Effects Of The Corona Virus Outbreak On Contracts For Work

I. Introduction

In our previous articles, we have stated that Corona Virus (Covid-19) outbreak may have effects on performance of contractual obligations imposed on the parties to a contract, and that it may fully or partially become impossible or difficult to perform contractual obligations as a result of this pandemic, and have also mentioned about how these incidents may be evaluated and assessed in the light of general provisions of the Turkish Code of Obligations.In this article, we are going to briefly examine the effects of the Corona Virus outbreak on the contracts for work entered into by and between private law subjects.

In practice, given that all construction contracts, construction contracts in return for land share, factory, power station and infrastructural plant construction contracts, briefly, all construction contracts requiring preparation and manufacturing works shall be subject to the rules relating to this type of contract, it is unequivocal that this effect bears great importance in law.

II. The Concept of  Contract For Work 

Contract for Work is defined in Article 470 of the Turkish Code of Obligations no. 6098 as follows:

“A contract wherein the contractor agrees and undertakes to create or generate a work, while the employer agrees and undertakes to pay a price in consideration of it”.

Type of the contracts for work which first comes to mind and is most commonly seen and observed in our daily lives is the construction contract. However, in addition, for instance, building of a yacht upon a special order, manufacturing of packs fit for the products of a company, maintenance and repair contracts, preparation of a special computer software, and similar other contracts relating to works to be performed upon a special instruction of customer are also contracts for works.

Parties to a contract for work are on one side the “contractor” undertaking to create or generate a work, and on the other side the “employer” undertaking to pay a price in consideration of the work created or generated as such. Upon establishment of a contract for work, both parties thereto are deemed to have assumed mutual obligations. In this aspect, a contract for work is exactly and fully a type of synallagmatic contract.

Contracts for work may be established directly between private law subjects, or between public law subjects on one side and private law subjects on the other side. Public law subjects may sign a contract with private law subjects for performance of construction, maintenance, repair, demolishment, underwriting and similar other types of works.

That is why provisions regarding the contracts for works are seen and regulated not only in the Turkish Code of Obligations, but also in other laws dealing with legal relations or affairs having the public sector on one side thereof. Such laws as the State Bidding Law no. 2886, the Public Procurements Law no. 4734, and the Public Procurement Contracts Law no. 4735, and the regulations associated thereto also contain some provisions and rules pertaining to contracts for works.

This article is going to deal with the contracts for works entered into between private law subjects only, and the contracts for works entered into between public sector or administration on one side and private law subjects on the other side shall to be dealt with in a separate article.

All contracts entered into between two private law subjects and governed by Turkish Law are, as a principle, required to be evaluated and considered firstly according to the terms and conditions of the specific contract signed between sides, and all and any matters on which that specific contract remains silent are required to be evaluated and considered in the light of the pertinent provisions of the Turkish Code of Obligations.

One of the basic principles of the Turkish Code of Obligations, having adopted the Continental European Legal System, is the “freedom of contract” principle. According to this principle, the parties may incorporate any provisions deemed fit into the contract signed between them. As most of the provisions of the Turkish Code of Obligations are complementary by nature, it is possible for the parties to enter into contracts beyond and outside those provisions. Sole exception to the freedom of contract principle is that the parties cannot enter into any agreement containing provisions against the mandatory rules and provisions of the laws. Among the provisions of the Turkish Code of Obligations pertaining to contracts for works, there are only some very rare mandatory rules and provisions. For instance, we should mention herein that particularly withdrawal by contract of the right of renunciation / termination of a contract due to a fault of contractor, or in other words, a mutual agreement as to waiver from use of this right of renunciation / termination is in all aspects deemed invalid and null by the Supreme Court of Appeals.

All and any matters on which the contract, signed between the parties, remains silent shall first of all be governed by the provisions of Articles 470 to 486 of the Turkish Code of Obligations pertaining to contracts for work, and if and to the extent said articles also remain silent thereon, be governed by and subject to the General Provisions of the Turkish Code of Obligations.

III. Effects Of The Covid-19 Outbreak On Contracts For Work

Due to the ongoing Covid-19 pandemic:

• Delays and impossibilities faced in supply of goods and services, and
• Difficulties in obtaining finances, and
• Deceleration in production caused by social distancing practices and some other associated reasons, and
• Administrative decisions relating to stoppage of some activities, and
• Curfews and lockdowns, and
• Circulars of the Interior Ministry relating to temporary shutdown of some places of business

may make it impossible or excessively difficult or cumbersome to perform some certain contracts for work. Thereupon, it may be needed to reassess the binding effect of the contract on the parties thereto.

A barrier of performance may emerge in the sphere of influence of the Contractor or the Employer. For example, in a thermal power station construction contract, in case of permanent stoppage of manufacturing activities by a foreign supplier contracted for procurement of steam turbine, or in case of bankruptcy of a service provider contracted for design and construction of chimney gas treatment plant, we can mention a barrier of performance on the side of the Contractor thereof. In these probabilities, on one hand, the term “performance of the contract” may be extended, and on the other hand, the contract price may be increased (or even the performance of contract may occasionally become impossible). Likewise, in case of a final, definite and permanent impossibility, the contractual relationship may be deemed to have automatically terminated, together with all debts and obligations arising therefrom.

From time to time, the contract party exposed to a barrier of performance may be the Employer. For instance, in a ship building contract, the Employer which assumes to pay a mutually agreed upon contract price to the shipyard so as to have a ship built thereby may fail to find the required financial credit facilities, and it may therefore become very difficult or impossible for the Employer to pay this price. However, to whatever extent it has become impossible for the Employer to find the required financial funds, the monetary debtor (unlike its other types of debts or obligations) is not allowed to rely upon the provisions of articles 136 and 137 of the Turkish Code of Obligations pertaining to impossibility of performance. But it may request an adaptation in contractual obligations of sides in reliance upon article 138 of the Turkish Code of Obligations on the grounds of unforeseeable excessive difficulty in performance, or if it is not even relievable thereby, it may renounce the contract or send a notice of termination, thereby terminating the whole contract together with all of the debts and obligations contained therein.

Of course, the probable effects of an unforeseeable / unexpected event are required to be assessed and evaluated within the frame of the terms and conditions of each contract, because the mere existence of COVID-19 does not entitle the parties to refrain from performing their contractual obligations or to request an adaptation in contractual obligations solely for this reason. Where the contract parties have already procured the required materials and inputs, and to the extent the manpower and the manufacturing operations are not affected from COVID-19 bans, both parties are essentially required to perform their contractual obligations exactly as agreed in the contract. In addition, in order to benefit from the exceptional provisions of the said Code, it is required to demonstrate and prove by which way and to which extent COVID-19 has caused difficulty or impossibility of performance.

Excessive difficulty or impossibility caused by any event or incident which cannot be foreseen at the contracting stage may emerge in many different ways. In our assessment summarized in the following paragraphs, the most common events or incidents emerging in the spheres of influence of the Contractor or the Employer, namely, the failure in completion of the contract works against the predetermined contract price and within the agreed upon period of time, the actual cost of the contract works’ being excessively higher than the originally forecasted cost, or the failure in raising the required financial funds shall be discussed.

1. The Contractual Obligations of the Contractor

The most important obligations imposed on the Contractor by the provisions of the Turkish Code of Obligations pertaining to Contracts for Work are to commence and perform the contracted work in a timely manner, and to complete the work against the originally agreed upon price.

If and when it becomes excessively difficult or impossible for the Contractor to perform its obligations arising out of the Contract for Work against the agreed upon price and by the end of the originally stipulated period of time due to effects of Covid 19, in case of lump-sum price contracts, first of all, the provisions of 2^nd paragraph of article 480 of the Turkish Code of Obligations will be enforced and applied. Accordingly:

“…..

….. if and to the extent any causes which are initially unforeseeable or are indeed foreseeable, but are not taken into consideration by the parties subsequently prevent the performance of contract works against the lump-sum price agreed upon by the parties or make it extremely difficult, then and in this case, the contractor is entitled to request the competent judge to adapt the contract to the changing conditions, or if this is not possible or cannot be expected from the other party, then the contractor has the right to renounce the contract. Only where required by the good faith rules, the contractor may, however, use its right of termination.

….”

This article is in fact a special configuration of the provison of Article 138 of the Turkish Code of Obligations, which is among the general provisions pertaining thereto.

In accordance with said provisions, the competent judge or in the case of arbitration, the Arbitrator or Arbitration Panel may be requested to adapt the contract terms and conditions due to causes which are initially unforeseeable at the time the contract is signed, or are indeed foreseeable, but are not taken into consideration by the parties. However, to this end, it should be impossible to expect the contractor to continue performing its contractual obligations under the same contract terms and conditions.

Again in the same article, it is specified that firstly, a fair contractual balance will be tried to be established between the parties through amendments in the contract provisions, and if this is not possible or cannot be expected from the Employer, then the Contractor will have the right to renounce the contract. However, where required by the rules of good faith, the contractor will have the right to use its right of termination, rather than renouncing the contract.

Within the framework of Article 480 of the Turkish Code of Obligations, efforts will be made to sustain the contract as much as possible and the relevant provisions of the contract will be adapted to the changing conditions if possible. Adaptation means redesigning and reshaping of the contract through the most appropriate changes and revisions which may soften the negative effects of the difficulty of performance. These changes and revisions do not necessarily have to be price related . Adaptation may be made in such other forms such as the change of dates of payment or periods of performance agreed upon in the contract, or suspension of performance of contract for some time, or a decision not to hold the contractor liable for the delay in dispute.

If, however, it is not possible to sustain the contract through adaptation, or the arrangements or revisions required for sustenance of the contract are so heavy that the Employer cannot be reasonably expected to bear or abide them, then, the competent judge or arbitrator may order the Contractor to renounce the contract.

However, where required by the rules of good faith, the Contractor will have the right to use its right of termination, rather than renouncing the contract.

Under which circumstances or events the termination of contract may be requested in reliance upon the good faith rules will, however, be determined according to the concrete case or event in hand. For example, according to the case law of the Supreme Court of Appeals, whether the termination of contract will be proactively and prospectively effective or not is determined by looking at the stage of construction works at the time of court proceedings and trials, and the contract is accepted to be prospectively terminated only if and to the extent the construction completion level is above 90% and the construction quality is acceptable by all means.

According to Turkish Law, renunciation and termination of a contract are two different concepts. Briefly speaking, use of the right of renunciation of a contract is similar to making the contract null and void ab initio, i.e. it paves the way for a retrospective result. However, termination of a contract only leads to prospective results, and the contract will cease to exist from the date of termination.

In case of renunciation of a contract, the obligations performed prior to the date of renunciation are also required to be refunded or returned mutually between the parties.

On the other side, as termination of contract is a prospective act giving an end to the existence of contract effective from the date of termination, the Contractor will be empowered to claim and collect the price of all of the works completed until the date of termination over the price specified thereinfor in the contract. However, in this case, the Contractor will be deprived of the profit which it would be eligible to receive had the works been completed under the contract.

Article 480 of the Turkish Code of Obligations only authorizes and empowers the Contractor to request the adaptation of the contract upon occurrence of any events or incidents which do not initially exist and are unforeseeable by the parties thereto, or if such is not possible, to request renounciation of the contract. Even if and when the works have been performed at a cost lower than the cost and with efforts less than the level of efforts foreseen at the beginning, the Employer is under the obligation to pay the same fee pursuant to last paragraph of Article 480.

The Employer may, if the conditions are satisfied and met, make benefit from provisions of Articles 482 or 485 of the Turkish Code of Obligations as discussed in the following paragraphs or rely upon the general provisions of articles 136 and 138 of the Turkish Code of Obligations.

2. The Contractual Obligations of the Employer

The most important obligation of the employer arising generally out of the Contracts for Work is the obligation to pay the price of the Works. According to the Turkish Code of Obligations, the price may either be determined beforehand on lump-sum basis (Article 480) or if no such net price has been determined beforehand, may be set down on the basis of value as well (Article 481).

If the price is determined on lump-sum basis, save for the exception referred to in Article 480/2 of the Turkish Code of Obligations, the parties are bound by the price in principle. Neither the Contractor may claim an amount higher than the originally agreed upon price, nor the employer may pay a lesser amount.

However, it is important to state that if the Employer faces an excessive difficulty in performance or an impossibility of finding the required financial funds due to the economic conditions and circumstances caused by the COVID-19 outbreak, then it will have the same remedies directly in reliance upon provisions of Article 138 of the Turkish Code of Obligations. According to said article:

“ARTICLE 138– If and when an extraordinary event which is unforeseen and is not expected to be foreseen by the parties at the time of execution of the contract arises for a reason not attributable to the debtor, and changes the circumstances available at the time of execution of the contract against the debtor to such extent that it is no more in conformity with the good faith rules to expect and request the debtor to perform its contractual obligations, and the debtor has not yet performed its related contractual obligations or has performed its obligations by reserving and retaining its rights of claim arising out of the performance having become excessively difficult in the meantime, then and in this case, the debtor will be entitled to request the competent judge to adapt the contract provisions to the changing conditions, or if this is not possible, to renounce the contract. In contracts containing continuous obligations, as a matter of rule, the debtor uses its right of termination, rather than its right of renunciation.

The provisions of this article are enforceable also in debts in foreign currency.”

Where the contract price is determined not fully, but only in an approximate amount, there is a special remedy granted to the Employer. In these types of contracts, as per Article 481 of the Turkish Code of Obligations, the contract price is to be determined over the value of the subject works at the time and in the place of execution of the contract and by taking into consideration the expenses of the Contractor. In this regard , the price of the contract works may be determined to be more or less than the amount estimated initially.

However, if it is understood after the starting date of construction of the works that the contract price will be “excessively” higher than the amount foreseen at the beginning, and if this increase is not attributable to a fault of the Employer, then, the Employer may renounce the contract pursuant to first paragraph of Article 482 of the Turkish Code of Obligations.

According to the second paragraph of the same article, if the contract works are being constructed on the Employer’s own land, then, the Employer may either claim an appropriate reduction from the contract price, or if the contract works have not yet been completed, may preclude the contractor from continuing the works, and may terminate the contract by paying an equitable and reasonable price for the completed portion of the works. As it could be seen, the right of the employer to request a reduction in the contract price or termination of the contract is subject to a condition precedent of construction of the works on the employer’s own land. In all other cases, the right to request a reduction in the contract price or termination of the contract as stipulated in Article 482 of the Turkish Code of Obligations cannot be used.

Occassionally it may become impossible to complete the contract works due to an unexpected event or incident which is directly related to, but is by no means attributable to any fault of the Employer. In this regard, the law-maker departs from the general principle adopted in the Turkish Code of Obligations, and entitles the Contractor to claim both the value of the works completed under the contract and its actual expenses not reflected onto said value, as per first paragraph of Article 485 of the Turkish Code of Obligations.

As stated in our previous letter , according to Article 136 of the Turkish Code of Obligations, in the case of an impossibility which prevents performance of the works and does not arise out of a fault of the debtor, the debt or obligation is terminated, and both parties are required to return everything they have received from each other in accordance with the law provisions pertaining to unjust enrichment. But the law makes an exception to this general rule in case of contracts for work, and entitles the Contractor to claim both the value of the works completed under the contract and its actual expenses not reflected onto said value.

However, if the impossibility of performance is somewhat attributable to a fault of the Employer, pursuant to the second paragraph of Article 485 of the Turkish Code of Obligations, in addition to the value of the works completed under the contract and its actual expenses not reflected onto said value, the Contractor may also claim an indemnity for its damages as well.

At this point, we have stated that failure of the Employer to pay the price of the contract works due to economic bottleneck caused by COVID-19 may constitute a just cause for adaptation of the terms and conditions of the contract, or if such is not possible, for the renunciation of the contract within the framework of Article 138 of the Turkish Code of Obligations.

Taking into account both the currently existing circumstances and the process of emergence of these circumstances, for Employers who have lost their financing opportunities, we are of the opinion that these rights will always be born immediately, as an outbreak which was not foreseeable by anybody prior to December 2019 is now storming through the whole world in both social and economic terms.

In almost all of the leading economies of the world, curfews and many restrictions imposed on import and export of goods and persons have been impsed and even the individuals are being limited due to social distancing practices..

Healthcare expenditures have come to the forefront in almost all countries, and economic measures have been taken for the reduction of the negative effects of COVID-19 on daily life. It can also be observed that far larger economic stimulus packages are needed beyond the declared incentives, but it is not certainly known from where these sources will be provided.

Not only is it unknown how the economies of USA, Italy, Spain, Great Britain and France will be reanimated or revived when they have been exposed to heavy losses of lives, but it is also uncertain how life will return to normal.

Not only trading companies, but the countries having extremely developed economies are also in a very severe crisis. To such extent that the French President Macron has called the European Union to give budget support and help, rather than extending credit facilities to its member states, and has added that if it fails to give a correct response to the ongoing extraordinary shock, Europe will not have a future at all.

The European Union has started to take action in order to create a huge long-term recovery package fund of 1 Trillion Euros so as to support the governments, corporations and workers in their fight against the damages caused by Coronavirus pandemic. It is, however, not certain whether such a great fund can be created or not, or under which conditions and by which time it can be created at all.

Thus, it seems inevitable that all these negativities will cause an unpredictable crisis in the global financial markets.

Of course, It is our hope that such a crisis will not occur. However, if the concerns come true and financial crisis on a global scale emerges, it is greatly probable that it will become impossible for both Employers and Contractors to perform their contractual obligations.

Particularly, the large infrastructural projects financed by project financing methods or the projects such as construction of power stations with a total investment volume of around hundreds of millions of USD can no longer be expected to be realized and funded by the shareholders’ equity of companies.

Considering all these, it can be stated that the conditions set forth in Article 138 of the Turkish Code of Obligations have already been met.

IV. Conclusion

The Coronavirus outbreak is also capable of producing negative effects on the performance of contracts for work between private law persons. Therefore, due to such an extraordinary event that can not be forseen at the time of establishment of the contract, it may not be possible to perform the contractual obligations against the originally determined or foreseen price and by the end of the period of time specified in the contract, and for this reason, it may become necessary for a judge to adapt the contract. And even in some cases the contract may not be sustained and kept up through adaptation, and it may be necessary to renounce the contract – or if the conditions are met, to terminate the contract.

Each contract should be assessed in light of its own terms and conditions, and it should be determined whether an adaptation or a renunciation of contract – or if the conditions are met, termination of contract – is required or not.

If you would like to know more on Contracts for Work or require legal assistance, please get in touch with BerkerBerker Law Office via info@berkerberker.com or any other contact information listed at our website.