CEELM Covid-19 Comparative Legal Guide: Contracts in Turkey

CEELM Covid-19 Comparative Legal Guide: Contracts in Turkey

Covid-19 and Contracts in Turkey
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Contributed by Kolcuoglu Demirkan Kocakli

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

The current number of Covid-19 cases in Turkey is lower than in most of the European and Middle Eastern countries. To prevent the spread of the virus among the population, Turkish government has taken certain country-wide precautions. Turkey suspended flights to and from China, Iran, Iraq, the UAE, and many European countries, closed some of the borders, and schools, universities, kindergartens, daycare centers are closed for the second half of March. The Ministry of Interior has recently decided to close nightclubs, bars, gyms, spas, cafes, tea gardens, cinemas, wedding halls, show centers and many other public places until further notice. The government also postponed the tourism season’s start to the end of April. Most personnel employed in public institutions and agencies who are breastfeeding or expecting children, suffering chronic diseases, or are over the age of 60 are given paid leave, and this created a precedent for most of the private entities. While these precautions are believed to be vital to prevent Covid-19’s spread, an inevitably adverse effect is expected in the Turkish economy.

Even though the Turkish government did not declare Covid-19 as a force majeure event, as the impact of Covid-19 pandemic is estimated to continue for an indefinite period, business enterprises in Turkey have started to search for remedies for delays in the performance of their contractual undertakings, statutory requirements, and the supply of goods, as well as for early termination of contracts.

As Turkish law does not provide a uniform definition for the term “force majeure event,” each case must be assessed based on its own merits, and the parties’ written arrangements in contractual relationships must be taken into consideration. According to the Cassation Court and the scholars, a force majeure event is an unforeseeable and unpreventable extraordinary event that is beyond the affected party’s reasonable control, which inevitably causes the breach of a contractual obligation or violation of moral norms. Despite the fact that the Republic of Turkey has never experienced an extraordinary pandemic such as Covid-19 in its history, a number of the Cassation Court decisions declare epidemic diseases among the examples of force majeure events. Under Turkish law, the Law on Public Procurement Contracts, and some other pieces of legislation expressly address epidemic diseases as an example of force majeure events.

We believe that the primary criteria to be sought in the assessment of whether an epidemic or pandemic disease consists a force majeure event should include the direct and objective impact of (i) the disease and/or (ii) the precautions taken to prevent the spread of the disease, on a commercial/contractual relationship or on the performance of an obligation. Accordingly, if, in a particular case, performance of an obligation is not obstructed despite the prevalence of the disease or the country-wide precautions taken, merely the existence of the epidemic/pandemic disease in question may not be considered a force majeure event releasing the debtor from performing its obligations wholly or partially.

Turkish law provides certain remedies for business enterprises, if and when a force majeure event exists. For instance, the Labor Law allows employers to pay half salary for one week, if their workplaces’ operations are ceased or an employee is hindered from working due to a force majeure event for more than one week. After this one-week period, if the force majeure event and its impact continue to exist, the employer may terminate the relevant employees’ contracts with immediate effect, by paying severance pay and accrued labor entitlements. Parties to an employment relationship may also execute certain other arrangements by way of agreement, such as unpaid leave, part-time employment, telecommuting work arrangement, etc. The employers may also require employees to use their accumulated paid leave entitlements, throughout the continuance of the force majeure event. Moreover, the employers may apply to the Turkish Labor Institution to implement shortened work arrangement in their workplaces, based on the Unemployment Insurance Law.

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

Based on the “pacta sunt servanda” principle under Turkish law, every debtor must fulfil their contractual obligations in line with the contract, in spite of the difficulties and obstacles occurred after the contract’s execution. However, force majeure events may create an exemption to this general principle.

Article 136 of the Turkish Code of Obligations (the TCO) provides that, if performance of an obligation becomes objectively impossible due to any reason that is not attributable to the debtor, the obligation ceases to exist. If the contract in question is synallagmatic, the party that is released from its performance obligation due to such impossibility must return the act performed by the counterparty and it may not require the counterparty to perform its obligation anymore. However, the debtor whose performance is hindered must inform the counterparty without delay and take any necessary precautions to prevent increase of damages. Otherwise, such debtor will be liable to indemnify the counterparty’s damages. We also recommend that the affected party keeps proper record of documents which may help the relevant party to prove the effects of the force majeure event.

We believe that the Covid-19 pandemic and the precautions taken by the government may play a role as a force majeure event in contractual relationships and consist a ground for the termination of a contract, if it directly and entirely obstructs the contract’s performance. For instance, if a contract requires performance of an obligation specifically in Italy within a specific timeframe and it has become impossible due to the quarantine and the travel restraints, the debtor’s obligation deems ceased.

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

According to majority of the scholars, a debtor shall be released from its contractual obligations if the force majeure event in question makes the performance of those obligations completely impossible. Accordingly, if alternative ways for performance could be found, then the debtor may not avoid its obligation by relying upon the existence of the force majeure event per se. Besides, if the impossibility is temporary and the timing of the performance is not of essence in the contractual relationship (i.e., if late performance is acceptable and the delay would not make the performance pointless), the debtor’s obligations must be deemed to be postponed, but not ceased. Accordingly, based on the example that we gave in our responses to the previous question, if it is contractually and factually possible to perform the obligation in the debtor’s country rather than in Italy or if the timing is not of essence, then the Covid-19 pandemic and its impact may not justify the termination of the entire contract. The debtor affected by the FM Event must notify the other party of the FM Event and the alternative solutions without delay, take any necessary precautions to prevent increase of damages and perform the relevant obligation when the FM Event ceases to exist or at any other time designated by the parties or through following an alternative method.

In addition, Article 137 of the TCO provides that if performance of the debtor’s obligation becomes partially impossible due to any reason that is not attributable to the debtor, the debtor will only be released from the relevant part of its obligation. However, if it is clearly understood that such contract would not have been executed if the parties had forecast the partial impossibility before, then the entire obligation ceases. If the contract in question is synallagmatic, the counterparty’s consent for partial performance is sought. Accordingly, if the affected debtor’s counterparty consents to partial performance, then the relevant counterparty will also be liable for proportionate performance of its obligation under the contract. However, if the affected debtor’s counterparty does not consent to partial performance or the partial performance is not practically possible, then the entire obligation ceases to exist.

Another relief that a debtor affected by an FM Event can seek is the adaptation of the contract to the new conditions. According to Article 138 of the TCO, if an unforeseen and unforeseeable extraordinary event that is not attributable to the debtor occurs and adversely changes the circumstances that were existing at the time of the contract’s execution, and so the debtor can no longer be reasonably expected to perform its obligations as designated under the contract, the debtor can request adaptation of the contract to such new circumstances from the competent court. The debtor must exercise this right either before its obligation becomes due or after performing its obligation by reserving its right to request adaptation. If adaptation does not seem possible or relieving, then the debtor can terminate the contract. This right under Article 138 of the TCO is commonly exercised by tenants for the reduction of their rental fees. Considering that a large part of the population applies self-quarantine at their homes in order to avoid their exposure to the virus, shopping mall retailers, which have designated turnover-based rental fee arrangements with minimum monthly payment requirement under their lease contracts with the shopping malls, are expected to exercise this right in the coming months.

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

As explained above, the debtor whose performance is hindered by the FM Event must inform the other party without delay. As the Turkish law does not prescribe a specific period for this notification, each case must be assessed based on its own merits or the force majeure clause under the contract between the parties must be taken into consideration.

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

Even though Turkish law does not expressly require such causation requirement, this may be argued in a possible dispute. Therefore, it is naturally advisable for the affected debtor to always be prepared to prove that it would have performed its contractual obligations if the FM Event did not occur.

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

The TCO requires the debtor whose performance is hindered to take any necessary precautions to prevent the increase of the counterparty’s damages due to the suspension or termination of contract based on the FM Event. Otherwise, such debtor will be liable to indemnify the counterparty’s damages. Such precautions must be designated on a case-by-case basis.