COVID-19 – LEGAL IMPACT ON COMMERCIAL CONTRACTS

The highly contagious COVID-19 outbreak is not only directly affecting our daily life but also any commercial relation/agreement. Following the WHOs declaration of COVID-19 as a “pandemic”, various governments including but not limited to the ones much affected by the said virus have started to take drastic measures such as limiting export and imports, imposing quarantine measures, closing all or certain business and/or limiting their operations. These measures and possibly many others to follow would have fundamental effects on businesses. From a legal point of view, there is a risk that the obligations under the commercial agreements may not be fulfilled fully or partially due to the COVID-19 outbreak. Under this memo, we are assessing the legal impact of COVID-19 on commercial agreements and the possible legal actions that may be taken in response thereto.

1. Would COVID-19 lead to “impossibility” of the debt?

One of the events leading to termination of debt is impossibility of the debt. Impossibility is regulated under article 136 of the Turkish Code of Obligations (“TCOO”). According to the relevant article, a debtor shall be released from its obligations if the performance of the debt becomes impossible due to a reason which occurs after the execution of the agreement and is not attributable to the debtor. The impossibility might occur due to a natural event such as earthquake, natural disaster etc. or a legal event such as restriction on import and/or export of a good to be delivered as per the agreement. The Turkish High Court of Justice concluded in one of its decisions as the following: “The performance of the debt might become impossible due to a material reason such as the subject matter of the debt becoming impossible or due to a legal reason rendering the performance of the debt impossible or any other economic, social or similar event. In such a case, the debt itself becomes impossible. In case the debt might no longer be performed without changing the performance itself, the debt is considered as impossible to perform[1].

In case the delivery of goods under an agreement becomes impossible due to restrictions on import or export or lock down imposed in order to curb the spread of COVID-19, this might lead to a legal impossibility of the debt and release the debtor from its obligations under the relevant agreement. Upon the debt becoming impossible, the debtor is under the obligation to return any amount previously received as per the relevant agreement. Furthermore, the debtor should inform the creditor in due course that the debt has become impossible to perform in order not to be held responsible for the loss arising from the non-performance and should take any necessary measures to prevent further losses.

The debt may also become partly impossible to perform. In such a case, the debtor shall be released from the part becoming impossible. However, in case it might be argued that the agreement would not have been executed if the impossibility had been known at the execution date of the agreement, the total debt becomes impossible. On the other hand, the impossibility might be temporary. If the measures are imposed for a certain period, we would assume that there is a temporary impossibility event. In such a case, the debt is not considered as terminated since in principle it is possible to perform the debt at a later stage when there is no longer an impossibility. However, it is essential to assess each specific transaction and agreement individually. Especially, when there is a fixed term for the performance of the agreement, the debt should be considered to become impossible if there is an impossibility event at the due date even if the nature of the event is temporary.

Legal impossibility events are not limited to the ones described above. The force majeure event might also lead to the impossibility of a debt.

2. Could COVID-19 might be considered as a force majeure event?

The force majeure event is not specifically regulated under the TCOO. Deriving from French law, the force majeure concept has been taken over and developed by the Turkish High Court of Justice and the doctrine. The Turkish High Court of Justice has defined in one of its decisions the force majeure event as the following: “Force Majeure is an extraordinary external event occurring beyond the control of the debtor and could not have been prevented by the debtor inevitably leading to the non-performance of the debt. Acts of God such as earthquake, flood, fire and pandemics are considered as force majeure events.”[2]

The first characteristic of force majeure is that the event is (i) an external event and (ii) occurs beyond the control of the debtor. In other words, if the event is caused by the debtor itself or if the event could have been prevented if the debtor had taken the necessary precautions, the event should not be qualified as force majeure. In addition, the event should be an unexpected and extraordinary event. Within this respect, the High Court of Justice has concluded as the following: “Force majeure event might be defined as an external event which could not have been foreseen by the debtor and is not possible to prevent. The event might be caused by a natural event such as hurricane, earthquake, flood or caused by a third party (such as a tortious act) or a prohibition/restriction imposed by the public authorities.” Also, the relevant event should objectively render the performance of the debt impossible.

The events leading to a force majeure are not limited. Therefore, in case the COVID-19 pandemic fulfils the above specified criteria for the relevant commercial case/agreement, it would lead to a force majeure event and the debtor would be released from its affected obligations. However, it should be noted that COVID-19 would not automatically result in a force majeure event for each commercial agreement. The situation should be assessed specifically for each commercial relation by carefully examining the agreement and relation itself. For example, even though COVID-19 might constitute a force majeure event for a traditional commercial relation, it might be difficult to allege that it would have the same impact for an online sale in case such sale might still be conducted despite COVID-19.

In order to assess the situation, it would be helpful to examine the commercial agreement and determine whether it contains a force majeure clause. If yes, questions including but not limited to the below ones should be answered correctly:

• What is the governing law of the agreement? Are “disease” and/ or “pandemics” stated under the force majeure clause?
• What are the effects of measures taken in relation to COVID-19 over the commercial relation by taking into account the place of performance? Is there a causality between COVID-19 and the non-performance of debt?
• Has the debtor acting as a prudent merchant undertaken all the necessary measures in order to minimise and if possible prevent the events caused by the COVID-19 outbreak?
• In case of a notification requirement as per the force majeure clause, has the debtor made the necessary notifications to the creditor following the occurrence of the force majeure event?

3. Might be debtor request the adaptation of the agreement due to COVID-19?

Event though COVID-19 would not lead to impossibility of the debt, it might become very hard for the debtor to perform its obligations under the agreement. In such a case, it should be determined whether there is a “hardship” in the sense of Article 138 of the TCOO. As per the relevant article, in case an extraordinary situation arising from a reason not attributable to the debtor and which is not and could not have been foreseen by the parties at the execution date of the agreement renders the performance of the agreement excessively disadvantageous for the debtor in light of the good faith principle, the debtor has the right to request the adaptation of the agreement in accordance with the changed circumstance from the competent court provided that he has not yet fulfilled its obligation(s) under the agreement or has fulfilled its obligation(s) by reserving its rights. In case, by virtue of good faith principle, it is not expected to request the adaptation of the agreement, the debtor might also terminate the agreement.

In order to determine whether the debtor has the right to request the adaptation of the agreement or terminate the agreement due to hardship, the effect of COVID-19 on the relevant commercial relation should be carefully assessed. In case the performance of the debt has become disadvantageous for the debtor considering good faith principle, the debtor might request the adaption of the relevant agreement. The debtor should apply to the adaptation recourse prior to the performance of its debt or perform its debt by reserving its right of requesting an adaptation. Each specific case should be assessed to determine whether an adaption of the agreement is possible or if the agreement should be terminated due to hardship.

As explained in detail, the occurrence of COVID-19 outbreak has once again unveiled the importance of drafting a commercial agreement carefully by taking into account extraordinary events. As for the existing agreements, those should be reviewed by legal experts in order to assess the current situation and determine any possible legal actions that may be taken in response to the events caused by the COVID-19 outbreak.

Att. Derya ŞAHİNER

 

[1] Decision numbered 2017/350 of the 15th Civil Chamber of the Turkish High Court of Justice

[2] Decision numbered 2018/1259 of the Supreme Court Assembly of Civil Chambers