments is their strict adherence to formal requirements. The absence of mandatory elements prescribed by law can directly affect the instrument’s status as a negotiable instrument. Additionally, negotiable instruments are subject to the “abstraction” principle because they contain an acknowledgment of debt independent of the underlying transaction. Thanks to these characteristics, negotiable instruments have become an important tool in establishing commercial trust and developing credit relationships.
One of the most debated issues in practice regarding negotiable instruments is the validity of entries related to principal (capital) interest. The Turkish Commercial Code specifically regulates under which instruments and under what conditions an interest entry is valid. While an interest entry is accepted under certain conditions for promissory notes and bills of exchange, a stricter approach is adopted for checks.
II. Interest in Negotiable Instruments
Interest is the economic value paid as compensation for the use of a monetary debt. An interest clause in negotiable instruments refers to the explicit stipulation on the instrument that interest will be applied to the instrument’s face value at a specific rate. However, due to the strict formal requirements applicable to negotiable instruments, an interest clause is not deemed valid in all cases.
Under the Turkish Commercial Code, the interest clause is primarily regulated among the provisions of the promissory note; for bills of exchange, the provisions regarding promissory notes are applied analogously. For checks, however, a special and distinct regulation regarding the interest clause has been adopted.
i. Interest in a Bill of Exchange
A bill of exchange is a negotiable instrument based on a three-party relationship, wherein the drawer issues an order to the drawee to pay a specified amount to the payee. There are three primary parties in a promissory note: the drawer, the drawee, and the payee.
Pursuant to Article 675 of the Turkish Commercial Code, a clause regarding interest in a bill of exchange may only be validly agreed upon in bills payable on sight and in bills payable a certain period after sight. In addition, interest clauses in bills with a fixed maturity are deemed not to have been written. The primary reason the legislature imposed this restriction is to ensure that the amount due is definitively determined on the instrument in bills of exchange with a fixed maturity date . This safeguards the negotiability of the instrument and aims to protect third parties.
In bills payable on demand and bills payable a certain period after presentation, since the time of presentation is not fixed, it is not possible to calculate the interest at the time the instrument is issued and add it to the face value of the bill (or promissory note). For this reason, interest will continue to accrue on the principal for each day the holder delays presentation. Thus, this constitutes an exception to the general rule that the instrument’s amount must be fixed1 .
For the interest clause to be valid, the interest rate must be clearly stated on the bill. If the interest rate is not specified, the interest provision will be invalid and deemed not to have been written. Additionally, if the interest commencement date is not separately specified, interest begins to accrue from the date the bill is issued.
ii. Interest on a Promissory Note
A promissory note is a negotiable instrument in which the drawer undertakes to pay a specific amount of money to the payee unconditionally and without reservation. Unlike a bill of exchange, a promissory note involves a bilateral rather than a tripartite relationship. The parties to the instrument are the drawer and the payee.
Pursuant to Article 778 of the Turkish Commercial Code (TCC), provisions regarding promissory notes apply to promissory notes to the extent they do not conflict with the nature of the promissory note. Therefore, Article 675 of the TCC regarding interest conditions also applies to promissory notes. Accordingly, an interest clause may be validly established only in promissory notes payable on demand and in promissory notes payable a certain period after presentation.
Interest terms included in promissory notes with a fixed maturity are deemed to be unwritten. Similarly, the interest rate must be clearly stated on the instrument. If the rate is not specified, the interest clause is invalid. If the starting date of interest is not separately indicated, interest begins to accrue from the date the promissory note is issued.
One of the key distinctions between a promissory note and a bill of exchange is that in a promissory note, the issuer is also the principal debtor. In a bill of exchange, however, the principal debtor is, as a rule, the accepted drawee. Therefore, the interest provision in a promissory note constitutes an element that directly affects the scope of the issuer’s debt.
iii. Interest on a Check
A check is, by its nature, a negotiable instrument payable on demand, and its function as a means of payment takes precedence. Consequently, a different system regarding interest has been adopted for checks compared to promissory notes and bills of exchange. Since a check has no maturity date, applying capital interest to the instrument’s amount over a specific period is inconsistent with the structure of negotiable instruments law.
Since a check is a payment instrument subject to short presentation periods, Article 786 of the Turkish Commercial Code prohibits the inclusion of an interest clause. In accordance with this prohibition, it is in the holder’s interest to present the check for payment as quickly as possible2 .
This rule, stating that any interest clause in a check is deemed unenforceable, pertains to capital (principal) interest that can be applied to the principal amount up to a certain maturity date. The reason for this is that a check has no maturity date. It should also be noted that a clause regarding default interest may be included in a check. Default interest is the interest that may be applied if the check is not paid despite being presented within the specified timeframe3 .
III. Conclusion
Interest provisions in negotiable instruments are regulated in various ways depending on the type of instrument and its maturity structure. In promissory notes and bills of exchange, interest clauses are accepted under certain conditions; specifically, they are deemed valid only for instruments payable on sight or a certain period after sight. Furthermore, it is mandatory to explicitly state the interest rate; otherwise, the interest clause is deemed not to have been written.
Regarding checks, however, a stricter approach has been adopted, and all provisions regarding principal interest have been deemed invalid. The primary reason for this is that a check is not a credit instrument but rather a means of payment.
In conclusion, the interest clause in negotiable instruments is evaluated within the framework of the principles of formalism and security of circulation in negotiable instruments law. The legislature has accepted interest provisions within certain limits to ensure the security of commercial life, prioritizing the protection of third parties and the certainty of the instrument’s value.
Footnotes
1. Kendigelen, Kırca, Law of Negotiable Instruments, 2022, p. 190.
2. Kendigelen, Kırca, Law of Negotiable Instruments, 2022, p. 303.
3. Assoc. Prof. Dr. Ramazan Durgut, Law of Negotiable Instruments, Istanbul University Faculty of Open and Distance Education, p. 193.
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