28 Jun

Turkey-U.S relations has been tested for a while by the tension resulting from Turkey’s plan of acquisition S-400 missile systems (“S-400”) from Russia. As the delivery date of the S-400 approaches, the US’s tone has been intensified, and U.S. officials from different level of government has either threatened Turkey with CAATSA[1] sanctions or called their own government to leave Turkey out of F-35 Joint Strike Fighter Program (“F-35 Project”). All these messages, manifests, intimidations exchanged between parties, caused concerns as to the future of defense contracts for the defense industry players of both the US and Turkey.

Though the scope of the potential sanctions are not clear yet, it is highly likely that the US will take a step against Turkey, a NATO ally, to stop furthering its military co-operation with Russia by imposing either symbolic or harsh sanctions. The choice of the harshness level of the sanctions will be decided by the US, based on an analysis where it will weight all the potential consequences of  sanctions, ranging from alienating a strategic ally to conveying the message that military co-operation with Russia has no consequence for US allies.

Yet, macro effects of the sanctions are not clear, defense companies may have a clearer projectile for their own government defense contracts based on how their government contracts, in particular, how their contract’s force majeure clauses drafted. Below we examined, how each country’s defense companies may be exposed to the crisis and the legal arguments that they may have.

 Turkish and US Defense Companies’ Government Contracts

Historically, as a NATO ally, Turkey has preferred NATO countries, generally the US, as a supplier for its military needs. Consequently, the US origin supplies has the largest share in Turkish Armed Force’s (“TURAF”) inventory[2]. These US origin military equipment have been maintained by US origin, in some cases sole sourced, spare parts which acquired through either public procurements or direct supply procedures. Both the US and Turkish companies contract to supply this military equipment to the TURAF.

Potential sanctions may cause government contractors, both Turkish and US, not to be able to perform their contractual obligations where, as a result, they may face the risk of losing their letter of guarantees and/or debarment. In such a case, government contractors likely to argue that the sanctions constitutes force majeure, therefore the procurement authority should not take any administrative action against them. When the existence of the force majeure disputed by the government authority, the court bases its decision on both the Law on Public Procurement Contracts numbered 4735 and the government contract in question.

Public Procurement Law, Government Contracts, Force Majeure

The abovementioned scenario on the impossibility of performance would pave the way for the application of force majeure provisions in several cases.  The Law on Public Procurement Contracts numbered 4735 and dated 22.01.2002 (“Law”) stipulates provisions regarding force majeure. Pursuant to the Law, natural disasters, legal strikes, epidemics, the announcement of partial or general mobilization and other similar events that are determined as force majeure events by the Public Procurement Authority are deemed as force majeure.

For an event to be considered as a force majeure certain conditions shall be met. As per the Law, contractor should not be faulty; such event must constitute an obstacle in fulfilling the contractual obligations; the contractor is unable to remove such obstacle; and contractor must notify the contracting entity, in writing and with supporting documents, within twenty days as of the date which the force majeure occurred.

Whether or not an incident will be deemed as a force majeure must be evaluated case by case basis, as each contract may contain special provisions regarding force majeure. In practice, parties generally agree on more detailed force majeure clauses in their contract compared to the Law. In Turkey, disputes before the courts regarding force majeure are common.

Foreseeability and unavoidability are two prominent aspects force majeure with regards to the disputes before the courts. The defaulting party should prove that force majeure event were unforeseeable and unavoidable by any means. Nature of abovementioned aspects may vary depending on the parties to the government contracts. However, the principle of the prudent merchant must also be taken into account if one of the parties is a merchant as defined in the relevant legislation as the standards for unforeseeability and unavoidability are higher for the merchant party.

It should also be taken into account that government procurement contracts bear no differences from other private law contracts and civil law rules shall also apply to such contracts. This also can be observed in the Law as it refers to the Turkish Code of Obligations numbered 6098 and dated 04.02.2011 (“TCO”). Accordingly, provisions of the TCO may be applicable as a supplementary rules when necessary. TCO does not stipulate force majeure compared to the Law but prescribes the impossibility of performance which may be a result of a force majeure. The impossibility of performance may be legal or factual. A legal impossibility may be briefly defined as an impossibility to fulfill a contractual obligation because of an unexpected legal amendment or decision of a competent authority, and a factual impossibility may be summarized as an impossibility to fulfill a contract because of any factual reasons. Even though there are two different categorizations of impossibility, their legal consequences are the same.

In conclusion, both the Law’s force majeure and TCO’s impossibility of performance provisions shall be applied to the disputes with regards to the force majeure. As per the TCO, contractors may refer to the civil court for revision or termination of the contract due to the impossibility of performance. As a result of such rules, US sanctions may result in the liquidation of certain defense industry contracts depending on their potential effects notably on export/import regimes.

[1] CAATSA (Countering American Adversaries Through Sanctions Act), is a federal US Code that stipulates sanctions for certain acts including a significant transaction with the Russian Federation’s defense industry. Offset is an agreement that is used worldwide including Turkey, in many fields, especially defense industry. Offsets are generally used in order to receive some economic benefits when a large amounted procurement has been made from a foreign defense and aerospace company. Offset obligations are important for contractors since may reach really high financial degrees and continue for several years in most cases. In practice, Turkey uses offset agreements in order to provide a technological knowledge share between local companies and the foreign company that provide such supply.

[2]More detailed information on the topic can be accessed via: https://armedforces.eu/Turkey (accessed: 24.06.2019)

Authors: Şafak Herdem & Kaan Erdoğan

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