Covid-19’s Effects on Contracts

1.In today’s world, principles of “pacta sunt servanda”, “respecting the rights of others”, “obligation to compensate the damage by the person who caused it with fault”, “obligation to give what belongs to someone else”, “fair application of a penalty for the action resulting the penalty” are solidly established in all legal systems[1]. As a result of the principle of pacta sunt servanda (agreements must be honoured), the parties are expected to fulfil their obligations in a contractual relationship in our legal system. In other words, the debtor undertakes the risk of falling into difficulty in fulfilling his debts, in principle[2].

2.However, in some cases, the performance of the debt may become impossible or it may be extremely difficult to perform the debt as agreed in the contract due to unexpected events or situations. In such cases, expecting the performance of the debt from the debtor by adhering to the principle of pacta sunt servanda can be considered unfair and a contradiction to the rule of good faith[3]. As a result, depending on each case, the debtor may partially be discharged or with the judge’s intervention, some measures may be taken in order to save the debtor from this extreme difficulty.

3.Due to the negativities arising from current developments in the world[4] and in our country because of the COVID-19 epidemic, business life is highly effected by the measures such as halting transportation to certain countries, delays at customs, suspension of educational activities, suspension of manufacture in factories, closure of some shopping malls, cancellation of sports competitions; it is foreseen that impossibility of performance or excessive performance difficulties may arise, and may cause some conflicts accordingly.

2.Evaluation of the Situation Caused by the COVID-19 Outbreak in Terms of Code of Obligation

4.The concept of “force majeure”  which comes to mind as the most frequently used concept, when the topic is extraordinary, extreme, unpredictable situations that cannot be attributed to the parties; is defined as an extraordinary event occurring the outside the debtor’s influence area that is not possible to prevent of predict, even if the highest level of care has been taken, which is caused by nature or third parties[5]. In case a force majeure occurs, it is accepted that the debtor cannot be forced to perform the debt and will be discharged from his debt. By reason of that, force majeure is an event that arises inevitably and makes performance absolute impossible[6].

5.Discussions have already begun that the extreme conditions due to the COVID-19 outbreak would constitute force majeure for many relationships. Despite the widespread use, the definition of force majeure does not exist in our legal system, and there are some general provisions is the Turkish Code of Obligations (“TCO”) that will prevent the absolute application of the principle of pacta sunt servanda and stretch that principle.

6.In these provisions, there are concepts that can be applied to all contracts, not under the name of “force majeure”, but under the concepts of impossibility of performance and excessive performance difficulty. These two concepts differ from each other in terms of their attribution and results. On the other hand, the parties can also regulate the regime, which will be applied to the extraordinary and/or unexpected situations occurring out of their will with the clauses named force majeure or non-performance situations. It is known that in practice, such terms are included in almost every contract as a standard clause. With such general clauses, the emergency situations are divided into several phases and the rights and obligations of the parties are determined and the suspension of the contract, its duration, in which cases the right of termination arises, and how the liquidation will be conducted are clearly regulated.

7.In principle, the parties can determine the rules to which the unexpected situations in the contractual relationship will be subject to, at their own discretion. This is a consequence of the principle of freedom of contract. If the parties determine the terms and results of the situations to be encountered, these provisions gain superiority and the regime stipulated in the contract is applied. However, some of these clauses are detailed in a way that can lead the parties to the conclusion, while others state that only certain situations arisen shall be count as force majeure, and even some of them refer to a concept that is not even regulated in the law by saying “cases enumerated as force majeure in the law”. Furthermore, it is possible that the written contract between the parties has never been made as a result of the principle of freedom of form.

8.In case that there is no written contract or where there is no clause in the contract to bring the parties to the conclusion, the issue should be evaluated pursuant to TCO by considering concepts of impossibility of performance and extreme performance difficulties. For this reason, while considering “force majeure” in line with the widespread use for the situation caused by the COVID-19 outbreak, it is essential to determine in which concept the matter should be evaluated in accordance with the TCO, in order to determine the correct steps to be taken.

A.Impossibility of Performance (TCO Art. 136)

9.The closest regulation of “force majeure” in terms of definition and consequences is the Article 136 of the TCO. Indeed, said provision regulates that when the performance of the debt becomes impossible due to reasons for which the debtor cannot be held liable, the debt will be released. According to the article, the debtor, whose debt is released due to the impossibility, is obliged to give back the things received from the other party and loses right to demand the performance of the contract which has not been performed. In other words, if the debtor does not have any fault in impossibility, the debt will be released, and the debtor will be discharged[7]. It goes without saying that the impossibility mentioned here is “objective”. In other words, in order for the debtor to get rid of the debt due to the impossibility, performance should be impossible for everyone, not just for the debtor.

10.The Article 137 of the TCO regulates the partial impossibility of performance. Accordingly, the debtor will be discharged for only the part of the debt that becomes impossible. However, if this partial impossibility had been foreseen, it is clear that such a contract would not have been concluded in the first place by the parties, then the whole of the debt would be released.

11.In general, perpetual contracts defined as the contracts of which performance of fundamental obligations spread overtime and the actions are performed within a certain timeframe; while sudden contracts defined as the contracts of which fundamental acts are performed at once. Contracts such as loan, service, distributorship are perpetual contracts[8]. In such relations, if the perpetual act (e.g. the debt of paying the rent) becomes impossible later on, the contractual relationship ceases. However, the performed acts (e.g. paid rents) and the corresponding counter-act (e.g. providing the leased ready to use to the tenant) are not affected by such termination. This issue differs from the partial impossibility regulated under the Article 137 of the TCO[9].

12.The High Court of Appeals differentiates the force majeure according to the reasons of its occurrence. Accordingly, if the impossibility of the performance is for everyone, “objective impossibility” is the case, while if there is a situation arising only from the attitude of one of the parties of the contract “subjective impossibility” is the case. Apart from this, there is also a distinction of “faulty impossibility / faultless impossibility” depending on whether the impossibility originates from the parties’ fault[10].

13.The aforementioned impossibility may be caused by a natural phenomenon or may arise from a legal reason[11]. Failure of the organization company to fulfil its obligation due the blockage of the road caused by the avalanche may be given as an example of the impossibility is caused by a natural phenomenon, while due to banning of a construction in a region where the building company has promised the construction will be performed, the contractor’s failure to perform stands for the example of an impossibility arising from a legal reason. The High Court of Appeals characterized the flood disaster as a natural cause of impossibility and in one of its decisions, damage of the products in the entrepot was evaluated within the scope of force majeure in favour of the carrier[12]. In a different decision, the prohibition of paddy cultivation by the administration on the land leased for paddy cultivation is also evaluated as obstacle for performance in line with the Article 136 of the TCO[13].

14.From this point of view, the measures taken, and the situations encountered to combat the COVID-19 outbreak should be addressed separately. Because these may create an impossibility for certain contractual relationships or may not have the same effect in certain relationships. For instance, it can be accepted that if a factory fails to work due to a curfew, failure to produce the orders as committed will create impossibility. In this case, the factory’s debt will be released within the scope of Article 136 of the TCO, and the factory will return the payment it has received for the order. However, it would not be appropriate to evaluate the situation of a store owner, who could not pay the rent due to the decrease in the number of people going to the shopping malls, within the concept of performance impossibility. Because in this case, performance is still possible, but it has become difficult.

15.It should not be overlooked that Article 136 of the TCO also brings an obligation for debtor to notify the creditor and to take relevant measures that can be taken, besides the opportunity provided to the debtor by the said article. If the debtor does not promptly notify the creditor that the performance is impossible and does not take necessary measures to prevent the increase of loss, the debtor shall be obliged to compensate the losses arising from this. For instance, if the creditor had chance to supply the goods cheaper if the creditor had previously been notified that the performance was impossible, then it is possible to request the price difference from the debtor, who did not comply with the obligation to notify[14].

16.As can be seen, the consequences that the TCO system attributes to the impossibility of performance are simple. However, some contracts in practise consist of force majeure provisions including certain phases, notification obligations and waiting periods. Pursuant to the Article 136 of the TCO, there is no time limit for the contract to be suspended or for the parties to notify and wait. For this reason, unless otherwise agreed in the contract, it is necessary and sufficient to seek in every concrete event that the effected act is become permanently impossible. In order to determine whether this has happened, it is necessary to conduct a case assessment and to determine whether the debt ends automatically due to the impossibility.

17.In this case, businesses of which debts are become absolutely impossible by reason of the situation occurred due to the COVID-19 outbreak or the measures taken by the government, shall inquire whether the performance has become impossible. If this is the case, they shall examine the contract (if any) whether there is a helpful provision regulating their rights and obligations. If there is no such provision, the other party shall be promptly informed about the impossibility and the measures (if any) to prevent the increase of the loss shall be taken as per Article 136 of the TCO.

B.Excessive Difficulties in the Performance (Article 138 of the TCO)

18.The extraordinary situations that have not been foreseen and occurred after the contract have been executed, might make the performance extremely difficult, without making it impossible[15]. The issue of adapting the contract to changing conditions due to occurrence of extreme performance difficulties is a concept that has been discussed with the fact that the strict adherence to the principle of pacta sunt servanda is not always fair, especially during war periods[16]. In our legal system, such situations where performance is not impossible but substantially difficult for the debtor are regulated under Article 138 of the TCO.

19.According to the mentioned provision, the debtor has the right to request the judge to adapt the contract to the new conditions or to return from the contract if such adaption is not possible, in the case that an extraordinary situation that is neither foreseen nor expected to be foreseen by the parties at the execution of the contract (i) arises due to a reason that is not caused by the debtor, (ii) changes the facts, existing at the time of the execution, against the debtor to the extent that performance of the contract would contradict the rule of good faith, and (iii) if the debtor has not yet performed or has preserved relevant rights arising from this excessive difficulty while performing. Therefore, in the event that the conditions and balance in the contract are excessively disrupted due to a reason not caused by the parties, if the request for the debtor to perform the debt exactly according to the terms of the contract may be contrary to the rule of good faith, the debtor may request the contract to be adapted to the new terms and the judge shall also consider the nature of the situation and the contract, and may decide to adapt it to the new circumstances or to cease the debt[17].

20.Pursuant to Article 138 of the TCO, in order the judge to rule in line with the request, (i) the balance between the obligations of parties must have been substantially disrupted to be undertaken by the debtor after the contract has been established; (ii) this circumstance must result from an extraordinary situation (such as war, economic crisis, devaluation, natural disasters, prohibitions and restrictions on import and export) that cannot be foreseen during the establishment of the contract; (iii) the situation creating the excessive performance difficulty should not originate from the debtor; (iv) the actions have not been performed yet, or the debtor must have performed by retaining relevant rights[18]. As per Article 138 of the TCO, the adaptation should be requested from the judge as soon as these conditions are met[19]. At this point, it should be reminded that in its many decisions, High Court of Appeals held the opinion that economic crisis, inflation and devaluation risks should be undertaken by the merchants and the said conditions are not extraordinary to occur in Turkey, but if it is accepted that an extraordinary situation has occurred even when compared to the previous examples, the relevant condition is realized[20].

21.Accordingly, the judge will evaluate the case at hand and try to sustain the contract by restoring the economic balance, which has been disrupted, between the parties[21]. The adaptation can be in a way that the judge deems appropriate within a broad framework including discount, adjournment (deferment), increase, change the place of performance, payment of expenses[22]. However, if it is still impossible to sustain the contractual relationship with such changes on obligations, then it may be possible to return from or terminate the contract. Unlike the adaptation, it is not necessary to request the rescission of the contract from the judge. Determining that adaptation is not possible, the debtor can use the right of return or termination at court or out of the court (usage of this right out of the court is controversial), by taking the wrong assessment risk[23]. In any case, returning from or terminating the contract shall be deemed as “ultima ratio”.

3.Explanation Through Examples

22.We have already mentioned above that certain situations occurred due to the COVID-19 outbreak can be evaluated within the scope of impossibility of performance, and in order to determine whether it is actually objective impossibility, each case must be evaluated separately on the basis of each concrete case. The cases that are not of this weight can be considered as difficulty of performance if they meet the mentioned conditions. We would like to share some examples in order to assist the evaluation to be made in terms of impossibility of performance and excessive performance difficulty:

a.The effect on lease contracts of the stores in the shopping malls: It is known that shopping malls, which are visited by thousands every day, are completely empty since individuals stay in their residents with the thoughts of not being affected by the epidemic upon the measures and recommendations taken within the scope the COVID-19 outbreak. However, the content and rental fee of the lease contracts of such stores are set by considering the customers that are foreseen to visit under ordinary conditions. Will the decrease in the number of the customers, which may take several months lead the lease contract to be ceased due to the impossibility or the request for adaptation due to the excessive performance difficulty? This is a controversial example, but we are of the opinion that the obligation to pay the rental fee has not become impossible, but an excessive difficulty is occurred. Therefore, it is considered that it is appropriate to request the judge’s intervention to the contract. Even if it is accepted as an impossibility and the tenant has right to terminate the contract, in such case the store shall be evacuated and as the tenant have put a large investment to the store, it can be said that it is likely that this option is not also preferred by the tenant. As can be seen, in some cases the consequences of the impossibility of performance and the excessive performance difficulty get very close. Therefore, the analysis of the concrete case must be done accurately considering that the procedure to be followed is different for each option.

b.The effect on the contracts of construction: It is possible for a contractor who undertakes construction work to have difficulties in finding workers within the framework of the measures taken and not to complete the work within the committed time. In this case, the contractor may apply to the court demanding the adaptation of the contract regarding the debt of paying the lease of the landowners or similar debts due to the inability to complete the work on time. In terms of this example, it can be evaluated that the current situation does not create a negativity in the severity of impossibility but may be subject to an adaptation request due to the difficulty in performance. As per Article 480 of the TCO, it is clearly seen that this approach is also embraced in works with lump sum and that the contractor is primarily request the judge to adapt the contract to the new conditions, and if this is not possible or if it cannot be expected from the other party, the contractor has the right to return from the contract.

4.Conclusion

  • The collective or individual measures taken due to the COVID-19 pandemic emerge a situation that has a potential to create an imbalance in the performance obligations of the parties in certain contractual relationships and requires that many contractual relationships to be evaluated in this regard if the duration of the pandemic is extended. First of all,in such cases, it should  be checked whether there is a provision foreseen in the contract for extraordinary situations that subsequently occur and affect performance. To quickly describe the effects of the COVID-19 pandemic as a “force majeure”, will be an incomplete assessment within the scope of the TCO. Since the concept of force majeure is not defined under the law, the cases that will be considered as force majeure are not listed in the law as well. However, the issue is addressed in the TCO under the topics of impossibility of performance and excessive performance difficulties.Even though the aforementioned institutions seem to be similar, there are important differences in terms of having different provisions and legal consequences as well as necessity to follow different procedures within their own context.
  • In this respect, it is important to carry out concrete case evaluations, to determine which obligation is affected at what level, and to take measures in line with the appropriate institution. As a matter of fact, conditions that occurred within the scope of the COVID-19 pandemic may cause impossibility of performance for certain contracts, and excessive performance difficulties for others. In the case that there is no written contract between the parties or if the related provision of the contract cannot lead parties to a conclusion, it will be appropriate to evaluate the case in accordance with the conditions of the concrete case and the provisions of the TCO mentioned above.

Best regards,

Bozoğlu İzgi Attorney Partnership


[1] Işıktaç, Hukuk Felsefesi, 4th edition (İstanbul: Filiz Kitabevi, 2015) p. 141. 

[2] Kocayusufpaşaoğlu et al., Borçlar Hukuku, Vol. III (İstanbul: Filiz Kitabevi, 2016) p. 270. 

[3] Erman, İstisna Sözleşmesinde Beklenilmeyen Haller (BK. 365/2), (İstanbul: Fakülteler Matbaası, 1979) p. 55. 

[4] The World Health Organization has declared “International Public Health Emergency” in terms of the Covid-19 virus. As of 30.03.2020, the number of cases detected in the world is 738,987 and the number of people who died due to the virus is 35,013. During this period in many countries, visitors entering the country from abroad are subject to mandatory quarantine for 14 days, and in countries where the number of cases is worrying, the ban on free movement is enforced except for vital conditions.

[5] Kocayusufpaşaoğlu et al., Borçlar Hukuku, Vol. III, p. 189.  

[6] Tekinay et al., Borçlar Hukuku, 7th edition (İstanbul: 1993) p. 1003.  

[7] Tekinay et al., Borçlar Hukuku, p. 998. 

[8] Zevkliler, Gökyayla, Borçlar Hukuku Özel Borç İlişkileri, 11th edition (Ankara: Turhan Kitabevi) p. 29.

[9] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler, Vol. I, 11th edition (İstanbul: Vedat Kitapçılık, 2013) p. 578. 

[10] High Court of Appeals Decision – Yargıtay 11. H.D. numbered 2015/10768 E. 2016/4782 K. dated 28.04.2016. 

[11] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler Vol. I, p. 568; Tekinay et al., Borçlar Hukuku, p. 999. 

[12] High Court of Appeals Decision – Yargıtay 11. H.D. numbered 2013/11759 E. 2015/3693 K. dated 17.3.2015. 

[13] High Court of Appeals Decision – Yargıtay 6. H.D. numbered 2012/9490 E. 2013/1612 K. dated 5.2.2013. 

[14] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler, Vol. I, p. 574-575; Kocayusufpaşaoğlu et al., Borçlar Hukuku, Vol. III, p. 191.  

[15] Tekinay et al., Borçlar Hukuku, p. 1005. 

[16] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler, Vol. I, p. 580. 

[17] Erman, İstisna Sözleşmesinde Beklenilmeyen Haller (BK. 365/2), p. 54. 

[18] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler Vol. I, p. 583. 

[19] It can be seen that the difficulty of performance and the impossibility of performance discussed above are separated. Due to the impossibility of performance, it is not necessary to apply to the judge in order to be discharged.

[20] Please see: High Court of Appeals Decision – Yargıtay 11. H.D. numbered 2003/13877 E. 2004/8181 K. dated 13.09.2004. 

[21] Erman, İstisna Sözleşmesinde Beklenilmeyen Haller (BK. 365/2), p. 113. 

[22] Kocayusufpaşaoğlu et al., Borçlar Hukuku, Vol. III, p. 272; Oğuzman, Öz, Borçlar Hukuku Genel Hükümler, Vol. I, p. 583. 

[23] Oğuzman, Öz, Borçlar Hukuku Genel Hükümler, Vol. I, p. 583.