Exchange Rate Volatility Shakes Government Contractors up in Turkey

Government contracts are executed within the scope of public procurements by the government for varied purposes such as constructions, or procurement of goods or services by and between the relevant government agency and the awarded bidder. Except otherwise stipulated, the government contracts are regulated by and subject to the Public Procurement Contracts Law numbered 4735 (“Law №4735”).

While the monetary policies followed, interest rates and other factors affect the condition of the TRY and cause continuous fluctuations, the inflation is running at an annual rate of nearly 20%. It can be evaluated as that this is the biggest economic problem that the Turkish economy has experienced since 2001. Turkish lira’s plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults characterizes the financial and economic crisis in Turkey. The rapid shrink in the economy caused a great loss to people who do business with TRY. Therefore, businesspeople, who signed a government contract with the government, wonder whether the devaluation of the TRY over foreign exchange is deemed as force major or not.

The transactions in the public procurements are related to administrative law, and the implementation of the government contract is entirely related to the field of private law. On the other hand, since there is no superiority of one of the parties over the other in private law relations, the governmental entity and the contractor parties are in an equal position in the fulfillment of the contractual obligations in the contracts to which the governmental entities are a party. Also, it is understood from the provisions under the Law №4735 too that the implementation of government contracts is related to private law. As an example, in terms of the implementation of the government contracts, the fact that the provisions of the contract cannot be amended and an additional contract cannot be drawn up, except for the cases specified in Article 15 of the Law №4735.

Since the issue of amending government contracts is subject to disputes that are frequently seen in practice, the legislator limited the changes to be made within the framework of Article 15 of the Law №4735 to the place of work or delivery, provided that the administration and the contractor mutually agree, and the duration of the work, provided that the work is done or delivered before the deadline. In addition, it is required that as a result of the changes to be made in these matters, the contract price must not be exceeded. Moreover, as per Turkish legislation, government contract payments cannot be received other than TRY except for a few cases. If the relevant documents are issued in foreign currency, the monetary amounts in these documents would be changed into TRY based on the exchange rate of the Central Bank of the Republic of Turkey, on the date of the first announcement or invitation of the public tender. In this context, the obligation not to exceed the amount specified in the government contract may be deemed as a factor that puts the contractors in a difficult situation and cause loss when the economic conditions in Turkey are taken into account. With this respect, there are considerations that the fluctuations in the Turkey’s economy may affect the implementation of the government contracts due to force majeure.

With this respect, as per the article 10 of the Law №4735, natural disasters, lawful strikes, epidemics, partial and full mobilization, and other similar statutes are deemed as force majeure in government contracts. However, for these situations to be considered as force majeure, including for the extension of time, termination of the contract; it is obligatory that (i) the subject situation is not caused by a fault caused by the contractor, (ii) it prevents the fulfillment of the commitment, (iii) the contractor has not been able to remove this obstacle, (iv) the contractor must notify the administration in writing within twenty days following the date of the force majeure and (v) the situation requested to be deemed as force majeure must be documented by the competent authorities. Moreover, the existence of force majeure is to be determined by objective factors.

Accordingly, force majeure provides the opportunity for unilateral termination of the contract. In case the contract is terminated due to force majeure, its account would be liquidated following the general provisions and the performance guarantee and, if any, additional performance bonds would be refunded. Further, if any damage occurs due to the termination of the contract, the contractor would not be liable and would not face any indemnity, and deed obligations would terminate for both parties. In case of delay in performance as a result of force majeure, the delay-related consequences for the contractor would not apply during the period during which the force majeure is continuing.

Nevertheless, excessive price volatility is underinclusive of force majeure and the reason behind it is the risk in commerce is on the shoulders of the contractor. Under Turkish legislation, it is accepted that contractors need to foresee the excessive price volatility and be prudent about it. Thus, Public Procurement Authority does not accept the fluctuation in the currency as unpredictable for the contractors and does not give the right to terminate the government contract unilaterally. As per the Public Procurement Authority’s decision dated 07.11.2018 and numbered 2018/UY.II-1940 , regarding whether to accept it as force majeure within the framework of “other similar situations to be determined by the Public Procurement Authority when necessary” specified in Article 10 of the Law №4735, the claim of the applicant on this matter was not found appropriate, since it was understood that the preparation and programming works that would enable the contractor to be fulfilled per the government contract were not considered as force majeure, because it had to carry out the performance of the contractor by bearing the responsibility of a prudent merchant.

Consequently, contractors doing business with TRY under government contracts have to bear the consequences of fluctuations in the economy. However, this does not give power to contractors for the unilateral amendment or the termination of the government contracts due to force majeure according to the Public Procurement Authority. As per the Public Procurement Authority, the parties must be able to foresee and take precautions about the economic headwinds and therefore the condition of unpredictability, which needs to be present in force majeure is not met.

Simge Kılıç, Esra Temur, Zeynep Türe