COVID-19 may Justify Revisiting your Contractual Obligations under the Doctrine of Imprevision
With our previous paper which can be reached at (https://www.kesikli.com/repercussions-on-events-of-force-majeure-and-impossibility/, we explained the repercussions on COVID-19 outbreak in the context of “force majeure” and “impossibility” concepts. These concepts, as we explained in the said paper, refer to the situations where the performance is either temporarily or permanently impossible. It might be that, however, the effects of COVID-19 outbreak for particular contracts/obligations reach to the point where the performance is technically possible, but not economically feasible. The Turkish Code of Obligations (“TCO”) also provide for such an eventuality under section 138 which is the statutory connotation of the French doctrine of imprevision under which the question is not whether the performance had become impossible, but if the “economy of the contract” had been collapsed.[i] This doctrine is particularly relevant for payment obligations performance of which can rarely be deemed as impossible.
This doctrine of giving the courts the power to intervene the contractual obligations performance of which became gravely uneconomic, is regulated under section 138 of the TCO. According to the said provision, if an extraordinary event occurs for reasons not attributable to the obligor which could have not been foreseen at the time of the execution of the contract and which change the circumstances, as existed at the time of contracting, to the detriment of the obligor to an extent that it would be against the rule of good faith to expect the obligor to perform its obligations as originally agreed, the obligor may ask from the court (1) revision or if such a revision is not possible (2) rescission of the contract. However, the relevant obligation should be outstanding or should have been performed with a reservation to the obligor’s rights under TCO 138.
The Conditions for Application
The first pre-condition for application of this doctrine is that the balance of the correlative obligations stipulated in the contract should be overthrown. This does not mean, however, the detriment should be to an extent which would financially destroy the party intending to rely on TCO 138.[ii] The reference is made, in the article, to the principle of good faith. Therefore, the court of law should perform a balancing act and compare the detriment to be incurred by the party relying on TCO 138 and the benefit of the other party in insisting on performance according to the original contract. If, after this evaluation, the court decides that the detriment is relatively more predominant to an extent where it would be against the principle of good faith for the other party to insist on performance as per the original agreement, then the court will intervene. Needless to say, this is a case-by-case analysis which does not solely depend on the situation which the obligor is in.
Secondly, the extraordinary event must be unforeseeable at the time of contracting. Similar to the taxonomy made in our previous paper, for contracts executed before COVID-19 appeared this will not be an issue. On the contrary, for contracts signed whilst it is known by the parties that a global pandemic is forthcoming, reliance of this doctrine would be difficult, if not impossible.
The third condition is that the extraordinary event should not originate from the obligor. For the purposes of COVID-19 outbreak, the present author’s opinion is that it would be superfluous to discuss the issue of externality as it is very obvious.
Finally, the obligations should not have been performed or, if performed, a reservation is made as to the obligor’s rights relating to TCO 138. Otherwise, this right will be extinguished.
When this application is made, the court will modify or abrogate certain terms of the contract. This is, however, a qualified authority. The court, by using this power, should not alter the contract in a manner which, this time, one cannot reasonably expect the other party to live with it. If such an alteration is not possible, then the only remedy is rescission of the contract. However, TCO 138 does not mention the court’s authority to rescind the contract. Hence, it is for the relevant party relying on TCO 138 to go ahead and rescind the contract. If, however, such party’s determination that it has a right to do so is incorrect, this time the contract would stay intact and the other party may without any need to give a cure period pursuant to TCO 124-1, exercise its associated statutory rights triggered as a result of the obligor’s default.[iii] Therefore, due care must be exercised in this regard.
Turkish law also provides a remedy where an extraordinary event makes the contract significantly uneconomic, but not impossible. However, in contrast with the notions of “force majeure” and “impossibility”, the legal effects are not triggered automatically. Therefore, initiative must be taken by those who are intending to rely on TCO 138. Especially, if they are to perform their obligations, they should include a reservation to avoid losing their rights. As explained above, the application of the doctrine requires case-by-case analysis. This paper is not drafted with the intention to provide legal advice to individuals or businesses and should not be used as such.
@ Rüştü Mert Kaska | Kesikli Law Firm
[i] Ewan McKendrick, Force Majeure and Frustration of Contract (2nd edn, 2013) p. 29.
[ii] Kemal Oğuzman/Turgut Öz, Borçlar Hukuku Genel Hükümler Cilt -1 (İstanbul,2011) p.603.
[iii] Oğuzman/Öz, p.604.