The current political and economic developments both at domestic and international level cause sharp movements in exchange rates. These fluctuations adversely affect contracts involving transactions based on foreign exchange payments and thus, the contract parties pay much more than they have initially anticipated. This volatility makes difficult for the parties to maintain the contract with the terms agreed at the execution. The concept of "adaptation of contract" set out in the Turkish Code of Obligations addresses these issues and deals how the contract terms can be aligned with these unforeseen changes.
Under the principle of contractual freedom, the parties are free to implement any contractual arrangement within the limits set out in the applicable laws and must consider all potential risks associated with such arrangement. Once the contract is signed, the principle of "sanctity of contract" steps in, which is among the cornerstone principles of the contracts law. It means that the parties are bound with the terms of the agreed contract under any circumstances.
However, if an extraordinary and unexpected event occurs after the execution date, which is outside of the parties' control and fundamentally affects the equilibrium among the contract parties, it may be unfair to totally disregard this extraordinary event and have the contract terms apply without any changes. At that point, the Turkish Code of Obligations allows the alignment of the contract with the changed circumstances through the "adaptation" tool, which aims to protect the parties against this disproportional burden.
According to the Turkish Code of Obligations, a party may request the adaptation if the unexpected event occurs after the execution of the contract and creates an excessive burden for the performance of the contract. It should also be checked if the party requesting the adaptation can reasonably be expected to foresee such change. If another person engaged in the same business could predict such adverse change and take necessary measures, the contract parties cannot request the adaptation for the same change. In addition, the party requesting the adaptation must not be negligent in the occurrence of such unexpected event and must not yet have performed its obligations or must have performed by reserving its right to request adaptation; adaption does not apply retrospectively. If all conditions are met for the adaptation, a party must request from the court to adapt the contract to the changed circumstances. The judge should check the parties' interests, the changed circumstances and whether the adaptation is possible. For some instances, adaption may even make the balance among the parties worse. If the core objective of maintaining the contract can no longer be reached, the court should consider revocation of the contract.
Nowadays, the question is whether any fluctuations in the exchange rates qualify as an extraordinary event for the adaptation of the contract. According to the precedents of the Court of Appeals, the answer is no, because it does not meet the essential criterion for the adaptation: unforeseeability. The Court of Appeals believes that the fluctuations in the foreign exchange rates are foreseeable events as economic crisis happen frequently in Turkey. It further states that if the parties conclude a contract involving transactions based on foreign currencies, they take the fluctuation risk in Turkey and should have taken the necessary precautions. This would mean that the Court of Appeals considers the instability as an ordinary and predictable feature of the Turkish economy.
But, is it realistic to foresee any sharp movements in the exchange rates? Given that the political and economic circumstances dramatically change almost daily both in Turkey and at international level, it may be unfair to normalize economic crises in Turkey and argue that everyone should take necessary precautions for these fluctuations. Even if this assumption of predictability is correct, the scope and the massiveness of the outcome may not be easily calculated in each case. Therefore, we believe that such sharp fluctuations should be considered as "unexpected events" and courts should intervene to adapt the contracts with these changes.
Without doubt, such intervention should be limited, and the adaptation tool should not be used as escape route from burdensome debts. The main rule is to honour the contract as it is, and the adaptation is only an exception provided by law to protect the balance against the extraordinary events. The goal should only be restoring the balance between the parties by maintaining the parties' will and interests and not implementing a totally different contract. Therefore, judges should prioritize each party's interests based on the objective criteria and every single dispute should be evaluated according to its merits. Otherwise, the intended goal with the adaption may not be achieved.
Sharp and serious fluctuations occurring nowadays in the exchange rates may re-spark debate on the adaption of contract and future court decisions would shape these discussions. If the Court of Appeals continue considering the volatility as an ordinary event, each contracting party should carefully evaluate taking necessary precautions before and lowering the risk of uncertainty before entering into a contract although future circumstances are not always foreseeable or convenient to address at the negotiation stage.
(This article was first published by Dünya Executive)
© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2017
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.