Economic impossibility in Turkish contract law from the perspective of law and economics

Abstract

We argue that the proposed introduction of the doctrine of economic impossibility in Article 137 of the reform draft of the Turkish Code of Obligations is in line with economic considerations and facilitates business transactions. This new rule gives courts the explicit power to terminate a contract and relieve the party, which owes specific performance of its obligation, without imposing any duty to pay expectation damages to the other party. We argue that a court's decision to terminate a contract under economic impossibility should be based on three tests. First, a low-probability-event occurs between contract formation and performance. Second, this event causes an excessive increase in the costs of specific performance. Third, the concept of an excessive increase should take into due consideration the other party's interest in specific performance. The reform draft includes explicitly the first two tests, but not the third test. We also show under which conditions an excessive performance difficulty should not lead to termination of the contract but rather to an adjustment of the agreed price. We argue that the rule of economic impossibility, if diligently adjudicated, saves the parties transactions costs in comparison to a rule under which the law insists on specific performance or damage payments. We also argue that a specific rule of economic impossibility leads to better and more business-oriented solutions to the underlying problems than the alternative, which is to solve such problems under the broad and unspecific cover of the "good faith" or the "Clausula Rebus Sic Stantibus" doctrine. © 2010 Springer Science+Business Media, LLC.