COVID-19: Defense Contracts in Turkey and Force Majeure28 March, 2020
Following the World Health Organization (WHO) has declared COVID-19 a worldwide pandemic which basically refers to an increased overall risk to the population and due to alarming and ongoing spread of COVID-19 there has been dramatic drop in global demand for raw materials and spending globally. Such effects started to ripple through the supply chains which can be observed in various industries declared suspension of production recently. There seems to be no question that layoffs will follow and such an overall decline in some weak economies will led to governments in turn cut spending and step in with fiscal stimulus. A supply impact, by contrast, is also something like an impossibility of performance from contractors’ perspective in aerospace and defense industries since robustness and productional sustainability are of notable concerns to them.
In the face of a pure shock many governments have stepped up various measures intended to bolster their economies. For the first time in Turkey, we witness government really need to declare or redefine force majeure in civil contracts as part of its remedy and relief packages and with this exceptional resolve approach in an extraordinary time cannot hear what law says in this respect.
No question that government should do their best to ride the impacts out and to prevent financial crashes edging towards the effects and results of COVID-19 becomes clearer. However, it is unlikely to be the end of the story in defense contracts since contractors are subject to series of other legal requirements to notify and verify force majeure in Turkey. This article addresses some controversial issues aiming to give contractors in Turkish defense industry a better understanding of legal challenges they may face even in pandemic conditions and recounts the salient points which contractors should pay attention.
Operational Sustainability in Aerospace and Defense Manufacturing in the Wake of Pandemic
In U.S., most of the companies announced their intention to continue their operations by implementing additional measures to cope with the pandemic. Boeing stated that except for the employees who are able to work remotely during the pandemic; the production and fabrication on the KC-46, F-15, F/A-18, and T-7 will partially or fully continue, with enhanced hygiene on the production department in accordance with government and Center of Disease Control’s guidelines. However, while some work can be done remotely, some operations such as assembling the planes and some components requires work to be conducted on-field.
In addition, Lockheed Martin, Fincantieri, Oshkosh Defense and Northrop Grumman directed employees with potential exposure to the virus to work remotely. These companies also took measures such as pre-screening visitors and allowing only those who are necessary for business to enter the company locations. BAE Systems, General Dynamics Land Systems, GD Electric Boat, Huntington Ingalls Industries addressed that they are confident that the services will continue as they have not experienced production delays thanks to the implementation of precautions to keep workforces safe and the situation is under constant review as evolves. Similarly, Italy’s leading aerospace and defense company Leonardo announced activation of an extraordinary insurance coverage for the management of a possible COVID-19 infection for all its employees while the company remains operating.
In Turkey, while some companies such as Otokar Otomotiv ve Savunma Sanayi A.Ş. informed the Public Disclosure Platform regarding the suspension of its production activities for 14 days beginning from March 25, 2020 due to encountered disruption of supply and delivery process from European countries as a result of measures taken against coronavirus; others like Aselsan announced continuity of its production and design operations uninterruptedly.
Key findings of the above statements can be summarized as; (i) Defense manufacturers somehow continue to operate in general, (ii) No plans have been announced for stop of work, (iii) Some big-ticket companies clearly stated that they have not experienced production delays, (iv)Big-ticket companies generally do not require to refer to global supply chain and cost increases.
Governments’ Policies Announced
Putting aside the common understanding that defense contracts are highly subject to authoritative guidelines of governments, we, as legal practitioners in this area experienced that this still-evolving discipline requires to gather further information in reaction to highly possible effects both from government bodies and civil law. In that sense lawyers and contract managers should give serious consideration to legal underpinning and where their government and buyer country’s government stand in such disrupted conditions.
U.S. government announced a “memorandum” on March 20, 2020 for defense industrial base which states that the defense industrial base is a critical part of USA’s infrastructure; and guides the defense industry to ensure the continuity of their functions critical to public health and safety as well as economic and national security. The memorandum indicated that the employees who work in the critical infrastructure industry are expected to maintain their normal work schedule as they follow the guidance of Center of Disease Control. Additionally, Defense Department spokesman Lt. Col. Mike Andrews stated that Pentagon will raise progress payments to improve company cash flows, accelerate payments to prime contractors and start an emergency loan program with Small Business Administration for smaller contractors to mitigate impacts of the pandemic while assuring currently there is no major disruption to the supply chain due to the virus.
Italy, being one of the most affected countries from the COVID-19 pandemic, has adopted some intensive measures to wipe off the effects. With the Prime Minister’s Decree of March 22, 2020; all industrial and commercial activities are suspended except of the ones deemed vital for national production including aerospace and defense industries as well as other activities which has a strategical importance to national economy. Such industries will be able to continue with their production after getting an authorization from the Prefect of the province in which the activity is located.
Although Turkey has also announced several measures intended to limit the economic impact of COVID-10 there has been no precaution announced yet having specific focus on government contracts and particularly measures aiming to protect the defense contractors to apply force majeure in their contracts.
Pay the Most Attention to Your Defense Contract in Turkey
The defense contractors have grappled for years with clauses of certain defense contracts that some of those were drafted substantially inconsistent with general principles of contracts law. Giving an example that a clause that purports to claim force majeure in most cases is subject to acceptance of the authority unlike the commercial contracts. The similar can be said for impossibility of performance that would not always fall under force majeure in Turkish law. For some, such clauses entirely by law and not subject to negotiation. It is important to note that, this highly relates to misperception of dynamics and legal structure of defense contracts to be construed as commercial contract in case of any dispute but knowing all those details are not enough to prevent the disputes and the situation became more complex after COVID-19 pandemic.
One of the biggest concerns regarding COVID-19 impacts on business seems to be nonfulfillment of contractual obligations but this is not ‘as is’ and that simple to throat in defense industries. No doubt that, in case the current situation shall not be healed in the near future, it is likely to encounter long term challenges such as debarment and financial burden of penalties in conjunction with the force majeure provisions in defense contracts. Let us clarify why:
Public Procurement Contracts Law of Turkey (“Law No. 4735”) clearly states that epidemic cases, besides of natural disasters, legal strikes and announcement of partial or general mobilization may be considered as force majeure. Law No 4735 also allows administrations to stipulate additional force majeure conditions in the contracts if deemed necessary.
It seems that the definition and criterion is so far so enough, since the law explicitly refers to the term of “epidemic cases” and the COVID-19 pandemic may be argued in this regard. Interpretation is 100% correct but does not constitute the all since Law No. 4735 also sets further criteria for the assessment of force majeure.
One of the criteria is that the concerned case shall not arise from the contractor’s fault and be foreseeable. It is quite obvious that the occurrence of an epidemic case is neither a fault nor foreseeable, but it is responsibility of a contractor. The consequences of COVID-19 could be avoided by reasonable measures and performance of the defense contract might be possible. In this regard it is strictly suggested for defense contractors who may experience hardship while performing their contractual obligation in relation to the COVID-19 pandemic to act as a prudent merchant by applying possible measures with the aim of preventing or at least minimizing the risk that may arise considering the fact that the ‘prudent merchant principle’ is applicable to contracts interpreted, construed and governed in accordance with Turkish law. In many cases we have experienced that Turkish courts are generally unfamiliar with the dynamics of the defense industry; this mostly concludes with determinations in experts’ reports which is challenging as they may approach this principle quite widely in their reports.
Another point is that, Law No 4735 also requires force majeure to be notified within twenty days of occurrence with submission of supporting documents issued by competent authorities. Referring to the governments’ approaches and statements of companies stated above, satisfying the elements of a force majeure claim due to supply chain, government authorizations, layoffs, stop of work and similar operational issues could not be possible for many reasons in the wake of the COVID-19 pandemic. Even in ordinary course of defense contract, it is obviously difficult to obtain a supporting document by a competent authority stating the contractor cannot continue to perform its obligations due to any reason beyond its control and submit it within twenty days of occurrence of force majeure as required by Law No 4735. It gets much more impractical to persuade a government administration that is party to defense contract to accept force majeure claims due to those aforesaid reasons, in a situation that both the government where the defense contractor is registered has clearly announced production will continue and the contractors emphasized afore-said key findings on their releases.
These basic principles of ‘impracticality’ and ‘force majeure as a provision’ sometimes becomes more and more chaotic when background and foreground of incidents are not inconsistent with each other to claim force majeure. Unlike the commercial contracts, defense contracts are highly regulated and have several elements inherent in the defense industry. Many of those are awarded following a long decision process in consideration of need, priorities and budget allocation and determination of a possible liability and obligation is not always foreseeable for many reasons. However, this does not help us to relieve the defense contractors to manage their responsibilities even in pandemic conditions.
We have experienced similar situations where this constituted the hugely important part of a dispute in a litigation and strictly suggest defense contractors to seek clarification from legal counsels if unsure about the possible claims of force majeure conditions in defense contracts in Turkey.
Author: Şafak Herdem