Foreign Defense Contractors Stuck Between Possible Sanctions and Force Majeure Conditions in Turkey

Yunus CaglarLegal Counsel, Herdem Attorneys At Law

Starting from 14 October 2019 pursuant to the Executive Order issued by President Trump, foreign defense contractors conducting business in Turkey are watching the most recent updates in Turkey and U.S. relations. Even OFAC announced the removal of three Turkish government ministers and two Turkish government ministries from Specially Designated Nationals and Blocked Persons (SDN) List, the Executive Order is still in place and could pose significant consequences to foreign defense contractors supplying defense items to Turkey. Add to this, the sanctions prescribed in Protect Against Conflict By Turkey Act (PACT Act), the  bipartisan bill launched by  the Republican senator Lindsey Graham and Democrat Chris van Hollen and passed by the House, targeting the government of Turkey had hit a snag over particularly defense contractors. The PACT Act impose more restrictive measures on Turkish defense industry as it forces the U.S. President to impose the sanctions prescribed in Countering America’s Adversaries Through Sanctions Act (CAATSA) along with other ‘new’ and punitive sanctions.  It is clear that not only U.S. but also the EU based manufacturers conducting business in aerospace & defense and selling defense items to Turkey have been started to be restricted since some export/import licenses related to transactions being suspended.

No question that such challenges in political environment threaten the on-going defense contracts and worries the foreign contractors that to what extent they can rely on force majeure provisions in their contracts with Turkish military authorities.

The regulatory framework of procurement of defense items are prescribed in Turkish Public Procurement Law (‘Law No 4734’) and Law on Public Procurement Contracts (‘Law No 4735’)  in Turkey.  Article 3 (b) of the Law No 4734 which refers to goods, services and works procurement which are decided by the relevant ministry that these are related to the defense, security or intelligence or that these require to be treated confidentially, or procurements requiring special security measures during the performance of the contract pursuant to related legislation or those concerning the cases in which the basic interests of the state’s security needs to be protected and Article 3(n) of the of the Law No 4734  which refers to goods and services procurements through agreements and contracts allowing guarantees in advance in order to ensure provision of urgent needs that likely come up in cases such as defense, security and humanitarian aid issues which may arise from either international obligations or for national purposes, in a fast and effective manner exempts the of the Law No 4734  to apply in defense procurement. This provision constitutes the basis of Directives for each relevant institution such of Ministry of National Defense, Ministry of Interior, Service Commands, Presidency of Ministry of Defense, Mechanical and Chemical Industry Corporation and the defense procurement programs through NATO Support and Procurement Agency, Foreign Military Sales Programs.

Law No 4735 sets out the principals of the contractual clauses and refers and all contracts are deemed as typed on draft contracts promulgated on Official Gazette and requires parties to perform their contractual obligations within the scope of the Law No 4734. In other words, parties are not allowed to enter into typical or atypical contracts rather than those promulgated on Official Gazette which leads legal counsels to have special focus on matters such of ‘force majeure’ and ‘principles’ for a lengthy analysis. Therefore, the defense contracts have characteristics of a commercial contract namely means that any dispute between the parties arising out of the contract provisions are subject to civil law. In some cases, it is really complicated to determine which conflict should be settled in which court due to nature of the government contracts however Supreme Court decisions address the civil courts to settle the disputes.  

Force Majeure in Public Procurement Law Perspective as a Contractual Clause in Defense Contracts

Pursuant to article 10 of the Law No 4735, which constitutes the most and common force majeure conditions of defense contracts; circumstances that may be considered as force majeure are limited with; (i) Natural disasters, (ii) Legal strikes, (iii) Epidemic cases, (iv) Announcement of partial or general mobilization, (v) Other similar circumstances that may be determined by the authority when necessary.

For the contracting entity to be able to accept any of the circumstances stated above as force majeure, including cases of time extension and contract termination; it shall be absolutely necessary that the concerned case did not arise from the contractor’s fault, that it constituted an obstacle in fulfilling the contractual obligations, that the contractor could not afford to remove such obstacle, that the contractor has notified the contracting entity in writing within twenty days as of the date which the force majeure has occurred, and that it has been documented / certified by competent authorities.

In many cases defense contractors have difficulties to find a competent authority in their jurisdiction which would certify the force majeure for abovementioned circumstances as required or to convince the authority that the conditions they have constitute a force majeure which results with conflicts. Similarly, it is highly unusual by means of general contracts law that a party of a contract is entitled to determine the any circumstance of another party whether it constitutes force majeure or not. Thus, in some cases, Supreme Court rules that even the conditions are limited both in Law No 4735 and the contract the provisions of the Turkish Code of Obligations (“TCO”)  shall also apply to the contracts are such government contracts are also subject to civil law provisions in case of a conflict.

Force Majeure in Civil Law Perspective as a Contractual Clause in Defense Contracts

From TCO perspective, TCO does not stipulate force majeure specially but stipulates impossibility of performance in commercial contracts. Impossibility of performance may be legal or factual. Legal impossibility may be caused due to a legislative amendment or a prohibition of an act which would result in impossibility of performance of contractual obligations; whereas factual impossibility may be caused due to a fire or severe weather conditions which would also lead to impossibility of performance. Nevertheless, legal consequences of such impossibilities in accordance with the TCO are identical. Force majeure is a condition that may constitute impossibility of performance (both legal and factual) depending on the provisions of a contract. As per TCO, party to the contract that are unable to undertake its obligations due to a force majeure may apply to the court for the termination or amendment of certain provisions of the contract. In accordance with the TCO, the court may terminate or amend the contract if, (i) Occurrence of an unexpected and unforeseeable event and not expected to be foreseen by the party that occurred after the execution of the contract, (ii) Occurrence of an external event that was not caused by the actions of the party, (iii) In respect of the principle of good faith in Turkey, performance of relevant obligations should become excessively burdensome for the party as a result of the force majeure event, (iv) The party in question should have performed its obligations by reserving its rights for hardship or not yet performed the obligations under the contract. It’s at court’s discretion to decide on the existence of a force measure and take measures accordingly. Moreover; if the party in question fails to notify the counterparty on the impossibility of the performance and fails to take necessary precautions to prevent the increase of loss, the non-performing party shall be liable for the compensation of the resulting losses. Other than that, the defaulting party is not liable for any of the obligations undertaken in a contract.  Unexpected circumstances, although not stipulated as the force majeure in the law, may also be grounds for the termination of a contract. Several Turkish Supreme Court decisions show that the occurrence of unexpected circumstance may lead to same conclusions as force majeure as stipulated in TCO, such as the termination of contract.

Besides the provisions of TCO, The General Communique on Public Procurement (“Communique”) requires the contractors to act as prudent merchant during the tender process and the term of the contract. Lack of prudence would cause the event not to be considered as a force majeure by the authority.  However Turkish law does not prescribe a clear definition of a prudent merchant. As per the Supreme Court decisions, a prudent merchant should have a shrewd judgment and able to predict and plan for future eventualities. As such a prudent merchant, while doing business, must take the economic and political conditions into consideration. Giving an example; Supreme Court, in several cases, ruled that an economic crisis does not constitute a force majeure because a prudent merchant should foresee an economic downturn and act accordingly. However, the criteria of prudency may change depending on the sector, type of work conducted and even location of the work in most cases which require legal analysis on case by case.

Author: Şafak Herdem 

Contributing Advisors

Şafak HerdemManaging Partner, Herdem Attorneys At Law