Sponsored briefing: The COVID-19 Handbook – Force majeure and contracts

The novel coronavirus, now officially known as COVID-19, was first seen in Wuhan, China in December 2019 and continues to spread rapidly worldwide. The World Health Organization (WHO) declared it an ‘epidemic’ first and then a ‘pandemic’ on 11 March 2020.

As COVID-19 cases continue to surge amid crashed markets and overwhelmed healthcare systems, it is also taking a toll on contractual relationships as countries continue to take drastic measures to flatten the curve of the pandemic. These measures include the ordering of curfews, travel bans and state of emergencies, all of which undoubtedly have enormous impacts on businesses and contracts.

This note concerns force majeure principles, contractual issues pertaining to force majeure and tips for parties to take note of, from the perspective of COVID-19.

A brief look at force majeure

Force majeure events are exceptional events that render the performance of an obligation somewhat impossible. The definition, the events or the consequences thereof are not provided under the main Turkish legislation that governs obligations, ie the Turkish Code of Obligations numbered 6098 (TcO). However, although there is no codified definition of force majeure, the Turkish Court of Appeals is quite clear on the consequence of force majeure: the obligor will not be held liable for its failure to perform its obligations.

Force majeure events can arise out of social, legislative or natural reasons: a war or a coup d’état would be social reasons, whereas import prohibitions or embargoes might lead to force majeure due to legislative reasons. The most obvious and undisputed force majeure events are perhaps the ones that arise out of natural reasons. Earthquake, flood, typhoon, hurricane and lightning easily qualify as possible force majeure events as do epidemics – the Court of Appeals has previously decided that epidemics would constitute a force majeure event that would arise out of a natural reason.

As a WHO-declared pandemic, COVID-19 should under normal circumstances qualify as force majeure. We should add two caveats at the outset: first, an event may look like force majeure, but it may not qualify as one due to the facts of the case; and second, even if an event is a force majeure event under one contract, it does not mean it will be a force majeure for other contracts. In other words, not all events lead to the same conclusion and each case may have different aspects that must be considered.

Nevertheless, there are some characteristics that are regarded as prerequisites for force majeure. If one of these is absent, it will likely mean that there is no force majeure event in place. First, the event must be an ‘external’ event. This means it should not be associated with or attributable to the obligor, or its business. Secondly, the event must be unforeseeable and unavoidable to the extent that from an objective point of view, it would not have been possible for anyone to have foreseen or avoided the outcome. Also, the event must cause a breach of an obligation in an absolute and inevitable manner, rendering the performance of the obligation impossible. Importantly, the impossibility of the performance obligation must be caused by the force majeure event itself.

It will hardly be disputed that COVID-19 was an external event. Also, it is not likely that it was foreseeable or avoidable. The key is to determine whether it caused the non-performance of an obligation, whether it rendered the performance impossible. Then there are other issues, such as notification and the duty to mitigate damages. All of these need to be subject to case-by-case review.

Does your contract say anything?

The definition, requirements and the consequences of force majeure may well depend on what your contract says. The first thing to do therefore is to review the contract. Parties would be advised to look out for other terms that are sometimes (albeit not quite correctly) used interchangeably with force majeure events, such as ‘exceptional events’ or ‘events beyond control’.

• If there is a force majeure clause in your contract, then the procedure described in the contract must be followed and the duties described under the force majeure clause must be complied with. The most obvious of these is the notification periods, as some contracts might require the affected party to notify the other in a given period of time in order for the affected party to be relieved from its obligations.
• It gets more complicated if there is a force majeure clause in your contract but it does not specifically refer to an epidemic. This is a disputed area under Turkish law – one argument is that if this is the case and the clause lists force majeure events in a limited manner, then no other event may be regarded as force majeure. The other argument is that even if the clause lists force majeure events in a limited manner, other events may be regarded as force majeure if the general requirements of force majeure are met. This will depend on the specifics of the case and the interpretation of the contract.
• In any case, suspension and termination provisions under the contract are of vital importance. Your contract may include provisions in relation to if, how and when the contract may be suspended and/or terminated and may have defined what the payment terms in case of any such suspension or termination will be.

What If Your contract does not say anything?

If there is no force majeure clause in your contract, then this means that the following are not defined in the contract: force majeure events, procedure to be followed by parties and the consequences of a force majeure event. This does not automatically mean the end of story.

First, it should be checked whether the requirements set forth under the ‘A brief look at force majeure’ header above are met. If the answer is yes, then it may be possible for the affected party not to be held liable for the breach. As for notification and mitigation of damages duties, the obligor must notify the other party without delay that it has become impossible to perform the obligation and it must also take necessary precautions to mitigate damages. Otherwise, the obligor itself will be held liable for damages that arise out of the failure to notify or take precautions.

Importantly, under Turkish law, ‘risks’ or ‘potential force majeure events’ do not qualify as force majeure. A consequence of this is that the notification and mitigation duties described above will not be in place until the event renders the obligation impossible. It is worth noting that this is not always the case under contracts.

It is not an ideal case if the consequences of force majeure are not defined under the relevant contract. It is correct that a force majeure event breaks the causal link between the non-performance of the obligation (ie, breach) and the resulting damage, and so the obligor will not be liable for damages if there is a force majeure event. However, there are other issues surrounding force majeure. Consequences might vary under Turkish law and these will depend on a number of factors.

First, it must be determined whether the force majeure event renders performance completely and objectively impossible. If this is the case, then the TcO says the obligation will be terminated. This does not automatically mean that this is a typical termination of the contract as a whole, but the practical result may be the same. If the force majeure event renders performance partially impossible, then this will be applicable for the part that has become impossible, not for the entirety of obligations.

Alternatively, the force majeure event could have rendered performance of obligations temporarily impossible. This is very frequent with force majeure events and the result of this from a legal standpoint is that the performance of the obligation is effectively postponed until after the force majeure event is over. The TcO does not have a codified procedure for suspension, but in practice, a temporary force majeure event might lead to de facto suspension.

As far as temporary impossibility is concerned, the Court of Appeals does accept that there is a certain period of time during which the parties would be expected to ‘endure’ the continuance of the contract. From a practical point of view, this means that the Court would allow parties to get out of the contract at some point if the event continues (and therefore the performance continues to be impossible) and this may (or may not) be in the form of rescinding the contract. The key issue is that there is no single answer and all of these will be decided on a case by case basis – some of these cases may even involve being subjected to higher standards solely because a party to the contract is a ‘merchant’.

Does COVID-19 constitute a force majeure event?

It depends, because the requirements described at the outset of this section must be met in order for COVID-19 to be deemed a force majeure event. It is very unlikely for COVID-19 or any other potential force majeure event to automatically qualify as a blanket force majeure event.

Take a Turkish contractor as an example: this company has undertaken to build a hotel for an employer in Veneto, Italy. Due to the outbreak and the current restrictions in Veneto, the Turkish contractor is barred from performing its obligations in time. The reason for this is that it is simply impossible for the Turkish contractor to continue construction works due to the force majeure event. The result is that the contractor is in breach of its obligation at the face of it, but it cannot be held liable for this breach.

This is not applicable to all cases. If this Turkish company entered into a contract with the same employer, but its obligation is to give remote consultancy services, then it is not as likely that the Turkish contractor’s obligations are prevented by a force majeure event. It is still possible, depending on the specifics of the case.

On this note, it is important to reiterate that even if COVID-19 constitutes a force majeure event under a certain contract, this does not mean that the obligor is relieved from all of its obligations. Partial impossibility is very much possible and the obligation that has been affected from the impossibility caused by the force majeure event must be identified correctly in order to determine the effects of force majeure.

It is also worth noting that the rule under Turkish law is that a payment obligation cannot be rendered impossible due to a force majeure event. This is associated with the nature of this debt. Naturally there may be exceptions to this rule, but in general, it will be highly unlikely for COVID-19 to render the payment obligation impossible – regardless of whether your contract specifically addresses this issue or not.

The main takeaway from this section should be that incorrect identification of a force majeure event or its impact on your obligation, incorrectly assuming that COVID-19 constitutes force majeure for any and all obligations, or mistaking an event for a force majeure event in general may have serious consequences. In brief, such incorrect conclusions may cause the obligor to be liable to perform the obligation and also cause it to be held liable for damages arising out of non-performance of the obligation.

Hardship: Another option

If COVID-19 does not qualify as force majeure for a contract, then parties should consider invoking the hardship clause under the TcO. Hardship is a different concept, as it does not render performance of an obligation impossible like force majeure does. Hardship means that the performance of the obligation is still possible, but it has become so difficult that it cannot, in good faith, be expected from the obligor to perform this obligation under the same terms and conditions as were initially agreed.

That being said, hardship is not entirely irrelevant from force majeure and impossibility, because the requirements are not very different. The condition that renders the performance of the obligation extremely difficult would need to be unforeseeable and unpredictable (it could not have been foreseen or predicted at the time of contract signing) and the obligor must not have had fault in the fact that the performance has become so difficult. There are other conditions for the hardship provision to be successfully invoked and if so invoked, it will allow the affected party to ask from the court that the terms and conditions are adjusted and if this is not possible then the contract may be rescinded.

What else should you cconsider?

Certification requirements – In some cases, a certification by a relevant authority might be required for the event to constitute force majeure. This may be a requirement under the applicable legislation as well Turkish Public Procurement law as one example. Parties should check the applicable legislation (as well as the contract) to identify whether this is relevant for their obligations.

Cross references and subcontracts – Parties should look out for cross references in other contracts, as well as provisions in subcontracts. Some subcontracts may be the product of a flow-down of the main contract and may require further notifications or notifications under different terms.

Insurance – The COVID-19 outbreak might be quite relevant within the context of an insurance policy, even if COVID-19 does not constitute a ‘force majeure event’ under the relevant contract. Your insurance policy, be it a construction-all-risks policy, a mechanical breakdown policy, or a general commercial enterprise policy, may cover epidemics or other forms of events which might be relevant. Insured parties are therefore advised to check their policies as well as the notification requirements thereunder and reach out to insurers to discuss what their options are.