Evaluation of Coronavirus Regarding the Contracts
The World Health Organization has declared the coronavirus disease (COVID-19) outbreak, which has spread across the world, a pandemic (“Outbreak”). Minister of Health Fahrettin Koca, confirmed on 11 March 2020 that the first coronavirus case had occurred in Turkey and the Ministry began to take measures to prevent the spread of the Outbreak. The circular on “Coronavirus Measures” (“Circular”) dated 16.03.2020 and prepared accordingly by the Turkish Republic Ministry of Internal Affairs General Directorate of Provincial Administration to be distributed to all is a mandatory public decision. The Outbreak went far beyond China, its country of origin, and became a global crisis. While some countries are imposing curfew, in others, activities of exportation are prevented since borders are being closed. The decisions made by local and international platforms regarding the Outbreak also emphasize the seriousness of the event. The current and possible legal effects of the Outbreak for the business world and especially its effect on the contracts signed before the Outbreak requires legal evaluation. Whether this Outbreak can be evaluated as a force majeure will be the basis of these evaluations.
1. IS THE OUTBREAK A FORCE MAJEURE EVENT?Before assessing whether the Outbreak may be considered as a force majeure or not, first we need to define force majeure. Although the concept of force majeure exists in the the Turkish Code of Obligations (“TCO”) numbered 6098, there is no explicit definition. According to the decisions of the Court of Cassation, force majeure is an unforeseeable event outside the parties’ control, which arises after the signing, and which causes the impossibility of performance. Some common examples of force majeure events include natural disasters such as fire, earthquakes, floods and outbreaks. Similarly, martial law, war, state of emergency and import-export prohibitions are listed as force majeure events. At this point, the Outbreak is considered as a force majeure event. However, the existence of the Outbreak alone is not sufficient for invoking a force majeure clause. In order for these events to be regarded as force majeure, there must be a causal link and cause-effect relationship between the failure to fulfill the obligation and the Outbreak. Avoiding the performance of the obligation and demanding the postponement of obligation until the event ends without any causal link and based solely on the virus threat and the application in other sectors is considered an abuse of right. However, the party for which the performance of the obligation is impossible due to the outbreak will no longer be obliged to fulfill its obligation.
2. SHOULD THERE BE A FORCE MAJEURE CLAUSE IN THE CONTRACT?When a force majeure event occurs, the contracts which determine the obligations between the parties should be reviewed first. Parties should carefully consider whether there is a force majeure clause in the contract, and if there is one, whether the Outbreak may be listed among the force majeure events. However, this is only related to the management of the process and is, in fact, only a descriptive statement. Even if there is no force majeure clause in the contract, if a force majeure event occurs, its legal consequences shall be applicable. In accordance with the decisions of the Court of Cassation and the provisions of the TCO, even if there is no force majeure clause in the contract, the consequences of the force majeure will be applicable for the part failing to perform.
3. HOW DOES CORONAVIRUS AFFECT THE PERFORMANCE OF THE CONTRACTS OF SALES-LEASE-WORKS?If the Outbreak does not prevent the fulfillment of the obligations under the contract signed before the Outbreak, it cannot be said that there is a force majeure, because, as mentioned above, the Outbreak is not sufficient on its own to be considered a force majeure. In every case, it should be considered whether the contract has become non-performable due to the Outbreak. Depending on whether the contract may be performed or not, the concepts of “impossibility of performance” and “hardship” which are regulated in the TCO will be applicable. In the case of impossibility of performance, Article 136 of the TCO stipulates the following rule: “If the performance of the debt becomes impossible due to the reasons that the debtor cannot be held liable, the debt will end.” In other words, if the performance of the contract becomes impossible due to a force majeure event, the debtor’s debt will end. The most important point to be considered here is the “impossibility” of performance. In order for the debtor to be released of the debt, the law directly seeks the impossibility of performance rather than debtor’s being under very difficult conditions. For instance, although the contract for the sale of a Chinese product is valid and binding between the parties, the prohibition on the entry of Chinese products from customs after the Outbreak is an event that makes the performance of debt impossible. For this reason, the seller shall be released of the obligation to perform the contract. To give another example, due to regulations restricting the sale of disinfectants and colognes abroad because of the Outbreak, the seller cannot be held liable for sending one item instead of two to a buyer outside the country. The concept of hardship is defined in the Clause 138 of the TCO: “If an extraordinary event, which was unforeseen and not expected to have been foreseen by the parties at the time of the contract, arises due to a reason outside the debtor and alters the conditions existent at the time of the contract in such a way that is in disadvantage of the debtor that asking the debtor to perform his debt may considered to be a violation of good faith, and if the debtor has not yet performed the debt or performed and reserved his rights arising from the hardship, the debtor has the right to request from the judge the adaptation of the contract to the new circumstances, and if this is not possible, the revocation the contract. As a rule, in contracts of continuous performance, the debtor shall exercise his right to terminate the contract instead of revocation.” In this case, the party having hardships in fulfilling the contract due to the Outbreak, has the following legal rights respectively:
a. Requesting the adaptation of the contract,
b. Revocation/termination of the contract.Hardship in performance of the subject of the contract means that the contract can still be performed, but that it will cause extreme difficulty to the debtor if he performs his debt. In other words, there is no impossibility in question, but the debtor is under a burden that cannot be expected for him to endure. For instance, the difficulty of paying the rent for shopkeepers who experience a great decline in sales due to the people not leaving their homes as a result of the outbreak, is considered a hardship. Another example of this is a medical mask vendor who, after signing the contract for a certain price, is unable to supply masks or to procure them without paying exorbitant prices due to the increase of demand for masks because of the Outbreak. Debtors from both examples above are entitled to apply to the court for an adaptation. Through an adaptation lawsuit, the debtor may claim that the prices agreed in the contract create an imbalance under the new conditions and beyond the control of the parties, and accordingly request that the prices in the contract to be reduced to a reasonable level. In cases where adaptation is not possible, the parties may terminate the contract. In other words, in order to make a distinction between hardship and force majeure events, the following criteria should be taken into account: If the current contract is impossible to perform, this is a force majeure event, and if the performance becomes extremely difficult, this is a hardship. In the event of hardship, the party having difficulty in performing the contract may apply to the court and request that the contract be adapted to the new conditions. If adaptation is not possible, he will be able to use his right to terminate the contract. Legally, if the item subject to debt is replaceable when destroyed, impossibility of the performance of debt is not possible. The biggest example of this rule is money. Since money is always a replaceable item, impossibility in money debt is not accepted as a rule. On the other hand, if a single and unique item such as a work of art, is the subject of the contract and gets destroyed, the debt will end since the item, which has no replacement, becomes impossible to perform. Ultimately, it is necessary to evaluate whether the force majeure occurs in each event and whether it affects the parties’ ability to perform their obligations. In contracts where a force majeure clause exists and where the Outbreak is considered to be a force majeure event, the problem may be resolved more easily and the party for whom the performance of the debt has become impossible may terminate the contract. However, if a force majeure clause is not regulated in the contract, whether the performance of the contract has become impossible will be evaluated. In this case, if the performance of the contract is impossible, the force majeure rules will be applicable; if the performance of the contract has not become impossible, but it has become extremely difficult, then hardship rules will be applicable.
4. HOW DOES THE ADMINISTRATIVE DECISIONS IMPACT THE CONTRACTS?The decisions taken by the State in the present day affect the lives of all citizens. In the light of the foregoing, mandatory and advisory decisions taken by the administration due to the Outbreak may result in impossibility of performance or hardship. The decisions of the administration which the public is obligated to follow are final and binding since they do not leave any initiative to the individuals and may result in the impossibility of the performance of the contract. In addition, the contracting party should implement the advisory decisions of the administration in a way that does not jeopardize the performance of the contract because, while taking the initiative to implement the advisory decisions, it should not be forgotten that the contract and the debt arising from the contract are still binding.
5. HOW DOES THE CORONAVIRUS AFFECT THE CONTRACTS WITH THE BANK?The Banking Regulation and Supervision Agency (“BRSA”) published its decision numbered 8948 on 17 March 2020, which, in order to overcome in the easiest way possible the expected recess and contraction in economic life, provides flexibility for delays in loan payments according to the following measures:
1. The 90-day default period envisaged to classify the loans as non-performing loans has been extended to 180 days.
2. Similarly, the requirement for the loans whose principal and/or interest payments have been delayed more than thirty days or have been restructured once again during the one-year period term to be classified in the Third Group has been suspended.Related applications shall be valid until 31 December 2020. We tried to present our legal initial evaluations with respect to the implications of the Outbreak. However, in these days where new developments occur every day about the Outbreak, we recommend that every development be evaluated meticulously and specific to the case. We hope that these difficult circumstances will come to an end soon.