Cross-Default Clauses in Bank Loan Agreements
A. INTRODUCTION
Bank loan agreements, and the commercial and individual loans provided through banks via these agreements, hold immense significance both in terms of macroeconomics and the fulfillment of household needs. While banking transactions are subject to rigorous supervision by both the BRSA (Banking Regulation and Supervision Agency) and the CMB (Capital Markets Board), difficulties occasionally arise—particularly for consumers and small-scale enterprises—regarding the aspects of these activities that directly affect them. Some of these difficulties stem from financial constraints or the inability to negotiate the content of the contract, while others arise from the inclusion of unfamiliar terms and definitions interspersed within pre-prepared contracts of adhesion (standard form contracts).
The consumer or merchant signing such a contract often does so without comprehending the legal and financial terminology contained therein, virtually praying that the repayment process proceeds without financial hardship. Indeed, they harbor a justified apprehension regarding the exact consequences of failing to perform obligations imposed by a contract filled with obscure terminology, where no right to negotiation or intervention was granted. One such concept, which appears in loan agreements but whose meaning, scope, and consequences are often not clearly understood, is the “cross-default” clause. In this article, after addressing bank loan agreements, their characteristics, and performance in general, we will examine the features of cross-default clauses and their impact on the performance of the contract.
B. BANK LOAN AGREEMENTS AND THEIR PERFORMANCE
1. The Term “Credit” and Types of Credit in General
The concept of credit originates from the Latin word “credere”, meaning to trust someone. While this represents the subjective meaning of the term, in daily usage, “credit” is primarily used in an economic sense and is often synonymous with a loan for use (commodatum/mutuum) contract. In a banking context, credit should be regarded as any form of economic support provided by the bank to the beneficiary for a specific period. Alternatively, it is defined as the money that a bank or a similar financial institution undertakes to provide to its client as an advance or a debt. Another definition describes it as the temporary transfer of a certain purchasing power to another party based on the confidence of future repayment. Finally, credit can be defined as the temporary relinquishment of purchasing power based on a contract in exchange for consideration, subject to the right of recourse, and the assumption of liability arising from the risk of non-repayment.
Lending operations constitute one of the most fundamental instruments of banking activities. Banks may engage in lending operations in any form or manner, whether in-cash (pecuniary) or non-cash, subject to the provisions stipulated in other laws (Banking Law, Art. 4/1-c). In legal doctrine, in-cash credits generally refer to loans provided directly as liquidity, whereas non-cash credits, in a narrow sense, refer to guarantees, letters of guarantee, counter-guarantees, suretyships, avalizations, acceptances, and endorsements provided by banks in favor of their clients.
Depending on their subject matter, in-cash credits are categorized as vehicle loans, housing loans, consumer loans, business loans, investment loans, etc. Based on their maturity, they are classified as short-term (up to two years), medium-term (up to five years), and long-term (exceeding five years). In addition to the narrow definition of credit, the Banking Law has significantly expanded its scope. Pursuant to Article 48: “In-cash loans, non-cash loans such as letters of guarantee, counter-guarantees, and suretyships… bonds and similar capital market instruments purchased… and risks undertaken due to forward and option contracts… are considered credit regardless of the account in which they are monitored.” Thus, the meaning of “credit” has been broadened to encompass nearly all banking operations other than deposit-taking.
2. Definition of Loan Agreements
Various definitions of loan agreements and credit facility agreements have been proposed:
A credit facility agreement is a contract between a bank and a borrower wherein the bank undertakes to extend credit within a specific limit in exchange for interest and commission.
It is a framework agreement that obligates the lender to open a credit line (in-cash, in-kind, or liability-based) and refrain from demanding repayment until maturity.
It is a private law contract regulating the rights and obligations of the parties regarding the in-cash or non-cash credit to be utilized by the bank’s client.
In light of these definitions, bank loan agreements can be defined as contracts that regulate the mutual rights and obligations of the parties concerning the credit to be extended by a bank to its client. This definition emphasizes the reciprocal nature of the debt and obligations, regardless of whether the credit is in-cash or non-cash, or whether it constitutes a single transaction or a continuous relationship like an overdraft account.
3. Legal Nature of the Loan Agreement
There is no consensus in legal doctrine regarding the legal nature of credit facility agreements. However, prevailing views generally fall into three categories: those characterizing it as a loan for consumption, those viewing it as a multi-stage contract, and those considering it a single-stage contract.
This article was published in the Istanbul Medeniyet University Faculty of Law Journal (IMUFLJ), Year 2020, Volume 5, Issue 9, pp. 247-280. Click here to access the full text of the article in Turkish.