Turkey: State Of Emergency In Turkey: An Analysis Of Outcome For Contractual Relationships

Last Updated: 25 October 2016
Article by Şahin Ardiyok and Belit Polat

Turkey's Council of Ministers declared a three-month state of emergency (SOE) on 20 July 2016, in the aftermath of the coup attempt on 15 July 2016. The SOE, which was published in the Official Gazette and approved by the Turkish Parliament on 21 July 2016, was recently announced as extended by 90 days by the Council of Ministers. SOE is regulated under Article 119, 120 and 121 of the Turkish Constitution (Constitution) and State of Emergency Law no. 2935 (Law no. 2935).

The declaration of an SOE does not revoke, change or alter the implementation of current legislation; however, the Council of Ministers, meeting under the chairpersonship of the President, is entitled to issue decrees having the force of law on matters which relate to the SOE in order to ensure reestablishment of public order. This article aims to provide a snapshot reminder for selected implications of the SOE on those parties to contractual relationships. Considering the Fethullah Terrorist Organization (FETO) was linked with a variety of firms operating in a wide range of industries, the key is to shed light on the aftermath of the SOE and to remove any legal uncertainty on managing commercial procedures with the institutions or companies of FETO.

Since the initial declaration, the Council of Ministers issued several SOE decrees laying down a set of emergency measures affecting the business world and including various laws and regulations with the aim of improving the investment environment.

For instance, on July 23, 2016, the Council of Ministers issued the State of Emergency Decree Law no. 667 (Decree Law no. 667) and took measures concerning the institutions and organizations linked to FETO. According to the Decree Law no. 667, certain institutions and organizations linked to FETO including associations, charitable foundations and certain universities have been closed due to their link with the terror organisation, and their rights, receivables, assets and properties will be confiscated and transferred to the Treasury. The Council of Ministers also issued the Decree Law on Measures to be taken under the State of Emergency and Arrangements Made on Certain Institutions and Organizations no. 668 (Decree Law no. 668) on July 27, 2016, ordering the closure of agencies, television channels, radio stations, daily newspapers, magazines and publishing houses which were linked with the terrorist group.

The Council of Ministers further issued the Decree Law on the measures taken under the State of Emergency no. 670 (Decree Law no. 670) on August 17, 2016, which provided relief to the uncertainty of the aftermath of those transfers. Indeed, Decree Law no. 670 stated that those who have a claim with respect to the obligations and liabilities shall apply to the relevant administration with the ledgers, registers and documents that substantiate the conviction within the sixty days' period starting from the date of entry of the Law. With respect to the closure procedures, which shall be carried out subsequent to the date of entry of the Law, the sixty days' period shall start running from the date of closure. Thus, the procedures and principles concerning the assets, receivables and debts of those institutions and organizations are established and receivables of the bona fide third persons from the transferred institutions and organizations have been reserved in order to prevent any victimization in the legal relations and protect the financial order.

The Turkish Government continues to work on improving Turkey's financial situation and trying to incentivize foreign investors through passing new legislation and easing certain procedures. Indeed, with an effort to reach the long-term financial targets and ensuring uninterrupted continuance of commercial life, the Turkish Parliament adopted the Law on Supporting Investments on Project Basis and Amending Certain Laws and Decree Laws No. 6745 (Law no.6745) which was published in the Official Gazette on September 7, 2016. Pursuant to the Law no.6745, the Council of Ministers adopted various incentives to improve the business environment, such as customs tax exemption, income tax withholding support, support for project-based initiatives and carrying out infrastructure investments. Thus the Government aims to take precautions to mitigate the unforeseeable risks for investment projects and contractual relationships.

On the other hand, the SOE may cause impossibility of fulfillment of a contract due to impossibility of the enforcement of relevant clauses. As known, contracts and property rights may be cancelled in case these relate to public authorities, public economic undertakings or firms which are deemed to be related with the actors of the coup attempt. However, with respect to usual private law relationships or pending transactions, one of the questions of fact is whether those circumstances automatically give rise to the impossibility to fulfill related contracts. Yet, approvals, grants, permits and licenses issued by public authorities prior to SOE continue to be valid and binding with respect to the non-retroactive effect and protection of vested rights.

In general, several circumstances result in the impossibility to fulfill a contract, such as confiscation of bank accounts, appointment of a trustee to a contracting party, devaluation and high increase in exchange rates in foreign currency transactions or imprisonment of a debtor of a contract party etc. In contract law, the main principle of pacta sunt servanda prevails, and thus—although the conditions change—the parties have to exercise their acts resulting from a contract. However according to the Turkish Code of Obligations, in case of extraordinary situations, which are unpredictable and cannot be expected to be predicted at the time of execution of the contract due to reasons which are not attributable to the debtor, it may be possible to request the termination of a contract or request the Court for an adaptation. Moreover, in some circumstances non-fulfillment of obligations arising from the contracts due to the measures taken within the scope of the SOE may constitute impossibility of fulfilment, which may be considered as an occurrence of a force majeure event.

The term  force majeure refers unforeseeable and unavoidable conditions that are beyond control and that prevent the fulfillment of general obligations. In this respect, if the contractual obligations cannot be fulfilled due to SOE measures, this situation shall be deemed as a force majeure event due to impossibility to fulfill. In this case, in which the fulfilment of obligations becomes impossible due to the occurrence of a force majeure event, the debtor might be discharged from its obligations or a delay regarding the performance of the obligations might occur until the end of the SOE period.

The SOE may pose problems in relation to a force majeure or impossibility of fulfilment of the debts resulting from contracts such as contracts of sale, construction, services, employment, etc. A remarkable point worth noting is that it should be determined within a dispute whether the occurrence of impossibility of fulfillment arises from the measures taken within the scope of SOE or not. This is mainly because an SOE does not directly constitute an event of impossibility of fulfillment. Indeed, in order for such situations to result in impossibility of fulfillment, proper justifications that cause impossible performance resulting from the SOE shall be in question; such as garnishment of parties' bank accounts, appointment of a trustee, or arrest of a person.

As a matter of principle, some contracts may have an SOE as a force majeure event; however, when that is not the case, how the courts will interpret the impact of the SOE on ongoing contractual obligations is yet to be seen. In general, the Supreme Court may accept reasons such as a change in the economic conditions, high devaluation, and monetary depreciation as reasons for impossibility of fulfillment, based on case-specific analysis. Indeed, the Turkish Supreme Court's former practice varies in relation to exceptional circumstances, yet the Courts' main criteria would be the evaluation of the "timing". For instance, in case SOE is declared during the contract negotiations between the parties, it should be accepted that SOE cannot be deemed as a force majeure event as the parties of the contract is aware of the situation. With respect to pending transactions, depending on the drafting of these provisions, careful consideration on the termination clauses might be significantly vital for the parties of such contractual relationships. In case fulfillment of obligations, which arise from contracts that were signed prior to the declaration of SOE, becomes impossible and if the debtor is not faulty, the obligation may not be regarded as violated thus the debtor might not be responsible. However, in case the debtor is faulty—unless proven otherwise—the debtor might be fully responsible for the damage.

Another discussion, on whether SOE constitutes a valid reason for a termination of a contract, might be the change in the control of the contracting party. Indeed, several private law contracts include clauses on changes in ownership or amendment in shareholding structure of the contracting party in order to regulate post-merger situation of the existing contractual relationship. Thus, regardless of on which side of a contract you might be, a careful consideration shall be beneficial for the parties in order to discuss whether a change in control (such as an appointment of a trustee) eventually results in a right for termination.

Indeed, the Decree Law on the measures taken under the State of Emergency no. 674 (Decree Law no. 674) on September 1, 2016, stipulates that the authorities of trustees who were appointed to the companies on the grounds of their membership, coherence or relation to terrorist organizations will be transferred to the Saving Deposits Insurance Fund (TMSF or "Fund" which is an independent administrative authority and assigned to financially fight terrorist organizations and provide uniformity in the acts of trustees) by a judge or court, and the task of trustees will end in accordance with the Code of Criminal Procedure Law No. 5271. Based on the Decree Law no. 674, the authorities of trustees were transferred to the TMSF and thus the trustees will be in charge until transfer transactions are finalized.

As a general note, we should summarize two possible options regarding the scope of the power inferred to the trustee. The first option is to subject the decisions of the managing body to the approval of the trustee, in which case the trustee has supervisory powers. The official executive board continues its daily activities however the decisions taken by the board or transactions to be concluded with third parties are submitted to the approval of the trustee. Second option is to transfer the authority to manage and control to the trustee in which case the trustee has full managing powers. Power inferred to the TMSF can be identified as managing trustee since the Fund appoints a new executive board to companies transferred. The managing competence of the executive board and the duties and powers of the board members cease to exist. The executive board is not able to take decisions or conduct transactions even with the approval of the trustee. In this case as well, present relations continue to exist until the termination of the contract. The trustee, acting as the managing body however, can decide on the termination of the contract in which case such relation will cease to exist. These being said, as per the Decree Law no. 674 the TMSF is additionally entrusted with the authority to sell or liquidate the companies. In this respect, TMSF, as of the day of appointment, acts as the managing body of those companies.

The legal status of a company transferred to the TMSF or a company that falls within the scope of the Decree Law no. 674 is similar to the status of a company which has been appointed a trustee, since the management and control of the company is executed by the Fund. Furthermore, where the TMSF establishes that the current financial situation of the relevant companies is not sustainable, it shall be entitled to decide that those companies be sold, liquidated or their assets be sold. The Decree Law no. 674 stipulates that the TMSF is authorized to decide to sell or abolish companies or their assets if they are found to be unable to maintain their existing situation because of financial conditions, partnership structures or market conditions. In terms of the sale of sustainable companies, acquisition transactions are conducted. Such transaction includes both assets and liabilities of the company. Liquidation conducted by the Fund is not subject to the provisions of the Bankruptcy and Enforcement Law or the Turkish Commercial Code. The company, upon declaration of the liquidation committee, is deleted from the Trade Registry without further requirements.

It is important to note that, in the event that it is decided that assets of a company be sold via their commercial and economic entirety, the TMSF shall be entitled to pay off the debts belonging to the previous periods out of the tender price or make the tender winner pay them off on the condition that those debts were incurred by virtue of an actual asset or service relation between that company and persons who had no membership, affiliation or connection to FETO.

On the other hand, SOE may have sectoral impacts as both the Law no. 2935 and sectoral regulations may contain sector-specific measures. For instance, the Law no. 2935 stipulates that it is possible to requisite and control production, sale and distribution of essential supplies of food or even closing of workplaces, having regard to the events which necessitated the declaration of the SOE. Another example might be the Petroleum Market Law no. 5015 which requires companies to keep petroleum stocks in a certain amount calculated by the previous year's average daily consumption in order to sustain market continuation, preventing risks in crisis or extraordinary cases and fulfillment of liabilities as a requirement of international agreements.

Consequently, attention should be paid to the relevant legislation, regulations and their practice, as the conditions are evaluated on a separate basis according to the aspects of each case. It is advisable for both parties of a contractual relationship to follow potential impacts of SOE and legislation, take necessary legal precautions and discuss relevant options of possibilities or rights to rely on favorable measures.

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.

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Şahin Ardiyok
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