COVID 19, Clausula Rebus Sic Standibus

The epidemic, which began in 2020 as corona virus disease (CoViD-19) in China, has spread to Europe and other continents and has also affected our country considerably. Various precautionary measures are being taken as the outbreak poses a serious threat to the health of our population. As a result of these measures, it affects our business, the work of the courts and the future of existing contracts.

The outbreak of CoviD-19 and the possibility of its spread may constitute obstacles for the parties to existing contracts to fulfil their obligations. As a result of these obstacles, problems such as the opening of litigation, the elimination of the applicability of the contractual provisions, in particular the adaptation of the contract to the newly created situation and the sustainability of the contracts may arise due to the failure of contractual acts.

There is no doubt that the epidemic is considered as "force majeure" because it is transmitted from person to person, extends over a wide geographical area and the measures taken in this regard restrict business activity.

After conclusion of the contract, the conditions contained therein may change considerably. These changes may differ significantly from the conditions that the parties take into account when concluding the contract. The difference in the conditions between the conclusion of the contract and the time of performance appears as an impediment to performance. This need may arise in particular in the case of contracts which establish a permanent debt relationship such as rent and service, and in the case of long-term contracts such as employment contracts. In these cases, conflicting facts and subsequent differences in value between the measures taken at the time of contract conclusion and contract performance must be harmonised and compensated for.

The basic principle to be applied in this matter in the law of obligations is the principle of Pacta Sunt Servanda (fidelity). According to this principle, the debtor is bound by contract, and even if circumstances change greatly against himself, he must perform his obligations. This principle can lead to an unfair situation towards the debtor, since the conditions are aggravated and the performance is expected to be executed accurately. Especially in cases of force majeure such as war, rebellion, terrorism, famine, earthquake, natural disaster, high inflation or epidemic, waiting for the debtor to bear only the consequences of the negative effects of the unforeseen and irresistible events distorts the principle of equality between the parties.

The principle that comes on the agenda in this case is the Clausula Rebus Sic Stantibus principle. If conditions have changed in accordance with this principle, the borrower's obligation to perform must change either in substance or in time, so that the balance between the measures must be restored and a concrete contractual fairness must be established.

The Turkish Code of Obligations, legal theory and court decisions accept the adaptation of the contract on the basis of the rules of justice and honesty in case the terms of the contract change significantly and the business base partially collapses. It is entitled "Excessive hardship of performance" according to Article 138 of the Turkish Code of Obligations and is the main provision regulating the adaptation in Turkish law. This provision states "If an extraordinary situation, which was not foreseen and expected by the parties at the time of the conclusion of the contract, arises for a reason not originating from the debtor, the existing facts at the time of the conclusion of the contract will change in the way that the requirement of performance is to the debtor's disadvantage and contrary to the rules of good faith, and that the debtor has not yet performed his obligations or has not done so while preserving his rights due to the excessive hardship of performance, the debtor has the right to ask the judge to adapt the contract to the new conditions or to withdraw from the contract if this is not possible. In the case of open-ended service contracts, the debtor usually uses the right of termination instead of the right of return.”

Article 480/2 of the Turkish Code of Obligations regulated as a special provision the adaptation in the contract for work. This provision states: "However, if the situations which are not foreseen or foreseeable but which are not taken into account by the parties prevent the execution of the work with the lump sum determined by the parties or make it extremely difficult, the contractor shall have the right to request the judge to adapt the contract to the new conditions and, if this is not possible or expected from the other party, to withdraw from the contract. In cases where the rules of good faith so require, the contractor can only use the right of termination''. 

The Clausula Rebus sic Standibus rule refers to the adaptation of the contract. By means of the adaptation, the content of the contract can be changed or it is decided to extend or shorten the duration of the contract. The premature termination of the contract is a change in the duration of the contract with regard to its legal nature.

The adaptation of the contract to changing conditions can be carried out according to the rules established by the contracting parties or according to the applicable legal regulations. If there are no contractual or legal rules, the judge can also make an adaptation. The adaptation of the judge to the legal rules actually means "filling the gaps", whereas the fact that the judge adapts the contract with the rules he has personally established for the specific event is considered a "real adaptation".

Voluntary (contractual) adaptation: the parties may lay down in advance the rules applicable in the event of an open or closed circumstance adjustment, in accordance with the principle of contractual freedom. If the parties do not foresee positive or negative adaptation rules for the changing contractual conditions, an adaptation gap arises in the contract.

Legal adjustment: The Turkish Code of Obligations does not contain a general provision on legal adaptation, but there are some positive or negative adaptation rules for changing conditions and adaptation in some contracts. The positive legal provisions provide for the adaptation of the contract to changing conditions. As examples of such rules, the Turkish Code of Obligations contains provisions regulating the possibility of terminating contracts that establish a permanent debt relationship before the due date (TCO Art. 331; 369; 617). These provisions do not refer to the content of the rights and debts in the contract, but bring changes regarding the duration of the contract. By analogy, these provisions can also be applied to credit, safekeeping and care contracts until death.

The negative rules in the law are the rules that predict that the contract is valid without change, even if the terms of the contract have changed. The Turkish Code of Obligations has expressly prohibited the adaptation of the law in cases provided for under Articles 307 and 575. However, situations of force majeure should be an exception to this rule.

The Turkish Code of Obligations contains two important provisions such as the "general adjustment" in case of excessive hardship in performance under Art. 138 and the "special adjustment" in a contract for work under Art. 480 para.2. According to these provisions, the debtor has the right to ask the judge to adapt the contract to the new conditions if the conditions are not foreseeable or could not be expected to be foreseeable during the conclusion of the contract, or are foreseeable but are not regulated in the contract. If this is not possible or cannot be expected of the other party, the right to withdraw from the contract emerges. If the rules of good faith so require, the debtor usually uses the right of termination rather than the right of return, especially in the case of ongoing service contracts.

Judicial adaptation: if the contract or law does not contain adaptation rules, the judge must fill this gap in the event of a dispute and adapt the contract to the changing conditions by means of the legal rules he has laid down. The actual adaptation is this type of adaptation and its conditions can be listed as follows:

There should be an adaptation gap in the current treaty. Contractual and legal adaptation rules should not be included in the treaty.

While the judge fills the adaptation gap, according to Art. 1(1) of the Turkish Civil Code, he should create a legal norm to solve the concrete event he handles with. When drafting a norm, the judge should be based on the rule of good faith established in Article 2 of the Turkish Civil Code. Within the framework of this rule, the judge must examine the hypothetical contractual will of the parties, define the contract accordingly and adapt it. There should not be any situation that prevents an adaptation, the party requesting an adjustment should not be flawed. It should not be foreseeable that the terms of the contract will change (TCO Art. 138; Art.480(2)). The conditions requiring adaptation of the contract should be based on the events that occurred after the conclusion of the contract and the party requesting the judge's adaptation should not have foreseen these events at the time of the contract or the foreseen events should not be expected. The party applying for an adjustment should not have caused the change in the conditions by its own conduct and should not have acted erroneously. If the balance between the measures has not changed significantly or the difficulty of performance has not been excessively overwhelming, the judge cannot make a decision to adjust.

The services should not yet have been performed or should have been performed with reservations.

Conclusion

As is to be expected, termination of the contract will not always be the most economical solution, especially with regard to long-term contracts. When the risk associated with COVID-19 decreases or disappears completely, there are many contracts where the interest of the parties to the contract is directed towards the continuation of the contract. For this reason, the provision of Article 138 of the Turkish Code of Obligations, which regulates the "adaptation of the contract", may offer a more appropriate solution than the legal solutions provided in the event of a conflict with the contract, such as impossibility (no performance at all), delay (not on time) and improper performance. Considering that any performance, in particular monetary indebtedness, is not impossible, it may be more appropriate to speak of an excessive hardship of performance in most cases. In cases where Article 136 of the Turkish Code of Obligations cannot be implemented, Article 138 therefore offers a suitable solution. There are already many contractual relationships where performance is difficult due to COVID-19. According to Article 138, the adaptation is made by the judge. Therefore, if the possibility of applying Art. 138 is not to be excluded, the performance of services must be made with reservation.

The fulfilment of a debt that can be executed is a prerequisite of the moral principle of loyalty, but Art. 138 makes it possible to adapt the contract to changing conditions. COVID-19 can be considered an unforeseeable, exceptional change that may occur after the conclusion of the contract. However, the impact on each contractual relationship should be assessed separately in each specific case. For example, the negative effects of the epidemic in the food industry are not great, but it can be said that it has definitely led to extreme hardship of performance in the entertainment, catering and cosmetics industries. The measures that the government has taken in the construction contract due to the epidemic may lead to excessive hardship of performance. The point to be taken into account here is the "unpredictability of the impact on contracts" of extraordinary changes that occur after the contract is signed. The victim side of the contract, which cannot foresee this effect and cannot be expected to carry out the performance in accordance with the rule of good faith, may have the right to adapt the contract and demand this from the judge.

The judge decides whether the contract should be adapted to changing conditions, such as an increase in the sales, labour or rental price, whether the contract period should be extended or shortened, or whether the contract should be terminated prematurely or retained. In deciding on any of these options, the judge is dependent on the demands of the parties.

If the judge decides to adapt the contract to changing circumstances, he must choose the form of adaptation that best suits the purpose of the contract, provided the interests of both parties are taken into account.

 

Advt. Prof. Dr. Arzu Oğuz

Academic Member of Ankara University, Faculty of Law

Founder of the law firm Oğuz