AUTOMATIC TERMINATION CLAUSES UNDER TURKISH LAW
With the increase of electricity trading volume in Turkey, market players tend to use standardized trading contracts which are widely used in Continental Europe1. Along with such agreements, new risk management systems are introduced into Turkish legal market.
These kinds of contracts include, risk management provisions regulating bankruptcy case of one of the contract parties. Accordingly, in the event a bankruptcy procedure is initiated against one of the contract parties, the contract shall be terminated automatically without need of a notification2.
The validity of these automatic termination provisions are not analysed in accordance with Turkish law. This paper aims to examine validity of such provisions from a general perspective.
Freedom of Contract
In accordance with Article 26 of Turkish Code of Obligation, the parties of a contract are free to determine to conclude a contract and to determine the content of the contract. In other words parties of contract are free to structure their contracts provided that the mandatory ordre public rules are regarded, the contract does not violate any personal rights or the subject of the contract is not impossible. The law defines contracts, which do not regard these limits, as null and void.
Under the light of the foregoing, contracts structured in accordance with free will of the parties and which do not breach limitations determined under Article 26 of Turkish Code of Obligations are valid contracts. This should also mean provisions regarding automatic termination in case of bankruptcy should also be valid contract provisions.
However, in case of bankruptcy, disposal rights of the bankrupt entity on all of its assets will be transferred to the bankruptcy estate. Therefore whether automatic termination provisions are valid or not must be analysed in accordance with the Turkish Enforcement and Bankruptcy Law.
1 European Federation of Energy Traders (“EFET”) General Agreement Concerning the Acceptance and Delivery of Electricity
2 EFET General Agreement Clause 10.
Since electricity trading agreements can be categorized as sale agreements, Article 98 of Turkish Code of Obligations will also be applicable. Article 98 sets forth that under synalagmatic contracts if one of the contract parties are not able to fulfil its obligations under the contract, especially if it is bankrupt, other party is entitled to request guarantee for the fulfilment of the obligations. Otherwise this party can abstain from fulfilling its obligations. This will be analysed below.
Effects of Bankruptcy on Contacts
Some contracts listed under diverse legal regulations are terminated automatically with the bankruptcy of one of the contract parties. Ordinary partnership agreements and running account agreements are examples of such agreements.
In principle, bankruptcy does not have an effect on sale agreements. In other words, sale agreements (i.e. electricity trading agreements) do not terminate automatically if one of the parties goes bankrupt. However, depending on the fulfilment of obligations of the parties, there will be different outcomes. The subject has to be analysed under various presumptions.
Under specific circumstances, the non-bankrupt party is entitled to request the fulfilment of the contract. For example, in the event of bankruptcy if the price under a sale contract has been paid but the contract subject is not delivered, the buyer can request the price from the bankruptcy estate as bankruptcy receivable. However, if the bankruptcy administration is of the opinion that the contract is in favour of the bankruptcy estate the administration is entitled to opt to fulfil the contract.
If under a sale agreement none of the parties fulfilled their obligations, the buyer can request warranty shows that the seller can perform its obligations under the contract in accordance with Article 98 of Turkish Code of Obligations. If not, the buyer can refrain from paying the price. In this case if the bankruptcy administration does not provide guarantee, the nonbankrupt party can renege on the contract. If the bankruptcy submits a guarantee, the parties shall fulfil their obligations under the contract.
Furthermore Article 198 of the Enforcement and Bankruptcy Law entitles the bankruptcy administration to specific performance. If the bankruptcy administration determines the contract as in favour of the estate, it is entitled to perform the contract3.
Thus, under Turkish law bankruptcy administration has a cherry picking right over the contracts, if it is of the opinion that the contract in question is in favour of the bankruptcy estate.
Cherry Picking Right of the Bankruptcy Administration
As summarized above, under Turkish law the bankruptcy administration has cherry picking right with regards to the contracts that the bankrupt entity is a party of4. Under these circumstances, it can be argued that automatic termination clauses in sale agreements are circumventing the cherry picking right of the bankruptcy administration.
In fact, the German Federal Court Decision mentioned below ruled the same.
3 Baki Kuru, İcra ve İflas Hukuku p. 1245
4 Article 198 of Turkish Enforcement and Insolvency Law
German Federal Court Decision
On 15 November 2012 the German Federal Court analysed in its decision numbered IX ZR 169/115 whether automatic termination clauses in the event of a bankruptcy in sale contracts are valid or not. The contract subject to the decision is regarding delivery of energy.
With its decision the Court ruled that such automatic termination clauses abrogate the cherry picking right of the bankruptcy administration regulated under Article 103 of German Insolvency Law (Insolvenzordnung) and are therefore invalid6.
In accordance with German Insolvency Law Article 119, agreements violating Articles 103 – 108 of the Law are null and void. Thus agreements, abrogating/limiting the application of Article 103 are null and void in accordance with Article 119.
As mentioned several times above, the bank administration has cherry picking right in accordance with Article 198 of Enforcement and Bankruptcy Law. Depending on the status of the obligations of the parties, contract party which shall fulfil its obligation is entitled to request warranty from the bankruptcy administration. Other than this, the parties shall fulfil its obligations. Thus under Turkish law, sale contracts are not terminated automatically in the event of a bankruptcy.
Whether such automatic termination clauses are valid under Turkish law are not tested before Turkish courts. Taking the similarities between Turkish and German insolvency rules we are of the opinion that Turkish courts may rule in the same direction regarding validity of these contract provisions.