Installment Sales Agreements
The reason for the emergence of a different type of sales contract, rather than an ordinary sale agreement, referred to as an ‘installment sales agreement’ is to contribute to production by reviving the market through enabling people who are unable to pay the purchase price at the point of sale, to immediately make use of the goods they wish to purchase.
Installment sales agreements are regulated under Articles 253-263 of the Turkish Code of Obligations (“TCO”). As it is a type of sales contract, it bears all of the qualities of a sales contract. Provisions of the Law on the Protection of the Consumer (“LPC”) shall apply to installment sales agreements that qualify as consumer transactions.
TCO Article 253/I incorporates a definition of installment sales: “[An] Installment sale is a sale where the seller undertakes to deliver goods to the seller before the payment of the sales price to the buyer, and the buyer undertakes to pay the sales price in portions.”
As the LPC was still in force during the time of entry into force of the TCO, provisions of the TCO related to installment sales that protect the buyer, who is in the position of a consumer, are more detailed and protective as compared to the provisions of the LPC, which regulate similar situations (installment sales). This leads to an interesting situation. The provisions of the TCO shall prevail over the provisions of the LPC insofar as they are in favor of the consumer.
As well, provisions of the TCO regarding installment sales shall prevail where the provisions of the LPC and Articles 253 ff. of the TCO overlap.
As is clear from the definition in the introduction taken from the Law, the subject of an installment sales agreement is “a movable asset.” Even if the system of the TCO mentions the existence of the sale of a movable asset where a right to claim, economic value, or immaterial asset is sold through installments, it is not technically possible to speak of the existence of an installment sales agreement. Similarly, in the installment sales of immaterial goods (trademarks, patents, industrial designs, etc.), TCO Articles 253 et seq. shall not apply. Additionally, TCO Article 253/I does not cover the performance of work in installments.
Delivery to the Buyer prior to the Payment of the Sales Price: Article 253 of the TCO mentions the "delivery" of the movable commodity. The agreement of the parties to the transfer in a way other than the delivery of the possession shall not affect the installment sales qualification of the contract. The obligation of the seller is to deliver the goods sold prior to the sale price is fully paid. It is not a structural element for the installment sales agreement to execute the obligation of delivery of possession prior to payment of the full sales price.
Partial Payment of the Sales Price: Under TCO Article 253/III (7), the number of installments cannot be less than two. It is not obligatory that the amount of the installments, or period between maturities is even; it is sufficient that the installment be objectively determinable at the time of maturity.
Payment Period of Installments: Under Article 256/I of the TCO, the buyer is obliged to pay at least one-tenth of the pre-sales price in advance and, at the latest, at the time of delivery. The remaining part of the sales price must be paid within three years following the establishment of the contract. Due to the mandatory nature of this provision, installment sales agreements are deemed void when the parties stipulate a payment period greater than three years.
In the doctrine, it is argued that a more appropriate solution shall be if the seller loses the right to claim installment receivables regarding the period that exceeds the legal payment period, in comparison with Article 256/III of the TCO; repayment of the installments that were paid after the end of the term of the contract can be demanded due to unjust enrichment in that instance.
At the same time, it is stated that if there is substantial change to the detriment of the economic condition of the buyer after the establishment of the contract, the installment deferral contracts that exceed the statutory period of payment should also be considered valid. Unemployment and force majeure are given as examples to such substantive changes.
Providing Credit to the Sales Price: Installment sales agreements aim to provide credit to the buyer. As mentioned in the introduction, above, the existence of an installment sales agreement is accepted when the payment of the sales price, in installments, aims to provide additional purchase power, credit, to the buyer.
Obligation of prepayment: The buyer is obliged to pay at least one-tenth of the cash purchase sales price (not the sales price), at the latest, at the time of delivery, and in advance (credit card/in cash). The parties may agree on a higher prepayment amount. Under Article 256/II of the TCO, the Council of Ministers may reduce the amount of the advance payment and the legal payment periods by one-half, or increase these periods up to two times, according to the type of sale.
Under Article 255 of the TCC, installment sales agreements shall only enter into force at the end of the period of withdrawal and, thus, the seller cannot demand execution of prepayment from the purchaser before the end of the period of withdrawal. Installment sales agreements shall yield its effects and consequences for the buyer seven days after the receipt of a copy of the contract signed by the parties. The buyer may notify the seller, in writing, of the cancellation of the declaration of intent during this period.
An increase in the sales price in return for waiver of advance payment shall be invalid according to the Article 256/IV of the TCO. This leads to partial nullity and, thus, the sales contract shall survive, together with the prepayment obligation. The seller who delivers the goods to the purchaser without receiving the prepayment shall lose his rights over the unpaid portions of the prepayment amount that was determined in the contract (TCO Article 256/III).
Obligations of prepayment and limitations of the contractual time period are to protect the buyer. Obligation of prepayment guarantees that the buyer is able to pay at least a part of the sales price. On the other hand, the purpose of limitation of the contractual time period is to prevent physiological deception of the buyer through demonstration of low installment amounts that are spread out over an extended period of time.
Form Requirements and Content
TCO Article 253/II stipulates that installment sales agreements shall be invalid unless made in writing. As both parties undertake obligations in the agreement, it is accepted that both parties shall sign the agreement; thus, approval of an installment sales agreement that is concluded orally by the parties, or with the signature of only one of the parties, shall not be sufficient .
Under the Article 253/III of the TCO, in the event that the subject of the installment sales agreement is a good that “falls under the field of activity” of the seller, the legislator does not find ordinary written form sufficient for the establishment of the contract, and regulates the mandatory components of the agreement, as follows:
- Names and places of settlement of the parties.
- The subject of sale.
- Advance sale price of the goods.
- Additional price that is determined through installment payments.
- Total sales price.
- All other performances the purchaser undertook in cash or in kind.
- Amounts of advance and installments, and the number of installments, which shall be no less than two.
- The right of the buyer to withdraw the declaration of will regarding the conclusion of the contract within seven days.
- Records of the agreement regarding the possession of the property, or transfer of the receivable of the sale price, if foreseen.
- Interest to be paid that may be no more than thirty percent of the statutory interest rate in the event of default or deferment of maturity.
- The place and date of establishment of the contract.
These elements are conditions for validity for hire purchase agreements that entreats “goods that fall under the scope of commercial field of activity” and, in the event that one or more of these are not present in the contract, the contract shall be null and void.
State of Default and Annulment of the Contract
Optional rights of the seller in the event of default of the buyer are regulated under Article 259 of the TCO. Accordingly, in the first instance, if the buyer defaults on paying the advance, the seller may only demand the advance, or elect to annul the contract.
Following the valid establishment of the contract, in the event the buyer defaults on payment of the installments, the seller may demand payment of the due installments, or may demand that the remainder of the sales price be paid, in full, immediately, or may annul the contract. For the buyer to be able to demand the remainder of the sales price, in full, or annul the contract, the seller must have exclusively reserved this right, and the buyer must have defaulted on at least two respective installments that constitutes at least one-tenth of the agreed sales price, or on an installment that constitutes at least one-fourth of the selling price, or on the last installment. However, if the amount the seller demands due to annulment is equal to or more than the amount of the paid installments, the seller cannot annul the contract.
Before the seller exercises the right to demand complete payment of the remaining amount of the sales price owed, or annulment of the contract, he must grant a period of at least fifteen days to the buyer in which to remedy the situation.
Annulling the installment sales agreement is a right that is granted only to the seller under Article 260 of the TCO. According to the provision, in the event the seller annuls the contract due to the default of the buyer on payment of installments, both parties are obliged to return what they have received thus far. The seller may also demand an equitable usage fee and compensation in the event of a decrease in the value of the sold goods due to unusual use. However, the seller cannot demand more than the amount that could have been demanded if the performance had been executed on time.
In the event the seller annuls the contract prior to the transfer of the goods because of the buyer’s default on payment of the advance, he can only demand the legal interest that has accrued, and only on the unpaid advance, until the date of annulment of the contract, and compensation owed due to the decrease in the value of the goods after the establishment of the contract. If any penalty clause has been stipulated, it cannot exceed ten percent of the advance payment price.
Additionally, under Article 258 of the TCO, unless the installment debt is connected to a negotiable instrument, the buyer can always discharge his debt by paying the rest of the sales price in one payment. In this case, the portion of the advance sales price that corresponds to the unpaid installments, being not less than one-half, is reduced in accordance with the shortening of the payment period.
Competent Court and Arbitration
Under Article 262 of the TCO, the buyer who is resident in Turkey cannot waive the authorization of the court of residence, in advance, nor conclude an arbitration agreement in the disputes that arise from the installment sales agreements he has signed.
“Prepayable installment sale,” which is a type of installment sale, is regulated in Articles 264 to 273 of the TCO. In this type of sale, the buyer is obliged to pay a certain part of the sales price, in installments prior to delivery, and delivers the good to the buyer when the agreed payment amount is reached; whereas, the idea of “receive today pay tomorrow” is valid for installment sales, the idea of “pay today receive tomorrow” prevails in this kind of sales. These regulations, which have a limited use area in practice, can be considered as a separate study topic.
Whereas installment sales contracts that falls under credit sales contracts have been regulated only under two Articles in the repealed law, it is regulated, in detail, in the TCO, in Articles 253 to 263. Despite the inconveniences for the buyer related to the nature of credit sales, the prevalence of installment sales contracts, in practice, and based on economic need, has led to the regulation of this sales type under detailed mandatory rules.
Provisions for installment sales also include reflection of the idea of protecting the weaker side, which is one of the fundamental philosophies of the TCO. In this context, preventive measures that protect the buyer have been taken with detailed provisions.
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