Tackling Force Majeure in Defense Contracts in Turkey13 July, 2020
There are pitfalls inherent in reaching out to a decision regarding contract suspension and termination in defense contracts in Turkey. 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. It is important to note that this highly relates to misunderstanding of dynamics and legal structure of defense contracts to be construed as commercial contract in case of any dispute.
In general, a force majeure refers that, in case, performance obligations of an obligor become impossible to perform due to reasons not caused by obligor’s acts or omissions, performance obligations of the obligor terminate. In contracts where performance obligations are mutual, the obligor shall return any rendered performance to the other party in accordance with the unjust enrichment principles. Limited to this purpose, in cases where parties are obliged to compensate any damage occurred prior to the impossibility of performance by law or a contract are excluded. The law entitles the obligor to petition for judicial modification or, if judicial modification is not applicable, termination of a contract, in case: i) an unforeseeable event occurs not caused by any act or omission of obligor; ii) the unforeseeable event renders the obligor’s performance excessively prejudicial to the obligor; iii) obligor have not performed its obligations yet or performed by reserving its rights arising from impossibility of performance. The law also requires obligor to notify impossibility of performance to the obligee in a reasonable time and shall take all necessary measures to mitigate damages, otherwise obligor shall compensate the damages caused by incompliance with this article. Another issue is that in contracts where performance obligations are mutual, obligee is entitled to reduce its own performance proportionate to the performance obligations rendered impossible.
In government contracts law perspective the authority which is party to the government contract may recognize similar circumstances in case such circumstances have the following aspects; a) The incident did not arise out of contracting parties’ commitment or omission, ; b) The incident constitutes an obstacle in fulfilling the contractual obligations; c) The contractor could not afford to remove such obstacle ; d) The contractor has notified the contracting entity in writing within twenty days as of the date which the force majeure has occurred; e) The incident has been documented / certified by competent authorities. No question that the incident shall be unforeseeable and unavoidable in this respect.
Subcontracting and Force Majeure
Supply of work and services for performance of a government contract is not always a subcontracting on legal grounds. From government contracts perspective the authorities require to approve the subcontractors when a subcontractor is officially designated by means of government contracts law. However, in cases where the prime contractors enter to an agreement with third party independent contractor for works and services fall under the government contract, the tendency of the prime contractors in most cases is to reflect all terms and conditions to the contract by and between itself and the third party independent contractor. This is hardly a situation which third party independent suppliers are likely to accept, not is it in the long run in the interest of the authorities. There seems more inconsistency for acceptance of ‘practically not applicable’ conditions by the independent contractor as those are not bound with the provisions of law related to force majeure in government contracts.
Admittedly, the authorities cannot expect the prime contractor and third-party independent contractor that there will be a back to back agreement by and between those which contain all clauses of the defense contract. There should be some certain changes especially in intellectual property ownership and technical issues including but not limited to compatibility and etc. Which should be pursued to long negotiations between prime contractor and independent third-party contractor. As with many other issues of the government contracts, a foreign defense independent contractor is highly suggested to review the intellectual property expectations with details. In many government contracts, the authority requires clauses that all intellectual property of works and services regarding the subject matter of the defense contract should be owned by the government which is not reasonable as this also refers or may likely involve technology transfer issues. Under such a clause, an acceptance by a foreign defense contractor is not only an acceptance of a simple clause. For the sake of an example; authority needs prime contractor (shipyard) to build a component of a ship and the shipyard enters to an independent contract with a foreign company to supply some parts of those component. The government contract by and between the authority and the shipyard requires all intellectual property rights of the component should belong to authority and the force majeure should be notified within twenty days with documentary proof. The shipyard reflects all those conditions to the contract with itself and foreign defense contractors and foreign defense contract accepts as it is. In such a case; the foreign defense contractor commits to transfer its intellectual property rights to shipyard with the ultimate beneficiary of government authority rather than selling a product and should have a documentary proof to assert force majeure claims which are subject to acceptance. This never works in commercial contracts!
Conditions Precedent or Conditions Subsequent
There are few subjects that needs to be more extensively analyzed than the wording of force majeure in defense contracts. We have experienced in many cases that export licenses or reselling authorizations of a sole source company were at the center of legal discussions with respect to force majeure in litigation. Clearly, whether an authority or defense contractor enters into a defense acquisition contract on assumption of that there is no legal restriction to supply the work or service subject to the contract. However, in some cases a global framework of rules and developments on the export control has impact on the defense contracts and the contractors may expect more flexibility for the conditions restricting themselves to sell to the government and further changes in a continuously shifting environment. Turkish Supreme Court addresses the term ‘prudent merchant’ in many cases where ended with litigation. The rulings are extremely unlikely that independent contractors have reasonable ground to foresee such restrictions. In addition, in some cases, the rulings refer that assertation of force majeure in this nature has no legal ground as those constitute the conditions precedent or conditions subsequent in long term supply contracts rather than force majeure.
Several strategies shall be discussed in order to mitigate the risk associated with force majeure in defense contracts. Although the best-fit does not meet the commercial practical expectations in all cases validly exercisable rights on contracts always offers a safe zone for legal remedies.