Construction Arbitration: Türkiye - Part 1

Legal system

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

Turkey is a civil law jurisdiction like most continental law countries, deriving a large portion of its laws from European states. Turkey’s Commercial Code is derived from Germany; the Turkish Civil Code, Code of Obligations and Code of Civil Procedure are derived from Switzerland, while the Turkish Penal Code is derived from Italy.

The following instruments have legal force and effect: the Constitution, international treaties, laws or codes, decrees, by-laws and regulations, all of which are published in the Official Gazette.

As per article 87 of the Constitution, Turkish Grand National Assembly (the Parliament) has the power to enact, amend and repeal laws. By-laws and regulations, on the other hand, are made by administrative bodies. The President of the Republic may issue presidential decrees on matters regarding executive power.

Laws cannot be passed with a retroactive effect. In fact, as per the principle of non-retroactivity of laws, the codes are enacted in principle to be applied to events, transactions, and actions after the effective date, save for some exceptional cases such as the protection of vested rights and improvement in financial rights, which are required by the public interest and public order. (See: Decision of the Turkish Constitutional Court Lawsuit No. 2007/44; Decision No. 2009/148; Date of Decision: 15 October 2009.)

Contract formation

2. What are the requirements for a construction contract to be formed? When is a “letter of intent” from an employer to a contractor given contractual effect?

Turkish contract law places a great emphasis on the principle of freedom of contract and party autonomy. The first article of the Turkish Code of Obligations numbered 6098 (TCO) sets the basic requirement to form a legally binding contract: the mutual declaration of intention of the parties to form a contract. According to article 26 of the TCO, the parties are free to determine the content of a contract, subject to limitations set forth in the laws.

Construction contracts are classified as “Contracts for Work” in the Turkish law of obligations. In construc- tion contracts, one party (the contractor) undertakes to construct the work while the other party (the employer) undertakes to pay a price, (and sometimes provide materials and equipment) for such work. As a result, for a construction contract to be established, the contractor must undertake to construct a work, the employer must undertake to pay the price, and these mutual declarations of intent of the parties must be compatible with each other.

The letter of intent is a stage that emerges during the negotiation of the contract. By means of a letter of intent, the parties express their willingness to enter into a contractual agreement.

In the letter of intent, the parties set forth the purpose of the legal relationship, the desired results of the legal relationship,correct the undesirables, may specify the certain negotiated aspects of the contract such as the essential and agreed points, the details that have not yet been agreed upon, the involvement of third parties in the contract or the nature of these, if there is any benefit to be obtained from the contract.

A letter of intent, by nature, is a unilateral and non-binding statement of will and has no binding effect under Turkish law; in fact, it is only a tool for interpretation of the parties’ will regarding the contract that is intended to be entered. The contractual effect of a letter of intent would depend on its content; conduct of the parties, and the context of the relationship between the contractor and the employer. If the letter of intent contains clear and unambiguous terms, and the parties intend to be bound by those terms, it may be considered a valid and enforceable contract. If both parties start performing their obligations under the terms set forth in the letter of intent, it can indicate their intention to be bound by the contract. Turkish courts usually focus on the objective intent of the parties when determining whether a letter of intent creates a legally binding agreement.

Choice of laws, seat, arbitrator and language

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

In Turkish law, “freedom of contract” principle is adopted as the general rule. Therefore, in accordance with the general rule, the parties are free to choose all of the above. There are, however, some exceptions to this general rule.

In cases where there is a foreign element in a contract, then this contract is included in the scope of the Code of International Private and Civil Procedure (CIPCP) numbered 5718, and in accordance with its article 24(1), “The obligations arising from a contract are subject to the law explicitly chosen by the parties”, rules of Turkish law can be eliminated by choosing a foreign law in a contract.

Code No. 805 on “Compulsory use of the Turkish Language by Economic Enterprises” governs in its article 1 that “All types of companies and enterprises having Turkish origin, shall make all transactions, agree- ments and notifications, and keep records and ledgers within Turkey, in Turkish.” This code states that in the contracts where there is no foreign element, then the parties are not free to choose the language of the contract. As per its article 7, a punitive fine may be imposed to those acting contrary to the provisions of Code No. 805.

Implied terms

4. How might terms be implied into construction contracts? What terms might be implied?

The concept of “implied terms” does not exist under Turkish law. However, Turkish law contains certain statutory provisions that may imply terms in construction contracts. For example, the duty of good faith and fair dealing between the parties or the requirement of contractor’s performance with reasonable duty and care may be implied into the construction contracts. The areas where a party’s agreement remains silent is to be construed in line with the TCO and other relevant legislation.

Having said that, the TCO gives legal consequences to a party’s silence under certain circumstances, such as the explicit or implied acceptance of the works by the employer as per article 477 of the TCO.

Certifiers

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

Certifiers are not regulated under Turkish law. However, construction inspectors and building inspectors have the same role as a certifier.

The employer is obliged to enter into a contractual relationship with a building inspection firm for construc- tion projects.

According to article 31 of the Code of Public Procurement Contracts No. 4735 (CPPC) on the Responsibility of Building Inspectors, administrative officers who carry out the building inspection are jointly and severally liable with the contractor for the loss and damage arising from the lack of inspection due to the lack of super- vision and the failure to do the work in accordance with the rules of science and art, for a period of fifteen years. In addition, the provisions of article 28 of the CPPC, which regulates criminal liability, are applied to those officials.

As per article 4 of the General Specification for Construction Works (GSCW), the building inspection officer is an officer or a committee to be appointed by the Administration for the supervision of the works and/or the real or legal person or persons appointed to carry out these works from outside the administration.

Building inspection is required for the buildings specified in Code No. 4708 on Building Inspection. In accordance with article 31 of the Building Inspection Implementation Regulation issued for the implementa- tion of Code No. 4708, a building identity certificate is provided by the Ministry for buildings determined by the Ministry that are at the completion stage.

Competing causes of delay

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

There are no specific references to concurrent delay in Turkish law, nor there is a reference for an automatic extension of time If both the contractor and the employer have a concurrent delay, then the dispute arising from such delay must be resolved in accordance with the contract. However, if the contract is silent, then the concept of default under article 117 of the TCO may be applied by analogy.

The Turkish Supreme Court interprets this concept in line with the contributory fault under article 52 of the TCO, which stipulates that if the aggrieved party contributed to the occurrence or otherwise exacerbated the position of the party liable for it, then the judge may decrease or abolish the damages.

Consequently, the dispute would be handled in accordance with the facts of the case at hand, considering the contributory fault of the employer.

Disruption

7. How does the law view “disruption” to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

Disruption in construction means inefficiency in a contractor’s work. Apart from the delay, disruption can occur even when the project is completed on time. Turkish law generally treats disruption as a breach of contract. The contractor must show evidence that the progress of work has been disrupted, of which elements have been disrupted and where or when the damages occurred, the amount of additional cost and cause of disruption that constitutes a breach of contract.

Principally courts and tribunals have no additional duty to quantify the damages themselves. The parties may bring in experts or request the courts or arbitral tribunals to appoint an expert for this purpose.

Disruption claims are difficult to prove; the contractor must provide daily reports, photo documentation, any evidence that the sequence of works has been disrupted, etc.

Acceleration

8. How does the law view “constructive acceleration” (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

The concept of constructive acceleration is not recognised under Turkish law. However, the concept can be incorporated into a construction contract.

If the delay caused by the acceleration is attributable to the employer, then the employer is under the obligation to compensate damages according to the general provisions of the TCO. A claim for unreason- able conduct or bad faith will be interpreted as a violation of the contract, and the degree of fault reparation sought, therefore, and the degree of fault will be assessed.

Force majeure and hardship

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

TCO does not explicitly refer to cases of force majeure, the concept however is recognised under Turkish case law. Although it has not been defined in TCO, some of the provisions refer to the force majeure without defining it such as articles 228, 576, and 579. However, it is not possible to legally define the term “force majeure” with regard to construction contracts.

Force majeure has generally been used to refer to extraordinary situations that are not possible to avoid and that may prevent the performance of the contractual obligations.

Although the wording of the law does not specify the situations amounting to force majeure, the doctrine and the case law give a degree of guidance. There is a general definition that is accepted by both the doctrine and the relevant case law. According to this, a force majeure event is an extraordinary event that occurs outside of the responsible or debtor’s activity and operation, which leads to the violation of a general norm of behaviour or debt in an absolute and unavoidable manner, and which cannot be foreseen and resisted. This definition has been accepted by the Supreme Court (see: HGK., E. 2017/90 K. 2018/1259 T. 27.6.2018).

Pursuant to the precedence of the Supreme Court concerning force majeure, the existence of which is determined on a case-by-case basis, natural disasters such as earthquakes, flood, fire or epidemic are consid- ered within the scope of the concept. In accordance with the principle of freedom of contract, the parties to a contract are free to determine the events to be accepted as force majeure and the consequences thereof. The parties are free to allocate the respective risks in the contract due to unavoidable and unforeseen events.

The party that fails to fulfil its obligations due to force majeure may refer to the concept of hardship as per article 138 of the TCO.

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

In cases where the construction costs become excessive or commitments become extremely hard to perform, the contractor may invoke article 138 of TCO and argue hardship in performance and request adaptation of the contract from the court.

As per article 138 of the TCO, a party that has not performed his or her obligations at all, or has performed his or her obligations by reserving the right to seek this relief, may apply to the courts and request the adap- tation of the contract terms in view of the new circumstances if an extraordinary event, which was not and could not have been anticipated by the parties at the time of the contract occurs due to reasons not attribut- able to the party seeking relief, alters the conditions present at the time of the contract to the detriment of such party in so far that requesting performance of the contract will no longer be in good faith. If adaption is not available, the party seeking relief may terminate the contract.

Since the relevant norm is of complementary character, it is possible for the parties to agree otherwise within their contracts and bring negative adaptation records that decide the contract will survive despite changing conditions.

Impossibility

11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

According to article 136 of the TCO, if the fulfilment of an obligation becomes impossible to perform, due to reasons for which the debtor cannot be held responsible, the debtor in this case, the contractor, will not be held liable for its failure to fulfil such obligation. Nevertheless, the contractor here has the duty to notify the employer and mitigate the damage, otherwise it is obliged to remedy the damages arising therefrom.

The contractor, who is released from its commitments due to impossibility in performance of the contract, that attributes reciprocal debt, is obliged to return the consideration it received from the other party, as the consideration in question qualifies as unjust enrichment.

If the performance of the debt becomes partially impossible for reasons for which the debtor cannot be held responsible, the debtor gets rid of only the part of the debt that has become impossible. However, if this partialimpossibility of performance had been foreseen beforehand and if it was clear that such a contract would not have been made by the parties, the entire debt would come to an end. In contracts that impose a mutual obligation, if the debt of one party becomes partially impossible and the creditor consents to partial performance, the counter performance is performed at that rate. If the creditor does not consent to such a performance or the counter act is indivisible, the provisions of total impossibility shall be applied.