SHOULD WE ANTICIPATE A FLOOD OF ADAPTATION LAWSUITS AND REFORMANTION, OF CONTRACTS? 13 April 2020
SHOULD WE ANTICIPATE A FLOOD OF ADAPTATION LAWSUITS AND REFORMANTION, OF CONTRACTS?
Many restrictive measures have been and are being taken both nationally and internationally in order to mitigate against the global “Coronavirus” (Covid-19) epidemic, which has been detected in almost all countries and continues to spread rapidly. Due to fact these restrictive measures impact commercial relations, business life and many contractual relationships directly, the status of these contracts and the legal relations between parties has started to be discussed and debated intensely.
These discussions and debates likely influence whether Coronavirus epidemic constitutes force majeure with respect to these contractual relationships, whether a failure by the parties to fulfill fully perform their contractual obligations due to the various national and international measures twill be considered a breach of their contract. In this context, we discuss below the subject of court adaptation or reformation of contractual obligations.
Before seeking a court adaptation of a contract, of course, , the parties are free to seek an agreement to amend their contracts to adapt to new circumstances, that is to agree to their own reformation without court intervention. If any such effort is unsuccessful, however, and certain conditions explained below exist, either party may request a judge to reform or adapt the contract to new circumstances, in other words, parties may file a lawsuit seeking to have the contract adapted or reformed.
Principles of “adherence to a contract (pacta sunt servanda)” and “freedom of contract” are cornerstones of Turkish contract law. As recognized by the Turkish Court of Appeal in well-established case-law, pursuant to these principles, the contract is to be performed according to its provisions at the time it was executed. In other words, even if new conditions arise making the performance of a party’s contractual obligations more difficult, the party is still obligated to perform as provided for in the contract, despite the new difficulties. In other words, the principle of adherence to a contract, as mentioned, constitutes one of the most fundamental principles of the law of contract, with the goal of providing predictability and certainty regarding the performance of contractual obligations, as well as encouraging the parties to act in good faith.This principle, however, is subject to certain limitations found in the private law.
The economic balance between the mutual performances existing when contract are executed may become unbalanced to the extent performance byone of the parties would result in a significant hardship for that party. In this case, abiding by the contract, and the principle of adherence to a contract, may result in unacceptable injustice or unfairness. In such a situation the principle of adherence to a contract gives way to the principle of “adapting the contract to changing circumstances”.
If changing circumstances circumvent the intent of a party or parties existing at the time a contract was executed, and the changes cause a situation strikingly and unpredictably unjust, the parties may be found to not be bound by the contract either wholly or in part. When faced with such changing circumstances, it may be necessary to seek reformation of the contract pursuant to Article 2 of the Turkish Civil Code.
Article 2 provides that in the case where extraordinary circumstances that: (i) were not reasonably foreseen, and were in fact not foreseen by parties at the time the contract was executed; and (ii) destroy the balance between mutual performances , making performance of contractual obligations by one or more of the parties significantly more difficult, provided the affected parties have not yet fulfilled the subject obligations or has fulfilled them with a reservation of rights, a judge may decide to require the performance in question for the benefit of the other party or may decide to excuse the affect parties from the obligations in question in full or in part and, in addition may reform or adapt the contract to take into consideration the extraordinary change of circumstances.
Adaptation lawsuits are most often seen in long-term, perpetual debt relationships. Adaptation in these situations, which is an exception of the principle of adherence to a contract, is addressed by Article 138 of the Turkish Code of Obligations under the title of "Hardship". According to this Article; “An extraordinary situation, which is not foreseen by the parties at the time of the contract and which was not anticipated by them, arises for a reason not due to the fault of the debtor and changes the existing facts at the time against the debtor in such a way as to violate the rules of good faith, then, if the debtor has not yet fulfilled his/her obligations due to the excessive difficulty of performance, the debtor shall have the right to request from the judge the adaptation of the contract to the new conditions and to revoke the contract if this is not possible. In contracts providing for continuing obligations, the debtor shall terminate the contract.”
One of the issues that need to be discussed given the current situation is possibility of bringing adaptation lawsuits, based on the “Coronavirus” (Covid-19) epidemic disease being an extraordinary situation a f unforeseen at the time contracts were signed by parties. For instance, “unpredictability” requirement for the adaptation of contracts signed before the virus had shown up in Turkey would be considered differently with regard tocontracts signed at the time the epidemic began to be seen in Turkey’s neighbouring countries in March 2020, and differently still when the virus started to be seen in Turkey. An argument that it was unforeseen by parties to a contract signed in, say, March 2020, when this epidemic had perhaps become the sole focus of the world, pushing even wars to the side, would not seem to be consistent with the requirement of good faith. We believe it likely experts would agree that the epidemic should be accepted as unforeseen for contracts signed prior to the time the virus showed up in Turkey or had become a global phenomenon.
To sum up, principles of “adherence to a contract” and “freedom of contract” are fundamental principles in Turkish law, pursuant to which a contract is to be performed as provided in it at the time it was executed, as has been settled by the case-law of the TurkishCourt of Appeal. That said, and although the measures imposed by the government have only covered a period of two to three months, if the, undeniably significant, effects of this epidemic continue, and even deepen, during this time and beyond, we expect experts will likely conclude these effects have deeply impacted the balance of the parties’ performances in long-term and perpetual contracts. For this reason, it may be that we will witness a flood of adaptation lawsuits in the upcoming weeks and months, assuming the other conditions set forth Article 138 of Turkish Code of Obligations and Article 2 of the Turkish Civil Code are present.
More particularly, for a judge to decide to adapt a contract due to “Coronavirus” (Covid-19), the following conditions must be satisfied:
- The balance between the performances of the parties to the contract should have become unbalanced to such an extent that one of the parties cannot be expected to perform some or all of its contractual obligations.
- The change in the balance between performances should arise from extraordinary reasons which were not and could not have been foreseen when contract was executed.
- The circumstances that cause the hardship should not be the fault of the party seeking adaption.
The party seeking adaptation should either not yet have fulfilled the obligation sought to be adapted or, if the party has fulfilled the obligation, it did so while reserving its rights given the excessive difficulty of the performance.
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