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How to handle contractual disputes in COVID-19 era

Since the COVID-19 coronavirus was first reported in Wuhan, China in December 2019, strict and unprecedented measures have been gradually imposed by governments around the globe to limit risks of contagion. On 11 March 2020, the severity of the phenomenon was emphasised by the World Health Organization (WHO)’s declaration of COVID-19 as a global pandemic. As circumstances continue to evolve, substantial business and operational disruptions are a cause of great uncertainty that now reigns in various sectors and trade relations around the world. The implications are particularly profound when it comes to performance of contractual obligations in view of COVID-19’s far-reaching socio-economic effects. In this context of a health crisis exacerbated by the unexpected nature of the outbreak, the main issue is whether parties to affected commercial contracts may invoke force majeure as an argument to justify for failure to perform their contractual obligations.

For contracts governed by Turkish law, the first observation to be made is that the concept of force majeure and its defining conditions are not explicitly provided in the Turkish Code of Obligations (TCO) (published in the Official Gazette dated 4 February 2011 and numbered 27836) (Law No. 6098). The Court of Cassation has come to clarify at various occasions what should be understood by force majeure and under which circumstances parties are entitled to rely upon this concept. Within the framework of the case law and legal doctrine, it can be said that force majeure is deemed to arise when a contracting party’s performance is materially affected by (i) an event beyond his reasonable control, (ii) the effects of which could not have been foreseen at the date of commencement of the legal relationship and (iii) avoided despite all appropriate measures being taken.

The real interest of the notion must be analysed within the meaning of articles 112 and 136 of the TCO regulating legal impossibility of performance in contractual obligations and its consequences. In principle, the debtor of an obligation is deemed to be liable in the event that he is unable to perform his obligation in accordance with the contract. However his non-performance or delay may be excused if he can prove that no fault can be attributed to him. In this regard, an event characterised as force majeure can constitute a ground for exemption from liability.

That being said, it must preliminarily be noted that a party’s ability to claim relief for a force majeure event depends upon the terms of the contract. If, within the scope of a force majeure clause, parties exhaustively provided specific contexts with precise terms on what events can constitute a force majeure, the court shall be bound by the stipulations of such clause. In essence, a force majeure provision seeks to identify the types of circumstances that will suspend a performance obligation. Some commonly listed force majeure events include natural disasters such as floods, earthquakes, hurricanes, epidemics and quarantines; war; terrorist acts; and government action, such as changes in laws. Therefore, in accordance with the contractual freedom principle, parties can include or exclude certain phenomena in their list. However, in absence of such clause, the general rule under Turkish law stated above shall be applied. The court’s examination with regard to the event will consist of a test involving cumulative criteria of externality, unpredictability and unavoidability.

On the question of whether the COVID-19 epidemic constitutes a force majeure event, it would be wise to say that it depends. In fact, the party seeking relief for a force majeure event must prove the link between the event and his impossibility to perform. Therefore, COVID-19 can be considered as a force majeure event in some cases and not in some others, due to its potentially subjective effects on the parties.

In this regard, chronology of the contractual relationship shall also be taken into consideration (criterion of unpredictability). For instance, parties of a contract concluded after 11 March 2020 (the date of the WHO’s declaration) could possibly not rely on COVID-19 as a force majeure event, considering that the situation was perfectly predictable by that date. For contractual relationships that started before 11 March, the question shall be answered by courts based on what extent risks were predictable to the parties.

That being said, whether the defaulting party took appropriate reasonable measures for performing his obligation will be analysed on the basis of each concrete case (criterion of unavoidability). Thus, as far as possible, parties are encouraged to perform their obligations and should definitely not rely on COVID-19 as an exit strategy. Moreover, it must also be noted that a temporary impediment only suspends the performance of the obligation but does not definitely extinct the obligation.

Furthermore, the party suffering from excessive difficulty of performance may choose to rely on article 138 of the TCO, which allows a remedy of adaption. The court, based on circumstances of the case, may either decide on adaptation of the contract to the new conditions or grant the right to terminate the contract.

Our advice for defaulting contractors 

As we stated above, the burden of proof weighs on the defaulting contractor for proving that the invoked event has the characteristics of a force majeure. It is therefore important to consider closely if the event represents the three aforementioned characteristics. If the answer is affirmative, it would be advisable to contact the other parties to take necessary measures for minimising any harm and, concurrently, to establish evidence that can be derived from the business effects of relevant governmental decisions.

Our advice for the other parties

For the other parties of a contractual relationship, it is also essential to evaluate if the occurrence of the event lead the debtor to an impossibility of fulfilling his obligations arising from the contract. It would also be advisable to contact the defaulting party in order to minimise any potential harm. Eventually, it is necessary to collect the evidence that force majeure is not constituted and the opposing party was, in possibility, to perform his obligations despite the occurrence of the events.

Conclusion

So far, it seems that contractual disputes in the COVID-19 era will be marked by gradually intensifying sanitary measures’ effects on contractual relations. In the current situation, in order to manage the legal risk, caution must be exercised with regard to each detail in parties’ individual circumstances and stipulations of the contract, before invoking force majeure.


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