Impact Of Covid-19 On Commercial Agreements & Legal Consequences Of Force Majeure

28.05.2020 - Att. Özge Erşen

Covid 19 which was arisen in Wuhan, China and has widely spread all over the world, has been declared as “pandemic” by the World Health Organization. After the announcement of the first case on 11.03.2020 in Turkey, it has been observed that impact of Covid 19 has been progressively increasing up until today. Covid 19 pandemic not only effects public health, but also may hamper the performance of obligations under commercial agreements among contracting parties. In this journal, we evaluated as to whether Covid 19 pandemic can be qualified as force majeure in terms of Turkish Law. Please be noted that, such evaluations have been made by taking into consideration the current legal and social situations announced as of publication date of this journal. Therefore, in case of an announcement of a new regulation, our evaluations hereunder must be re-assessed accordingly. The information contained in this journal includes general considerations, therefore, each situation and contract must be evaluated separately and specifically. 

What are the resolutions taken with respect to Covid 19 in Turkey?

As a result of the increase of spread of Covid 19, Republic of Turkey Ministry of Interior (“Ministry”) has announced circulars in order to prevent spread of Covid 19 and it is observed that such circulars have an impact on both social and economic life. Please find below brief of some of the announcements; 

  • The Ministry has decided by the circular dated 16.03.2020 that theatre, cinema, show centre, concert hall, engagement / wedding hall, restaurant / café with music / music, casinos, pub, tavern, coffee shop, café, cafeteria, country garden, hookah lounge, hookah cafe, internet lounge, internet cafe, each activities of all kinds of game halls/arcades, all kinds of indoor playgrounds (including shopping malls and restaurants), tea garden, association lounges, amusement park, swimming pool, Turkish bath, sauna, spa, massage parlours, SPA and sports centres will be temporarily suspended.
  • The Ministry has decided by the circular dated 21.03.2020 that all cafes and restaurants, patisseries and similar working places shall conduct the business by the way of “take away” and customers shall not be allowed to sit in such place therefore, all sitting areas shall be removed in such working places.
  • The Ministry has decided by the circular dated 21.03.2020 that barber shops, hairdresser salons and beauty centres shall temporarily suspended. 
  • The Ministry declared curfew on 21.03.2020 for those whose age is above 65 and who suffer from chronic illnesses and such people are restricted to go out of their homes and to walk in open areas such as parks, gardens.
  • The Ministry has decided by the circular dated 24.03.2020 that the working hours and number of customers of supermarkets will be changed and decreased and additionally, half of passenger capacity stated under license of public transportation vehicles, shall be allocated temporarily for transportation of people for intercity and intracity transportation.
  • Majority of shopping malls have been shut down other than supermarkets and pharmacies within those malls, based on announcements of the President Recep Tayyip Erdogan and the ministries. 
  • The President Recep Tayyip Erdogan has announced on 19.03.2020 within the scope of Economic Stability Shield Package that “The government will also ensure that the firms that have fallen into default in April, May and June have a “force majeure” note in their credit registry.”
  • Within the scope of General Communiqué No. 518 on the Tax Procedure Law published in the Official Gazette dated March 24, 2020 and numbered 31078 (Reiterated), the taxpayers stated under the Communiqué may benefit from the force majeure provisions within the period between 01.04.2020 and 30.06.2020 (such dates are included).
  • The Ministry has restricted highway and airline transportation by the circular dated 28.03.2020 and all entry and exit to 31 provinces has been banned by the circular of the Ministry dated 04.04.2020.

On the other than, administrative organisations also consider Covid 19 pandemic as a force majeure event. For instance, Energy Market Regulatory Board has considered Covid 19 pandemic as force majeure within the scope of Article 35 of the Electricity Market Licensing Regulation and Article 19 of the Regulation on Unlicensed Electricity Generation in Electricity Market.

What are the conditions for force majeure and which evet are considered as force majeure under the Turkish Law? Is Covid 19 pandemic considered as a force majeure? 

There is no definition or provision for force majeure under the Turkish Code of Obligations numbered 6098 (“TCO”). The definition and scope of force majeure has been evolved based on the Turkish Court of Appeals decisions and opinions of scholars.

For instance, Turkish Court of Appeal decided that “force majeure is an extraordinary event that occurs externally and also outside of the operation and management of the debtor, which inevitably and absolutely prevents the execution of the debt or general norms and which cannot be prevented and predicted. (Eren, F.: Borçlar Hukuku Genel Hükümler, Ankara 2017, s. 582). Acts such as earthquake, flood, and fire, epidemic are considered as force majeure.”

In another Turkish Court of Appeal defined the force majeure as “an unexpected event that occurs externally and also outside of the will of the debtor, which prevents the execution of the debt and which cannot be prevented despite the measures to be taken by anyone.” Additionally, the doctrine defines the force majeure as an external event which inevitably induces a performance of an obligation of a debtor. 

The elements of force majeure can be stated as follows within the scope of doctrine and decisions of Turkish Court of Appeal; (i) an event must occur, (ii) the consequences of the event must be unpredicted and inevitable, (iii) a debt must be breached and (iv) the event and the breach must be connected. Besides, at the time of agreement, consequences of the event must be inevitable and the existence of the event must be unpredictable .

Covid 19 spread qualified as a pandemic by World Health Organisation has heavily increasing its effect all over the world and Turkey. It can be stated that Covid 19 pandemic can satisfy the first condition of the force majeure (i.e. existence of an event). However, in order to determine as to whether force majeure event effects the contractual relationship of contracting parties, mandatory governmental decision that may affect the performance of obligations or other conditions of force majeure for the event in question must be confirmed and provisions of agreements must be evaluated. Covid 19 pandemic is not merely sufficient to evaluate the situation and come to a conclusion in this regard.

What is the legal consequences of force majeure?

Force majeure provisions under the agreements

The provisions of agreement regarding force majeure must be evaluated and the governing law of the agreement must be identified in case of a force majeure event as most of the commercial agreement contains provisions with respect to the force majeure such as force majeure events, the transactions to be performed or rights of contracting parties (time extension etc.), adjustment rights (as to whether it is contained in the agreement and what will be the criteria in order to implement the adjustment right), circumstance of the agreement if the force majeure takes a long period of time and termination rights of contracting parties due to the force majeure event.

Since the provisions regarding force majeure are not considered as mandatory under the Turkish Law, it can be set forth in the agreement on which events will be covered under force majeure event or not. In case of an event which stated under force majeure events of the agreement, even it is an event which does not constitute liability of debtor according to law, debtor can remain liable under the provisions of the agreement. Therefore, before making any conclusion with respect to impact of Covid 19 spread on contractual relationship between contracting parties, provisions of agreements must be cautiously and meticulously reviewed and process management in this regard must be conducted in line with the provisions of the agreements.

On the other hand, although restriction of force majeure event is considered as the general principle, Turkish Court of Appeal stated in a following decision that the force majeure events were not limited to those specified in the agreement “Article 27 of the contract indicates the force majeure events that will affect the term. Among these reasons, government discretionary act were also included. It would not be right to limit the force majeure events with the cases listed in mentioned article, even though price adjustments in February 2001 cannot be regarded as discretionary act of the government indicated in Article 27 of the contract.”

Provisions under the Turkish Code of Obligation

In case an agreement does not contain any provisions regarding force majeure or the provisions are not sufficient, provisions under TCO shall apply on legal consequences of contractual relationship between parties. Although there is no provision under TCO regarding force majeure, in case of a force majeure either Article 136 or Article 138 of TCO shall apply to event in question.

Impossibility of Performance

Constant Impossibility of Performance: In case of a performance of obligations becomes constantly impossible, the Article 136 of TCO, titled “Impossibility of Performance” shall be applicable. As per the said article, if it is impossible to perform all the obligations under the agreement due to the reasons that are not attributable to the obligor, the related obligations shall expire. In such a case, the obligor shall be released from payment of compensation as well as the performance of the obligation. Concurrently, as per the Article 136/2 of TCO, unless otherwise stated under law or contract, the obligor whose obligation expired, cannot claim the performance corresponding to its debt.

Turkish Court of Appeal stated in a decision that; provision of the contract must be taken into consideration for the event which is subject to force majeure, and contractor (defendant) cannot claim the contract price as the performance of the obligation became impossible and is obliged to return to the plaintiff the payment that has been obtained in cash prior to the execution of the agreement within the scope of unjust enrichment principles in accordance with the first sentence of the Article 136/2 of TCO.

Additionally, it must be noted that, as per the Article 136/3 of TCO, unless the obligor dully and timely notifies the creditor on the impossibility of the performance of the obligations and takes necessary precautions to prevent the increase of loss, the obligor shall be liable for the compensation of the resulting losses.

Partial Impossibility of Performance: Pursuant to Article 137 of TCO; when a performance of obligations under a contract is partially impossible due to reasons for which the obligor cannot be held responsible, the obligor shall be released from the obligations which became partially impossible. However, if it is clearly understood from the interpretation of the contract that such contract would not be concluded if the respective impossibility would have been foreseen by the parties in advance, then all of the obligations under such contract shall be terminated.

Temporary Impossibility of Performance: The performance of the obligation can temporarily be impossible due to force majeure event. For instance, a party who is willing to lease a house for 4 weeks during summer, executes a lease agreement. If a temporary impossibility occurs during the period between 1 July and 31 July, the lessor is in breach which is beyond its control. The lessee can use the house for 4 weeks during the summer after 1 August. Since the performance of the obligation is not ceased constantly, such event can be evaluated within scope of other provisions under TCO.

Excessive Difficulty of Performance

 It is important to distinguish the event as to whether it is subject to impossibility of performance or excessive difficulty of performance while managing the process since in some cases obligation is not become impossible but its performance becomes significantly difficult.

The fundamental principle of contract law is the principle of pacta sun servanda. As per such principal, provisions of agreement must followed and fulfilled with the exact same terms as it is executed. However in some cases the performance of the obligation by the debtor despite aggravated circumstances can be contrary to contract justice.

The principle of such events is set forth under the Article 138 of TCO which is an exception to the principle of pacta sun servanda. In such a case, it a proper way to manage the process in compliance with the Article 138 and relevant contract provisions. The lease agreement of the businesses which their activities have been suspend temporarily by government decision or the businesses whose revenues have been decreased due to the pandemic, can be evaluated under this Article. On the other hand, the adjustment request with respect to the construction contracts can be evaluated under the Article 480 of TCO.