I. INTRODUCTION
Pledge agrrement is one of the most commonly used vehicles in commercial transactions in order to secure the parties’ obligations. Especially in practice, the banks are requiring the borrowers to enter into pledge agreements as a condition for granting loan whereupon diverse properties and rights of the borrowers are pledged in favor of the banks. As explained below, the right of pledge does not entitle the pledgee to benefit from or dispose of the pledged property. However, the banks add provisions into their standard loan and pledge agreements whereby they attempt to receive excessive rights beyond the main purpose of the pledge agreements. Such agreements comprising unfair provisions are referred to as “unconscionable contracts” in practice. In this articletter, validity of such provisions shall be examined in terms of the principal of Lex Commissoria as well as the fundamental rules of Turkish law.
II. LEX COMMISSORIA
The principal of Lex Commissoria allows the pledgee to acquire the pledged property in case the obligor fails to perform its payment obligations. As per the Civil Code, Lex Commissoria is prohibited and in case the parties agree on the otherwise, such provisions shall be deemed invalid. However, invalidity of such provisions does not result in complete invalidity of the agreement.
Based on the assumption that the value of pledged property is generally higher than the amount of payment obligation, the prohibition of Lex Commissoria aims to protect the pledger having a weaker position before the pledgee.
The pledgee may recover its receivables via applying to official methods for liquidation of the pledged property under the Execution Code. It may be argued that the official methods and Lex Commissoria have the same consequences as the pledger shall in any event lose the ownership of the pledged property. However, the pledger has a chance to perform its payment obligations during the official proceedings whereupon it can prevent the liquidation of the pledged property. Furthermore, there may be further persons having pledge rights on the same property and prohibition of Lex Commissoria ensures that other pledgees may recover their receivables from the amount obtained from the liquidation of the pledged property via official methods.
It should be noted that the execution date of the agreement may constitute an exception to prohibition of Lex Commissoria. There is no restriction in Turkish law on Lex Commissoria agreements executed after the payment obligation has become due and payable. In this case, such agreements are deemed to have been made for performance of the pledger’s payment obligations.
In light of the foregoing, the pledgee may recover its receivables via official methods of the Execution Code. However, it is controversial amongst the doctrine whether the pledgee can be entitled to liquidate the pledged property via private sales methods.
Main basis of the above-mentioned controversion is arising out of some abolished laws where certain public institutions and public banks were entitled to liquidate the pledged property via private sales methods without applying to official methods of the Execution Code. Considerable part of the Turkish law doctrine is of the opinion that Lex Commissoria prohibition does not comprise the agrements allowing the sales of the pledged property via private methods. This part of the doctrine argues that the Execution Code does not have a mandatory provisions in this regard. However, those who support the foregoing opinion emphasise that such agreement shall bind only its parties and in case there are other rights, attachments or pledges on the pledged property, performance of such agreement shall be subject to consents of other pledgees or related parties.
Another part of the Turkish law doctrine is of the opinion that in case there are attachments on the pledged property or the pledgor has become insolvent, the pledged property may only be liquidated via official methods of the Execution Code.
On the other hand, rest of the Turkish Law doctrine states that the parties may not agree on sales of the pledged property via private methods unless such agreement is made after the payment obligation has been due and payable. Furthermore, the Supreme Court rules that any provision of an agreement allowing the pledgee to acquire the pledged property, and/or entitling the pledgee to sell the pledged property in case the obligor fails to perform its payment obligations, is invalid.
III. UNCONSCIONABLE CONTRACTS
Ideally, agreements are expected to include fair and reasonable provisions whereunder the parties’ rights and obligations are regulated. However, parties to an agreement may not be in equal positions in practice and one of the parties may impose its conditions in an unfair way on the other pary. In such case, provisions of Turkish law seeking to protect the public order may intervene and invalidate the unfair provisions of agreements.
In light of the foregoing, the agreements which excessively restrict a party’s economic freedom, jeopardizes a party’s economic future, and adversely depends a party on other party are referred to as the “unconscionable contracts”.
Naturally, agreements made in daily life resctirct the parties’ freedom to some extent. Such restrictions are not deemed invalid provided that they are in compliance with the rules of law and morals. However, unconscionable contracts include the provisions beyond the permitted extent of such restrictions and provisions thereof violate the rules of law and morals.
Pursuant to Turkish law, parties may not waive their freedoms or restrict them contrary to rules of law. As per Article 27 of the Code of Obligations, agreements contrary to mandatory rules of laws, rules of morals, public order and inherent rights as well as which impose impossible obligations on the parties are invalid. Similar rule is also stated in Article 23 of the Civil Code statingthat the parties have capacities to act and obtain rights which the parties may not waive. Therefore, it is not possible to completely or partially remove the partys’ economic freedom and ability to make transaction via unconscionable contracts.
As stated above, the banks lead to qualification of their agreements as unconscionable contracts by means of adding certain provision therein. Especially in standard loan and pledge agreements, the banks impose unlawful provisions on the borrowers.
Pledgers who have a weaker position before the banks need to be protected by mandatory rules of law. For example the pledgee may sell the pledged property for less than it is worth or it may provide advantage to itself or other parties via sales of such property. Hence, the mandatory rules of law may invalidate the agreements allowing the pledgee to sell the pledged property with any price or anywhere determined thereby in case the obligor fails to perform its payment obligation.
The question as to whether the private sales methods and Lex Commisoira are allowed under Turkish law must be evaluated in terms of the date and content of the agreements providing for such. Eventhough almost all the standard terms of the banks contain the provisions indicating private sales methods and/or Lex Commissoria, Turkish law comprises certain provisions in order to protect the borrowers and customers.
