The Turkish economy, already stagnant for years, continues to suffer from a nearly decade-long depreciation of its currency, coupled with, more recently, the severe blow of Covid-191. Although present economic projections for the Turkey have improved – e.g., on 12 October 2021, the World Bank revised its projection of Turkey's gross domestic product for 2021 up to 8.5%, from 5%2 – Turkish dispute resolution practices, particularly when it comes to Covid-19, will be dealing with the fallout for years to come.

In the following we, ASC Law, address: (i) an important decision by the Turkish Court of Cassation, Turkey's highest appellate court, on the "adaptation" (i.e., revision) of contracts due to "hardship"; (ii) the increased ability for Turkish litigants to attend court hearings online, a change likely to survive Covid-19; (iii) the increase in disputes arising out of transactions now under economic stress, some, but not all, of which related to Covid-19; and (iv) surprising evidence Turkish assets are no perceived by foreign investors as under-priced and, indeed, of an expectation the Turkish economy is set for a rebound.    

  1. Defences to a Contractual Party's Inability to Perform
  1. The false promise of Force Majeure, and the more promising "Contractual Adaptation"

At the time Covid-19 took hold in Turkey in early 20203, much of the talk in Turkish legal sector revolved around the relief provided, or not, by force majeure, which the Turkish Court of Cassation, Turkey's highest appellate court, has narrowly defined as "an extraordinary event ... leading to a violation of the general norms of behaviour" between contractual parties which "could not be predicted or opposed". General Assembly of Civil Chambers of the Court of Cassation, Case No. 2017/90 Decision No. 2018/1259, dated 27 June 2018; Turkish Code of Obligations (No. 6098), Art. 136. The all of nothing nature of relief based on force majeure – for example, a total suspension of one party's obligation to perform, to the detriment of the other party – has proven the force majeure defence to non-performance to be chimerical, temping to pursue but rarely provided by the courts.

A more promising approach, in our, ASC Law's, experience, is contractual "adaptation", whereby a Turkish court, upon a finding of "hardship", has the discretion to "adapt" – i.e., revise – a contract, or even terminate it, if it concludes to do otherwise would "violate the rules of fairness". Turkish Code of Obligations (No. 6098), Art. 138. More particularly, Article 138, which came into force in 2012, defines the hardship required for contractual adaptation as one: (i) resulting from a "situation which is not foreseen by the parties at the time of the contract and which could not have been anticipated"; (ii) which "arises from a reason not due to" a party suffering the hardship; and (iii) which "changes the existing facts at the time ... in such a way as to violate the rules of fairness". If the existence of a hardship can be established, and the party suffering the hardship "has not yet fulfilled its obligations because of the extraordinary situation and the resulting difficulty of performance", that party "shall have the right to request ... adaptation of the contract to the new conditions" or, "if this is not possible", the contract's termination4.

  1. Significant recent decision by Turkey's highest appellate court, the Court of Cassation

Although the flood of cases brought seeking contractual adaptation are still working their way through the Turkish courts, a recent decision of Turkey's Court of Cassation is worth serious consideration. There, the high court was considering a "split" in the decisions of two Turkish Regional Courts of Appeal regarding the availability of interim injunctive relief – in lawsuits in which Covid-19-based adaptation of two leases has been sought – suspending or reducing the payment of the rent due under the leases until the trial courts' final decisions. On 4 June 2021, the Court of Cassation found both plaintiffs had satisfied the demanding requirements for obtaining such relief, including having made prima facie showings of a "high likelihood of success" on the merits of contractual adaptation requests. Court of Cassation, 3rd Civ. Chamber, Case No. 2021/3452, Decision No. 2021/6001, dated 4 June 20215.

  1. The "Split" decisions of the Turkish Regional Courts of Appeal

One of the two lower appellate court decisions being reviewed by the Court of Cassation, i.e., Bursa Regional Court of Appeal, 4th Civil Chamber, Case No. 2020/1596, Decision No. 2020/1499, involved the rental of space out of which the tenant operated a kindergarten. The tenant initiated a lawsuit seeking the adaptation of the amount of rent due under the lease based on allegations the tenant had suffered an 80-85% decrease in its business. Upon filing the lawsuit, the plaintiff tenant requested interim injunctive relief in the form of a suspension or reduction of rent due under the lease during the pendency of the proceedings6. The Bursa Court of First Instance granted the tenant's request and, on 14 December 2020, the Bursa Regional Court of Appeal affirmed the trial court's decision.

The other lower court decision being considered by the Court of Cassation, i.e., Ankara Regional Court of Appeal, 15th Civil Chamber, Case No. 2020/2164, Decision No.2021/50, also involved a lease, pursuant to which the tenant rented space out of which it operated a wedding hall. The tenant, like the tenant in the Bursa lawsuit, sought adaptation of the rent due under the lease, claiming it had lost 83% of its business due to the Pandemic. It too sought injunctive relief, whereby the rent payments would be suspended or reduced, until the time the trial court made its decision on the adaptation request. Unlike the Bursa Court of First Instance, however, the Ankara trial court denied the request, and the Ankara Regional Court of Appeal, on 12 January 2021, affirmed that denial.

  1. The Court of Cassation decision

The Court of Cassation, when considering the "disagreement between final decisions given in similar situations" by the lower appellate courts, concluded the requested interim injunctive relief should have been granted in both cases. As a result, the decisions of the Ankara Regional Court of Appeal, and the Ankara trial court, were reversed, and the decisions of the Bursa appellate and trial courts upheld. 

In its decision, the Court of Cassation first noted Turkish law's "commitment" to the principle of "freedom of contract", while also observing "Court of Cassation jurisprudence", predating Article 138, had recognized an "exception" to this principle. In particular, the Court of Cassation had previously recognized the availability of contractual adaptation based on "changing conditions" and "the collapse of the basis for the transaction". With the adoption of Article 138 in 2012, "adaptation, accepted in Court of Cassation practice before the [Turkish Code of Obligations], became an article of law".

The high court then turned to the issue before it, i.e., the availability of interim relief "to temporarily secure the legal interests of individuals ... until the dispute is resolved". The court pointed out the "purpose of the adaptation request[s] here is not the termination or reversion of the contract, but the maintenance of the contract". It then reasoned that "[i]f an interim injunction is not given in lawsuits filed with a request for adaptation, in some cases it may not be possible to keep the ... agreement in effect until the end of the lawsuit".

In this regard, the Court of Cassation observed "especially due to the direct effect of the pandemic and/or the administrative measures imposed for epidemic prevention" lessees who are "unable to pay their rents may be evicted" before "the conclusion of the adaptation lawsuit ...". The result, in such cases, is the "purpose" of the adaptation action, i.e., "keeping the intended contract alive", will "not be achieved" and obtaining a remedy of adaptation will become "impossible".

Based on this reasoning, the Court of Cassation concluded the decision of the Ankara Regional Court of Appeal, which upheld the trial court's rejection of the tenant's interim injunctive relief request, was "not appropriate". As such, the "disagreement between the final decisions of the Bursa Regional Court of Appeal ... and the Ankara Regional Court of Appeal" was "resolved within this framework".

  1. The Court of Cassation decision as precedent7

The Court of Cassation's decision can be cited for the narrow, and undoubtedly correct, proposition that a decision on a request for interim relief from the payment of amounts due under the contract sought to be adapted does not necessitate a decision on the merits by the trial court8. Instead, the trial court is only to consider, when reviewing a request for interim injunctive relief, is whether as a preliminary matter the requesting party has made a prima facie showing about its likely success on the merits. 

But the high court's decision would seem to have broader import, as it suggests the Pandemic, which has affected "the majority of the society", presents a nearly per se example of a hardship justifying contractual adaptation, provided the party seeking adaptation has suffered a significant loss of business undermining its ability to make payments due under the contract sought to be adapted. In this regard, the Court of Cassation does little more than set forth the requirements for adaptation found in Article 138, while engaging in almost no analysis on whether these requirements have been satisfied – other than to note the percentage of business lost by the two tenants, i.e., a 80-85% decrease in the tenant's kindergarten business in the Bursa case, and a 83% decrease in the tenant's wedding hall business in the Ankara case. At a minimum, the Court of Cassation decision is certainly strong authority to support requests for interim relief from payment obligations under the contract sought to be adapted.

  1. Increased Availability, and Use, of "Online" Court Hearings

Turkish law has provided for online hearings since 2011. See Turkish Code of Civ. Proc. (No. 6100), Art. 149 (came into force on 12 January 2011, and allows, provided all parties consent and the court approves, for hearings by "audio and video transmission"). Nevertheless, the use of online hearings was all but non-existent, at least in civil litigation, until the onset of the Covid-19 Pandemic.

Once the impact of COVID-19 began to be understood, Turkey's Ministry of Justice began to strongly encourage the use of online hearings, while greatly ramping up funding for the necessary technological upgrades. In addition, in July 2020 Article 149 of the Code of Civil Procedure was revised, doing away with the requirement that all parties must consent to use of online hearings while granting the courts the authority, ex officio, to order online hearings. Moreover, a pilot program was launched in September 2020, whereby online hearings were implemented in certain proceedings, starting with those before Turkey's consumer courts9. Finally, in June 2021, a "Regulation on Conducting Hearings via Voice and Visual Transmission in Civil Proceedings" was promulgated by Turkish Ministry of Justice.

All of these efforts notwithstanding, online hearings were still not widely used during the height of the Pandemic, and since then, primarily because the courts lacked adequate and widespread technological capabilities. These capabilities, however, have continued to improve across Turkey. In this regard, a recent press release by the Ministry of Justice claims, as of 9 November 2021, it is now possible to attend "E-Hearings" in 1400 courts in 81 provinces, including 518 in Istanbul and 236 in Ankara, and more than 36,000 such hearings have been held since just 15 September 2020. 

We, at ASC Law, believe that even with the decreasing seriousness of the risks posed by Covid-19, online hearings are here to stay. Given their increasingly popularity over the previous months, and the obvious efficiencies – including significant savings for both the courts and the parties before them – coupled with the Ministry of Justice's significant capital investment to upgrade the technological infrastructure, there is simply no going back to the days where all hearings, important or not, must be attended in person.

  1. Rise in Disputes tied to increased Economic Stress, including Stress related to Covid-19

Somewhat counterintuitively, at least for those unfamiliar with the ups and downs of dispute resolution work, the recent weaknesses in Turkey's economy, including increased Covid-19-related financial stress, have been something of a boon for many of the sizable Turkish dispute resolution practices. That has certainly been the case for ASC Law.

For example, disputes related to the economic downturn, such those related to the inability of some companies to service their debts or satisfy similar obligations, have been making their way to local courts and, when provided for in the underlying documentation, arbitration. Thus, many large transactions completed in the past – whether financing, M&A or project-related – have now, or soon will, come under serious economic stress. Several of the dispute matters we are involved with fall into this category, although to date most have been limited to assisting clients in their efforts at conciliation. We expect several of these disputes, however, to end up in the local courts or before arbitral fora.

With regard to increases in our other dispute resolution workload, ASC law has seen a significant increase in, among others, disputes related to often necessary downsizing, whether temporary (e.g., requiring employees to take unpaid leave) or long-term (e.g., outright dismissals). We have also been involved in numerous consultations, mostly with employers, related to the many temporary measures imposed, since the onset of the Covid-19 Pandemic, by Turkish government on our clients' "workplaces", such as requiring employers accommodate employees who desire to work from home, and the concomitant need for employers to provide these employees with sufficient, and secure, online access, while at the same providing for the protection of their personal data.

We have also seen a marked increase in disputes arising between the parties to commercial contracts, such as supply and distribution contracts, as well as leases, many of which parties, regardless of which side of the transaction they are on, have suffered severe cashflow problems as the result of businesses having lost customers and even, as has too often been the case, having to close their doors.

  1. Investment Activity related to Turkish Assets now being perceived as Undervalued

Although not in the business of making economic projections, we, at ASC Law – as do others – look for meaningful growth in the Turkish economy in 2021, which will likely continue, albeit more modestly, into 2022 and beyond. We believe a portion of this growth will be the knock-on, but important, effect of an anticipated surge, the beginnings of which we are starting to see, in foreign investment drawn in by now attractively-priced Turkish assets.

Interestingly, one of surprising early piece of evidence of this anticipated surge is provided by data pertaining to foreign persons seeking Turkish citizenship by way of acquiring Turkish assets.  For example, Turkish citizenship can be obtained through the purchase of real estate in Turkey with a value of at least US$250,000. See, e.g., Land Registry Law (No. 2644), Art. 35. Such "acquiring property and citizenship" applications have quite dramatically increased this year. By way of comparison, these types of applications totalled just over 9,000 during the two-and-one half-year period from 2018 through June 2020. But, according to unofficial, but we believe reliable, information, the number of applications for just the first nine months of 2021 is already in the vicinity of 15,000.

ASC Law is assisting several foreign clients with this "acquiring property and citizenship" process and, although somewhat anecdotal, many of our clients have seconded our opinion that this year's increase in citizenship applications is based on a belief the Turkish assets being purchased are undervalued, and the value of these assets, and indeed Turkey's broader economy, are poised for meaningful rebound.

Footnotes

1. In 2013, the Turkish Lira ("TL") traded at slightly less than 2 TL/US$1, but is now approaching 10 TL/US$1. Https://tradingeconomics.com/turkey/currency. During this same period, Turkey's per capita income dropped, according to World Bank, from its all-time high of US$12,615 in 2013, to only US$8,538 in 2020, close to a 33% decline. Https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020&locations=TR&start=2008.  

2. Turkey Overview: Development news, research, data | World Bank. When doing so, the World Bank observed "an easing of restrictions permitted by accelerated vaccinations, and supportive external demand led to double-digit GDP growth in the first half of 2021, returning the economy and employment rate to pre-crisis levels".

3. The World Health Organization, as early as 11 March 2020, had declared the spread of COVID-19 a Pandemic. WHO/Europe | Coronavirus disease (COVID-19) outbreak - WHO announces COVID-19 outbreak a pandemic.

4. The UNIDROIT Principles of International Commercial Contracts, a non-binding "restatement" of international contract law, provide for similar hardship-based relief at Article 6.2.2 and Article 6.2.3. The ICC has published a model "ICC Hardship Clause", which was updated in 2020 and is available in several languages, including Turkish. ICC-forcemajeure-hardship-clauses-march2020-tur.pdf (iccwbo.org).

5. In Turkey, when there is such a "split", i.e., where two or more decisions of the Turkish Regional Courts of Appeal are irreconcilable or in contradiction with one another, the Court of Cassation may be asked to step in to resolve this split. As was the case here, the split often involves decisions concerning the application of the same statute where the underlying facts are similar. Law on the Establishment, Duties and Powers of Courts of First Instance and Regional Courts of Appeal (No. 5235), Art. 35.

6. Their request was made pursuant to Article 389 of Code of Civil Procedure (No. 6100), which sets forth the grounds for interim injunctive relief.

7. The doctrine of stare decisis, pursuant to which certain decisions by appellate courts are deemed binding on the lower courts, does not exist in Turkey. Nevertheless, appellate court decisions, which other Turkish courts find, for example, to be persuasive and well-reasoned, can often be quite influential.

8. It appears the Ankara Regional Court of Appeal, according to the Court of Cassation, rejected the interim injunction request "on the grounds the decision cannot be made in a way that settles the merits of the case".

9. Turkish Courts of First Instance are organised by subject matter, and include civil, commercial, consumer, criminal, family, intellectual property and probate courts.

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.