WHAT ARE THE CORONA (COVID-19) VIRUS EFFECTS ON CONTRACTS? DOES CORONA VIRUS CONSTITUTE FORCE MAJEURE? 16 March 2020

In the previous days, Corona (Covid-19) virus, first seen in Wuhan, China and then spreading all over the world, has been declared by the World Health Organization (WHO) as “Pandemic”, in other words an epidemic that has spread to a wide area all over the world. The ceclaration of corona virus as a pandemic by WHO, and the observation of Corona virus cases in Turkey, with the government then and taking various measures (e.g., the enforcement of school holidays, cancellation of public events, etc.) raises many questions about whether the Corona virus is a force majeure event, and what it means with regard to the status of contracts and legal relations between the parties.

What is Force Majeure?

Force majeure, as defined by one Turkish Court of Appeal ,[1]  is “an extraordinary event that absolutely and inevitably leads to a violation of a general norm of behaviour occurring outside the normal activity and operation of the obligee or obligor and that cannot be predictable and opposable (Eren, F.: Borçlar Hukuku Genel Hükümler, Ankara 2017, page 582). Natural disasters such as earthquake, flood, fire and epidemic are considered as force majeure.” In this sense, force majeure is an event that prevents the performance of the debt and an unexpected, external event that cannot be prevented despite any measures that can be taken by anyone and that occurs outside of the obligor’s will.

As suggested by the Court of Appeal decision quoted above, epidemic diseases may be considered  force majeure. For the epidemic to be considered as force majeure, the epidemic should not have been foreseen by the parties to a contract, it should not be possible for the parties to resist it,  and obligations undertaken by the contractual parties should be rendered incapable of being performed .

In addition, if parties have included epidemic diseases, natural disasters such as earthquakes, floods, and fire, and civil commotions as a force majeure events in their contracts, signed, emergence of any of these situations should be found to constitute force majeure. However, if epidemic diseases are not specified as a force majeure event in the contract, finding epidemic diseases as force majeure will be a question of how severely the ability of the parties to perform their contractual obligations is affected.

What is the Effect of Force Majeure on Contracts?

According to Article 136 of Turkish Code of Obligations (TCO), entitled “impossibility of performance”, the effect of force majeure on contracts is described as follows: “If it is impossible to perform all the obligations under the contract due to the reasons that are not attributable to the obligor, the debtor shall be released from performing the related obligations. In case of reciprocal contracts the debtor who is released from obligation due to impossibility is obliged to return the act he has taken from the other party in accordance with the principle of unjustified enrichment and also loses his rights to claim counter performance. The cases where the obligee is responsible for the damage arising before the performance of the obligation by legislation or the contract, is excluded from this provision. However, unless the debtor dully and timely notifies the creditor of the impossibility of the performance of the obligations and takes necessary precautions to prevent the increase of loss, the debtor shall be liable for compensation of the resulting losses.” According to this TCO provision , force majeure terminates the obligations undertaken by the parties in the relevant contract. For instance, if a sales contract is drawn up between parties and delivery of the product subject to sale has become impossible because of force majeure, the seller shall excused of its obligation to deliver the relevant product. In return, the buyer shall also be excused of the obligation to pay the price of product. If the product subject has been paid for by the buyer, in accordance with  Article 136 of the TCO, this payment must be returned to the buyer by the seller.

Another important point when reflecting on force majeure is that notification of the force majeure event, which makes the performance of the debt impossible, is to be given to the non-effected party . If notification of the force majeure event is not given to the obligee by the obligor, and measures are not taken to prevent further losses of the obligee, the obligor will be liable for these losses.

Is Corona Virus (COVID-19) a Force Majeure Event?

The Corona virus has been detected in our country and, indeed, in most countries of the world. Due to increasing number of Corona Virus cases day by day, various measures are being taken by governments to prevent the spread of the virus. The impact of these measures may be national, as well as international, and have and will impact, although these will vary, on legal relationships between parties.

The spread of the Corona virus in a country, deaths due to the Corona virus or even the taking of serious measures by governments to prevent the spread of the deadly virus, are not, in themselves sufficient to qualify the Corona virus as force majeure. In order for the virus to be force majeure for the parties to any particular contract, one or both of the parties should become unable to fulfil their obligations under  the contract due to the Corona virus. In other words, the  Corona virus must affect the parties to such an extent that one or both of them cannot perform their contractual obligations.

Therefore, determination of whether the Corona virus constitutes force majeure for contractual parties must be evaluated in light of the specific impact of the virus on the obligations of parties to a particular contract.

For example, consider a country, to which a customer has purchased a ticket to fly, closes its airspace due to Corona virus or flights to the country are stopped completely because of the virus. Given it is then impossible for the airline to perform its ticket obligation to fly the customer to this country, the closing of the country’s airspace or the ban on flights to the country, would almost certainly be considered a force majeure event, excusing both the airline company (of its obligation to make the flight) and the consumer (of his or her obligation to pay the price of the ticket) .

Consider the cancellation of school classes and public events such as fairs and concerts by government decree due to the Corona virus. These cancellations to would likely be found to constitute a force majeure event for the schools and organizers of the public events, their obligations to their students or the purchasers of tickets to the planned events would be terminated. For the students who had already paid for the concelled classes or the purchasers of tickets for the cancelled events, the amounts paid should be returned. The obligation of any artist to perform, as well as the obligation to pay the artist, at a cancelled concert, would also be excused.

Lastly, if shopping malls and other retail outlets were to be closed by the government, in order to prevent the spread of the virus, but no restrictions were imposed on online shopping, and there are no restrictions on the operation of and delivery by cargo companies, corona virus would not be a force majeure event for an online seller of products and services, with the buyer obligated to make payment for the products or sevices, and the seller obligated to arrange the delivery of the products or services. In other words, the parties to these online contracts would not have the right to rescind their contracts because of the corona virus.

When parties excused from their contractual performance due to force majeure, , as noted above, in Article 136 of TCO applies With respect to performance that is made significantly more difficult, but not impossible, Article 138 of the TCO applies.

Article 138 of the TCO provides that “An extraordinary situation which is not foreseen by the parties at the time of the contract and which is could not have been anticipated, arises from a reason not due to the debtor and changes the existing facts at the time against the debtor in such a way as to violate the rules of fairness. If the obligee has not yet fulfilled his/her obligations because of the extraordinary situation  and the resulting difficulty of performance, the obligee shall have the right to request from the court the adaptation of the contract to the new conditions and to revoke the contract if this is not possible. In contracts of continuing obligations the obligee shall terminate the contract.”

Although it is not possible for pecuniary debt to become impossible to repay, in accordance with the principle of "Kind shall not be destroyed" which prevails in Turkish law, when it becomes difficult to make payments at the price determined by the parties due to force majeure, and when the conditions set forth in Article 138 of the TCO also exist, adaptation may be requested from the court.

For adaption to be allowed, the following conditions must exist according to the provisions of Article 138 of the TCO:

• Circumstances and conditions should have changed extraordinarily, and this change should be have been unpredicted and unexpected by the parties at the time of the signing of the contract, or should not be taken into consideration by the parties at that time  even if predicted;
• Changing circumstances and conditions must upset extremely and clearly the previous economic balance between the parties' performances of the contract;
• There should be no fault of the party seeking adaptation with regard to the changes in the circumstances and conditions,
• The performance of obligations sought to be adapted should not have been completed yet, or any performance should have been made with a written reservation of rights.

Consider the application of Article 138 of the TCO to a hypothetical lease contract for a retail space that is subsequently impacted by the present health crisis. Clearly consumers who are avoiding public places have and will cause turnover losses for retailers including the hypothetical lessee. When this lessee signed the hypothetical lease contract, it would not have been in a position to know about the risk of coronavirus, and clearly this risk arose through no fault of the lessee. At the same time, it can be argued that the impact of the virus, and the related measures either self-imposed or imposed by the government, have resulted in an extreme change in the economic balance between the  lessee and lessor, it may be possible for the lessor to obtain, by court order, an adaptation  rent payment provisions of the lease.

Consequently, whether the Corona virus constitutes force majeure for any particular contract must bebe evaluated in light of what are the unique circumstances of the impact of the virus, and the measures taken against it, on that contract and the parties to it.

¹ Bkz. Court of Appeal, ACC, P. 2017/90 D. 2018/1259 D. 27.6.2018.