Covıd-19 Its Legal Effects On Contracts And Force Majeure Argument
Although there is an opinion of the International Chamber of Commerce (the "ICC") shared in the past regarding the SARS virus in terms of force majeure in the synallagmatic contracts, there are different evaluations in terms of the current situation.
Firstly, the legal nature of the issue preventing the fulfillment of the obligations arising from the contracts as specified in the intention of the parties and to the extent that the agreement is reached should be determined and it should be emphasized that an exclusive and independent evaluation in terms of the correlation between the concrete incident and this institution is necessary. Namely, when the existence of force majeure is accepted, the effects of this situation should be handled separately on the basis of each contract.
The concept of force majeure is described as those uncontrollable events that occurred after the signing of an agreement, that are not the fault of any party and that make it difficult or impossible to carry out a normal course of business and fulfil the terms of a contract for reasons beyond its control which may result amending, suspending or terminating the agreement.
As the concept of force majeure and the conditions deemed within this scope are not explicitly regulated under the Turkish Code of Obligations, Law no 6098, (the “TCO”) conditions that would be evaluated within this scope shall be determined by case law. In this context, epidemic disease was accepted as one of the conditions of force majeure in the doctrine and under a decree of Supreme Court Assembly of Civil Chambers, having the case nr. 2017/11-90 and decree nr. 2018/1259 and dated 27.06.2018. The mentioned decree shed some light on the issue with the following statement;
“Force majeure is an extraordinary event that cannot be foreseen and resisted against, occurring outside the activity and operation of the
responsible or obligor and leading to the violation of a general behavior norm or debt. Natural disasters such as earthquake, flood, fire and epidemic are considered as force majeure.”
The decree leads the way in the discussion regarding whether the epidemic can be accepted as a force majeure or not.
Having said that, it is seen by taking into consideration the relevant decrees of Supreme Court that the existence of force majeure is evaluated separately and individually for each concrete case and -especially for merchants- interpreted strictly under general conditions. On the condition that the epidemic does not render the performance impossible as a result of a separate and detailed evaluation for each commercial relation and agreement, it shall not be deemed as force majeure and if the required conditions exist, impossibility of performance and hardship may be considered. Whereas the concept of force majeure is not defined in the legislation, the consequences of such are defined as full impossibility of performance, partial impossibility of performance and excessive difficulty in performance.
- Full Impossibility of Performance
The regulation introduced in Article 13 of the TCO regarding the "failure to perform" situations, which do not meet the conditions of force majeure, but which cannot be attributed to the obligor as well, is as follows: If the performance of the obligation becomes impossible due to the reasons for which the obligor cannot be held liable, the obligation terminates. Moreover; the obligor, who is remissioned from obligation due to the impossibility, is obliged to return the performance he/she received from the other party as per the provisions of the unjust enrichment, and loses his/her right to demand the action that has not yet been performed by the other party.
- Partial Impossibility Performance
The partial impossibility is regulated in Article 137 of the TCO whereas the obligor, related to the partial impossibility of the fulfillment, would only be waived from the performance of impossible part of the obligation. However; in this case, if the parties would not execute the contract if they had foreseen in advance the fact of partially impossible obligation, the entire obligation would be terminated.
Likewise; in synallagmatic contracts, if the obligation of a party becomes partially impossible and the creditor is satisfied with partial performance, the counter-performance will be executed on such basis. In the event that the creditor does not give consent to such performance or if the counter obligation is of non-severable, full impossibility provisions will be applied.
- Excessive Difficulty in Performance
Having said that; approaching the concept of force majeure and having a clear regulation in the TCO, the implementation of the institution of “excessive difficulty in performance” may be considered as well. The legal basis for the adaptation request /or the revocation of contracts in case of a fundamental alteration of the equilibrium of the contract is the principle of good faith stipulated in Article 2 of the Turkish Civil Code (the “TCC”), both of which are regarded as the exceptions to the fundamental principle of sanctity of contracts (pacta sunt servanda), related to the "the foundation of the transaction collapse" and differing from the concept of impossibility.
Hardship is defined in the Article 6.2.2. by the UNIDROIT Principles of International Commercial Contracts ("d") as follows: “There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party.”
When an unexpected event that is not foreseen and not expected to be foreseen by the parties during conclusion of the contract occurs not resulting from negligence on the obligor’s part, and if the conditions present during the conclusion of the contract are modified to the detriment of the obligor to such an extent that demanding performance from the obligor would violate the principle of good faith, and if the obligor has not yet fulfilled his/her debt or has discharged his/her debt by reserving the right of hardship, the obligor shall be entitled to demand from the judge the adaptation of the contract to new circumstances, or to rescind the contract where such adaptation is not possible. In continuous contracts, as a rule, the obligor shall use the right to termination instead of the right to rescind.
In other words, within the framework of principle of good faith and bona fide, a request for performance from the obligor should be in contradiction with the principle of good faith, due to the Coronavirus outbreak.
Adaptation of the Contract might be demanded: This right is merely used by applying to the court. Where it is appropriate to reconstruct the risk sharing balance, the obligor may request an adaptation from the judge, but if such adaptation is not possible, to rescind/terminate the contract may be considered. The judge will ex-officio evaluate the
- concrete event and, if adaptation is possible, will freely determine the method and amount relating to such adaptation. In determining this, taking into consideration the balance of interests between the parties is essential.
- If Adaption is not Possible, Rescind or Termination Right Might be Used: If there is a discontinuous contract between the parties, the option of rescission ought to be used. Unlikely; if there is a continuous contract (e.g. lease contract) creating a permanent debt relationship, as a rule, the obligor shall use the right to termination instead of the right to rescind, as stated in the last sentence of Article 138 the TCO. Although it may seem possible to rescind/terminate the contract with a non-court declaration, the judge should consider adaptation, and if adaptation is possible, ending the contract will be deemed invalid. For this reason, it is suggested that this right should be used by court.
It should be noted that especially in commercial contracts, adherence to the contract (the principle of pacta sunt servanda) arranged between the parties is essential, and the adaptation of the contract is an exceptional case that should be applied in case of adaptation conditions. Primarily; it is imperative that after the signing of the contract, apart from occurrence of unexpected emergencies being objective, unpredictable and valid for all and that the changing conditions make the contract unbearable, thus, the foundation of the transaction collapses. If the specified conditions have been met, the contract may be requested to be adapted.
As a result of multidimensional assessments in terms of commercial relations, in order to ensure that the contract is deemed as effective by keeping it under favorable conditions adaptation or termination preference may be considered.
- Force Majeure Clause on Contracts
Fundamentally; regardless of whether the source is a law or contract provision, the force majeure regime typically makes it excusable for a party to fail to fulfill its obligation arising from the contract.
However; regarding the procedure to follow in the event of a force majeure, the existence and content of a contract concluded between the parties and the force majeure provisions -if any- involved within the contract should be examined primarily, rather than general provisions.
In potential conflicts, the form of force majeure clause involved in the contract between the parties and the characteristics of the concrete event will become more of an issue.
In the presence of a force majeure provision, the parties will have such obligations as acting in accordance with the directive of the provision and the contract during the duration of the force majeure, due diligence, notice, not fulfilling performance, consider the termination of the
contract as the ultimate remedy (ultima ratio) and if a maximum time phase is envisaged for the continuation of the force majeure situation respecting such phase.
The Supreme Court renders decision on the basis of a concrete case when carrying out a force majeure evaluation, and the conditions of such event in line with the provisions of the contract between the parties embody its assessment. It is observed that the Supreme Court deems as essential how the force majeure is defined in the contract and what kind of incidents are in its scope, especially in the case of merchants who are expected to act prudently in any case.
If there are no provisions in the contracts, regarding force majeure, then the precedent decisions of the Supreme Court, general provisions and the principle of good faith, as per Article 2 of the TCC will be taken as the basis. This; in case of legal initiatives against the obligor being unable to perform, in the force majeure defense to be carried out before the court, may determine the defense possibilities and framework and lead to a narrower maneuver area compared with the situation involving clear provisions regarding the force majeure in the contract.
Whether the force majeure is approved or not and the realization conditions of this case is determined according to the relevant provision. For instance, in terms of how long a situation must be present to be considered as force majeure, is frequently stated in the contracts. -e.g. the contract terms will be suspended in case of an outbreak (pandemic) lasting longer than 1 month.-
It should be noted that the force majeure situation, which has no effect on obligations arising from contracts between the parties, will also have no effect for the parties. In other words, it will not be acceptable to assert a claim regarding force majeure in terms of the contracts of a merchant whose activity has not been affected due to the situation that can be considered as a force majeure.
Therefore, a separate and individual examination should be carried out on the basis of force majeure and contracts, and whether the force majeure creates an "impossibility" in fulfilling these liabilities should be considered by assessing the obligations arising from the contracts.
Moreover, the most important source to shed light on the situation after the disappearance of the force majeure is the relevant provisions of the contract between the parties. Such contract provisions play a key role in shaping the legal and commercial fate of postponed or suspended contracts after the period of force majeure.
Finally, the issue of whether or not the performance that has not been fulfilled due to force majeure will be possible later on remains uncertain and may bear the feature of being the basis for demanding the performance of the actions that are not performed retrospectively. Here
again, the necessity of exclusive and separate evaluation of the subjects and qualifications of the contract and its performance arises.
- The Situation Against the Principle of Good Faith
As the Supreme Court frequently states in its decrees, force majeure, impossibility of execution and excessive performance difficulties should not be operated contrary to the principle of good faith and bona fide. Within the scope of freedom of contract and freedom of will being its natural extension, it is essential to keep the agreements signed by the parties in line with the will of the parties in accordance with the principle of “pacta sunt servanda” (agreements must be kept) and it should be concluded by evaluating whether the above mentioned conditions exist in each contract.
The risks that are always present and possible in commercial life and the jeopardy of failure to fulfill the obligations undertaken by the contract exist as an ordinary situation and it is obvious that the issues causing such results cannot be regarded as force majeure if certain conditions are not met as stated above. It should be accepted that the contrary situation would pose a greater risk for the safety of commercial life and would be regarded as an excuse for “avoidance of performance” for the parties and would cause abuse of the right.
For these reasons; before the party claiming that the "failure to perform" situation has arisen due to force majeure, firstly the nature of the force majeure and its place in the contract and then its effects on his/her obligations will be examined in detail.
Our suggestions regarding the usage of force majeure clauses and how to manage non-performance during the Coronavirus outbreak are as follows:
- The parties of the commercial contracts ought to evaluate whether the epidemic constitutes a force majeure in terms of the relevant contract by discussing the actual effect felt by the actions within the scope of the contract due to the virus by taking into consideration whether the current situation creates hardship or non-performance and whether the commercial activities going on in the places affected by the virus has come to a standstill.
- The parties of the existing contracts ought to stay in the regular communication with the other party in accordance with the correspondence and notification procedures specified in the Contract and mutual negotiations ought to be conducted to minimize the damage.
- Those who produce in China and fail to fulfill their contractual obligations due to various reasons may obtain a “force majeure” certificate by applying to the competent authorities in China.
- Suspension of the contract / Postponement of the fulfillment of the obligations arising from contract (this postponement may be valid for both sides of the contract or only for one party according to the agreement between the parties)
- The dangers of epidemic disease, pandemic and virus can be stated and their scope can be regulated according to the risk values of the contract, under the provisions regarding force majeure, to be envisaged in the contracts to be concluded.
- For contracts that have been concluded and do not have satisfactory provisions for a party in terms of force majeure, additional protocols may be issued as an annex and to be deemed integral part of the contract.
Whether the non-performance of contractual obligations, hardship or delay in performance arising due to Coronavirus can be considered as a force majeure or not ought to be evaluated separately and individually under each contract in terms of parties, the element of foreignness, the nature of actions, place of performance, applicable law and especially characteristics of the situation taken place. Thus; the relevant epidemic disease will not create the same effect on each contract in terms of the facts mentioned above.