The Consequences of Late Payment in the Procurement of Goods and Services

Author: Duygu Oner

Introduction 
Under Turkish law, the fundamental provisions regarding default and performance of debts are regulated under Turkish Code of Obligations numbered 6098 ("TCO"). Special provisions are regulated in Article 1530 of Turkish Commercial Code numbered 6102 ("TCC"), in relation to the performance period of pecuniary debts, and the emergence of the conditions for default, by referring to the "Directive on Combating Late Payment in Commercial Transactions" numbered 2011/7 of the European Parliament and Council ("2011/7/EU Directive") for the purpose of protecting the enterprises that supply goods and services against late payment risks for their pecuniary receivables.
As it is indicated in the preamble of the provision, many strong commercial enterprises use late payments as a financing instrument. However, this instrument puts the suppliers who provide goods and services to the strong commercial enterprises on the spot, it shakes up their financial situation, confuses competitive capacity and profitability, and it even drags them into bankruptcy1. 
The law-maker, in order to prevent late payments and protect small and medium-sized enterprises (SMEs) that supply goods and services against strong enterprises, stipulates through the provision under Article 1530 of the TCC that the debtor who fails to pay its debts in time goes into default without the necessity of notice, and that the creditor is entitled to default interest.

Scope of Application
The related provisions shall be applied only in the event of default in payment of the price in return for the goods or services, as set forth in the contracts, concluded for the procurement of the said goods and services, and with regard to the contracts that are concluded between two commercial enterprises. Within this scope, the said provision shall not be applied to the contracts that are concluded between a commercial enterprise and public institutions. The scope of application of Article 1530 of the TCC is criticized as it does not protect SMEs against public establishments; whereas, it does protect the SMEs that supply goods and services against large and strong commercial enterprises2.

Conditions for Default without Notice 
The moment when the debtor goes into default in the procurement of goods and services, and when the creditor is entitled to interest in this regard differs as to whether the parties have agreed to the date of payment, or the payment period.

Default in Cases where the Payment Date or Term is Determined 
Pursuant to Article 1530/2 of the TCC, in the event that parties stipulate a day of payment or a payment period in their contract, the debtor be in default without any necessity of notice, and the creditor shall be entitled to interest, even if it is not stipulated in their contract. This provision contradicts the general provisions of the TCO with regard to the default of the debtor. Under Article 117 of the TCO, in order to be able to say that the debtor is in default, it is essential for the creditor to place the debtor into default. The only exception to this rule is the instance where the agreed term is qualified as a "specified term." In other words, as per Article 117 of the TCO, the creditor must force the debtor into default, for the default of the debtor, in every case where a specified term is not stipulated in the contract. In fact, Article 1530 of the TCC provides that the debtor goes into default in all cases where a day of payment or payment period is agreed in the contract. 

In cases where the payment period is explicitly agreed to in parties' agreement, the lawmaker stipulates, in accordance with the purpose of protecting the creditor, a maximum limitation period regarding the payment date specified in the contract. As per Article 1530 /5 of the TCC, the payment period shall be a maximum of sixty days as from the receipt of the invoice, or an equivalent payment request or procurement of goods or services, or upon the completion of the review and acceptance procedure. In this scope, the performance period of the pecuniary debt is limited to sixty days in contracts concluded between two commercial enterprises, for the procurement of goods and services. On the other hand, an exception to the sixty days' maximum period is stipulated in the related provision. Accordingly, the parties may stipulate a payment period greater than sixty days, provided that they agree on this issue, explicitly, and it does not constitute a grossly unfair situation. Nevertheless, in the event that the creditor is in the position of supplier, and is an SME or agricultural or animal producer, or if the debtor is a large-scale enterprise, the payment period shall not exceed sixty days under any circumstances. If the parties stipulate a provision regarding the payment period in their contract that contradicts the regulations in this article, these provisions shall be rendered invalid.

Default in Cases where the Payment Date or the Payment Period is not stipulated 
As per Article 1530/4 of the TCC, in the event that there is no agreement as to the date of payment and the payment period in the contract with respect to the payment of the monetary debt in the procurement of goods and services, the debtor shall go into default 30 days after receipt of the invoice, or the equivalent payment request. In this case, for default to be present, it is sufficient for the creditor to send the invoice and that the debtor fails to make the payment within thirty days from receipt of the invoice.

In cases where the date of receipt of the invoice, or the equivalent payment request is unclear, the thirty day period shall commence upon the procurement of the goods or services by the debtor. On the other hand, it is stipulated that if the invoice is received by the debtor before the procurement of the goods and services, the thirty day period shall commence with the delivery of the goods or services to the debtor.

Another possibility that is stipulated under Article 1530 of the TCC, with regard to the commencement of the thirty day period, is where a procedure is foreseen under the law for the acceptance and the review of the goods. According to the related provision, in the event that the debtor receives the invoice, or the equivalent payment request on the date of acceptance or review, or before this date, the debtor shall be in default at the end of the thirty day period that follows the date of occurrence of the acceptance or review. In the said provision, the period that will be stipulated in the contract by the parties, in relation to the acceptation and review is limited, as well. In this scope, the acceptance and review period shall be a maximum of thirty days in the event that a review or acceptance procedure is stipulated in the contract. If a period that is greater than thirty days is prescribed for the review in the contract, the issue as to whether this period constitutes unfairness to the detriment of the creditor shall be taken into account. If the parties agree on a period for the review that is more than thirty days, it is required that this period shall not constitute a grossly unfair situation for the creditor. Otherwise, the period for the review shall be deemed to be thirty days, even if it is stipulated as a longer period in the contract.

That being said, it is accepted that the thirty days stipulated, above, regarding the default of the debtor, shall not be evaluated as a required minimum waiting period from the default of the debtor. According to the view that is accepted in the doctrine, after the debt becomes due, the creditor should be able to push the debtor into default without waiting for the thirty days to expire from the receipt of the invoice by the debtor, on the condition that a notice in default is sent. Indeed, granting the debtor an obligatory thirty day period for payment, although the debt is due, contradicts the purpose of the protection of the creditor3.

The Conditions under which to request Default Interest 
In the event that the debtor of the monetary debt goes into default in the procurement contracts for goods and services between two commercial enterprises, the creditor is entitled to the interest, even if it is not explicitly stipulated in the contract, as from the date agreed upon in the contract, or the days that follow the end of the payment period. Nevertheless, the creditor is required to fulfill the contractual and legal obligations to be able to request interest. 
With respect to the rate of interest, Article 1530/6 of the TCC sets forth that provisions stating that the debtor is not required to pay interest for late payment, or pays a very small amount of interest, the amount of which would be deemed to be grossly unfair, are void. Additionally, provisions stipulating that the debtor is not responsible for losses due to late payment, or has limited responsibility, shall be deemed to be void, as well, under this Article. In this respect, the parties may determine the interest rate freely in the contract, and to the extent that it does not contradict with the restrictions stipulated under Article 1530/6 of the TCC.

In the event that the interest rate has not been stipulated in the contract by the parties, or that it is deemed invalid, pursuant to the Article 1530/7 of the TCC, the applicable interest rate is determined in accordance with the announcement of the Central Bank of the Republic of Turkey, each January, and the interest rate shall be at least 8% higher than the late payment interest rate for commercial transactions that is stated in the Code on Legal Interest and Default Interest numbered 3095. 

As for the role of fault in claiming interest, the wording of Article 1530/2 of the TCC provides that the debtor who fails to pay its debts in time goes into default "except for the cases where he cannot be held liable." The wording of this provision allows for interpretation such that the debtor shall be at fault in order to be in default and, subsequently, shall pay default interest. However, such interpretation contradicts the provisions of the TCO, which stipulates that fault is not required for the default of the debtor, and with the purpose of protecting small and medium-sized entities against late payments stipulated in Article 1530 of the TCC. Therefore, it is argued in the doctrine that this provision should not be interpreted in such a way that it discharges the debtor from making interest payments in cases the debtor is not at fault to be in default. In this respect, it should be accepted that the creditor may claim default interest stipulated in the Code numbered 3095 even if the debtor is not at fault in delaying the performance of his obligations.

Conclusion
In line with the 2011/7/EU Directive, in order to prevent late payments and protect small and medium-sized enterprises that supply goods and services against strong enterprises, Article 1530 of the TCC stipulates that the debtor who fails to pay its debts in time goes into default without the necessity of notice, and that the creditor is entitled to default interest. Thus, the debtor goes into default without the notice of the creditor and is obliged to pay interest even in cases where a specified payment term is not agreed in the contract.

1 Preamble of Article 1530 of the TCC numbered 6102.
2 Çağlayan, Pınar, Mal ve Hizmet Tedarikinde Geç Ödemenin Sonuçları, Batıder, C.XXVII SA. 2, p. 218.
3 Ibid, p. 229.