Potential Effects of COVID-19 Pandemic on Business and Related Legal Issues
COVID-19 Pandemic, which started to spread on 12th of December in China and affected 120 countries including Turkey by March 2020, was declared as a Pandemic by World Health Organization on 17th March 2020. COVID-19 Pandemic, coronavirus, has never been experienced before by any society. Moreoverit has unpredictable effects, no cure and it is rapidly spreading while causing many deaths. Since the spread of new type of coronavirus has all these factors, it was inevitable for WHO to make a declaration of pandemic.
Since the first COVID-19 case revealed in Turkey, many countries and NGOs have been instantly informed, in addition, an extensive and effective collaboration has been carried out with them. Besides all administrative organs of the state, The Ministry of Health is carrying out a program against the pandemic with a remarkable determination. The State acknowledges the importance of the international cooperation and acts in coordination with the public in an endeavour to minimize the spread rate.
The administrative measures and decisions which aim to stop the spread of the coronavirus, is likely to affect the commercial activities in a negative way. This unfortunate pandemic will probably bring out many new commercial and legal controversies. However, as well as fighting against this pandemic which caught the whole world off guard, it must be taken some precautions and the businesses should be subsidized by the state with the purpose of minimizing the commercial losses caused by the pandemic. During this rare and vital period, all relevant units of the state must support each other to function excellently.
In short and long terms, legal disputes will likely to be a major problem for all sectors of commerce, especially for manufacturing sector. Within this scope, frustration, partial frustration and hardship, which are respectively regulated in articles 136, 137 and 138 of theTurkish Code of Obligations (TBK), must be taken into consideration.
The effect of COVID-19 Pandemic crisis on tourism sector may be seen similar to the effectof the political and military crisis between Turkey and Russia happened in 2015 due to the shootdown of the Russian fighter jet in Turkish airspace. However, the global characteristic of the pandemic makes them absolutely incomparable. Thus, it should not be claimed that businesses are now facing with the same frustration and hardship conditions in 2015. Furthermore, the difficulties caused by the Avian influenza (bird flu) in 2005, terrorist attacks in the past and unforeseeable increase of exchange rates originated legal discussions on the criteria of frustration and hardship. Unfortunately, it should mentioned that there is not anyprecedent on frustration or hardship which is in favour of a merchant that is defined in Turkish Code of Commerce. When compared to previous crises, not only did COVID-19 pandemic effect international commerce but also it negatively affected national commerce. Many sectors, particularly foreign trade and tourism industry, struggled against difficulties and remained standing while contributing to national economy and employment. Therefore, it is beyond doubt, theeconomic stability can be ensured by providing legal protection to these entrepreneurs.
In principle, it is impossible to terminate a validly established synallagmatic contract based on a sole declaration of one of the parties. As one of the general rules, it possible to terminate a contract with the parties’ consensus. Failing this and if a party does not also have the unilateral right to terminate, a party can unilaterally terminate a contract relying on the exceptions arising from the statute; repudiation or rescission of a contract.
The statutory and unilateral right of termination can risebecause of counterparty’s violations that are regulated by law and some external reasons that neither party is responsible for. According to article 136, 137 and 138 of the Turkish Code of Obligations (TBK); upon the request of one party, unexpected performance difficulty that occurred after the formation of the contract, may lead to the discharge, the adaption or the rescission of the contract (repudiation of a contract in case of a contract with continuous obligation). If an extraordinary situation that is unforeseeable or not expected to be foreseeable by the parties in course of the formation of the contract, arises without any fault of the party in debt, additionally if this situation, being contrary to good faith principles, changes the facts existing at the time of the formation of the contract against debtor’s favour, and if he has not performed his obligation yet or partially performed it with a reservation, he has the right to ask a judge to adapt the contract, if this is not possible then he has the right of rescission of the contract. In regard of contracts with continuous obligation, in principle, the debtor has the right of repudiation instead of rescission.
In order to provide fair commercial environment, the establishmentof the balance between the creditor and the debtor is one of the crucial duties of judiciary. Regarding the negative effects of the Pandemic, it seems inevitable for courts tore-evaluatetheir discretion on relevant legal matters, for the purpose of precluding the commerce from grinding to a halt.
It is contrary to the principles of equity to place a burden on a party (debtor or creditor) during this period of pandemic which was unexpected not only for business people but also for all states and international authorities. Moreover, without any support from government and judiciary, this burden on businesses may cause major economic problems on a national level.
It should be clear that when the conditions existing at the time of the formation of the contract changed significantly, the parties would no longer be expected to be bound by the same terms. Therefore,in respect with content and time,the primary solution may be to adapt parties’ obligationsto changing circumstances. It seems to be revealed that the most convenient solution to balance the economy which is unstable due to changing circumstances, should be rooted in good faith principles. Even the merchants have the ultimate commercial knowledge and experience, they could not foresee this crisis which meets the statutory conditions below;
a- Extraordinary changing of circumstances and conditions, this change being unforeseeable and unexpected or even if foreseeable not being taken into consideration by the parties in course of the formation of the contract,
b- The balance between obligations of the parties being disrupted by changing circumstances and conditions,
c- No fault of the parties in changing the circumstances and conditions,
d- Not completed performance.
There should not be any other condition to bring forward the right of adaption or repudiation. Moreover, regarding the present extraordinary circumstances, it should not matter whether a party is a merchant or not. Impossibility of performance may occur in case of a debt being naturally and rationallyunperformable or as a result of an administrative decision.
The negative socioeconomic conditions of COVID-19 pandemic are being experienced on a national level and also globally. Apart from foreign trade, manufacturing and tourism industry; this present state of pandemic also caused extraordinary and negative effects on transport, banking, real estate, health, retail, education sectors and on all small scale businesses. Within an objective perceptive, it should be beyond dispute that the Pandemic constitutes the conditions of the hardship defined by the law.
In case of the adaption of the contract in favour of the party who is not expected to fulfil its performance, if almost the all necessary conditions have been occurred in order to discharge the debt or if it is not possible to provide any convenience for the counterparty then the repudiation of the contract may arise. According to article 138 of TBK, while a party must demand an adaption before court, it is not a condition in case of repudiation. However, in case of a discretion on the adaption by court, the repudiation may not be valid anymore.
We hope that the COVID-19 pandemic will disappear as soon as possible and hope that the possible negative effects will be minimized thanks to the measures taken by the authorities. Finally, we firmly believe that any legal process that may be effective in eliminating or minimizing social and economic problems will be carried out delicately and in a balanced manner, and that the law will be applied as a result of acomprehensive evaluations.
EKSIOGLU LAW OFFICE