Construction Arbitration: Türkiye - Part 2

Clauses that seek to pass risks to the contractor for matters it cannot foresee or control

12. How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer’s requirements in design and build forms?

In principle, the parties to a construction contract are free to specify certain risks, which include force majeure, responsibility from the ground conditions and errors in project documents.

If the contract is silent on these matters, then article 114 of the TCO can be applied to the liability and reparation. As per article 114 of the TCO, the debtor is liable for all defects and the scope of the debtor’s liability is determined according to the specific nature of its commitments and will be shaped by the common will of the parties.

If the materials, ground conditions (the land) and the project document provided by the employer has errors OR are defective, then the employer cannot claim any rights against the contractor due to the defects that arose from these. Nevertheless, the contractor has a duty to inspect and notify the employer as soon as becoming aware of the defective materials or unsuitable ground conditions.

Article 472(3) of the TCO expressly stipulates that if it is understood that the materials provided by the employer or the land or site conditions are defective, then the contractor must immediately notify the employer, otherwise the contractor will be liable.

“Immediate” means that the defect is notified to the employer “without delay” by the contractor at a time that allows the defect to be corrected at no additional cost to the employer or with the least possible impact.

Duty to warn

13. When must the contractor warn the employer of an error in a design provided by the employer?

Article 471(2) of the TCO provides that the extent of duty of care owed by the contractor is determined by taking due account of the behaviour demonstrated by compliance with the occupational and technical rules of a prudent contractor who undertakes similar works.

Article 472(3) of the TCO, the provision regarding the materials, requires an immediate warning to be issued by the contractor, which can also be applied to design that was provided by the employer.

Precedence sets forth that if, after being notified by the contractor that the plans, design or project is not in compliance with the purpose of the project or is erroneous, the employer instructs the contractor to proceed with the erroneous design, then the employer must bear the damages that might arise from the implementa- tion of such erroneous design (Turkish Supreme Court, 15th HD, 22.04.1991 T 4761 E. 1956 K).

Good faith

14. Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

The principle of good faith is an established general principle of Turkish law, whereas good faith performance or enforcement of a contract emphasises faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. The principle of good faith is codified under articles 2 and 3 of the Turkish Civil Code (TCC), pursuant to which parties “shall act in accordance with the principle of good faith when exercising their rights and performing their contractual obligations, and that an explicit abuse of right shall not be protected under the law”.

As per article 473(2) of the TCO, the employer may interfere with the work if it is understood that, due to the fault of the contractor, the work will be defective, or not in accordance with the construction contract. In these cases, the employer shall give the contractor additional time to remedy the defective work and take the necessary measures; if the contractor does not remedy these defects within the given additional time, and provided that the employer gives the contractor, then the employer has the right to have another contractor remedy the defects or continue the work.

The right to termination for convenience is regulated under article 484 of the TCO, although it is a right recognised within the statute, its exercise shall be made in line with the principle of good faith.

Regarding pre-agreed sums, Turkish courts have the right to reduce liquidated damage amounts as per the good-faith principle.

Time bars

15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 (“otherwise in connection with the contract”)? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

If the parties decide on a notification regime for their claims in their construction contract, failure to comply with these notification requirements does not automatically preclude the claim from being successful. There is no statutory provision yielding respondent the right to file a procedural objection to a claim solely on grounds that the contractual notification scheme has been violated.

As per article 116 of the Code of Civil Procedure No. 6100 preliminary objections, a respondent may raise are limited to objection on grounds of arbitration, jurisdiction and division of work.

The limitation period under Turkish law commences on the first date on which a notification is admissible. The limitation period is a defence tool that precludes the right to be claimed. As per article 152 of the TCO, when the principal claim becomes time-barred, so too do all claims for interest and other accessory claims.

Suspension

16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

If a contractor does not perform in accordance with the contract, the employer can terminate the contract but cannot suspend paying the contract without sending a termination notice due to non-performance. This may vary depending on the provisions of the relevant contract.

If a contractor fails to complete the work within the contract period and goes into default, the employer may grant a time extension to the contractor to complete the work within a reasonable time frame according to article 123 of the TCO, but if the contractor does not complete the work in such time, the employer may terminate the contract within the scope of article 125(2) of the TCO.

On the other hand, the contractor may suspend carrying out the works if the employer does not pay the due amounts to the contractor. If the payment agreed in the contract is not made, the contractor cannot be requested to continue the work. In this case, the contractor may suspend the work for a reasonable period of time and request the payment of the receivable with interest if there is a default, or the contractor may also use its right to terminate the contract pursuant to article 125 of the TCO.

Omissions and termination for convenience

17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

Pursuant to article 484 of the TCO, the employer may terminate the contract at any time before the work is complete provided that the contractor is compensated for the work carried out before the completion and that the contractor is indemnified in full. This mechanism is called “termination for convenience”. For this provision to be applicable, the works must be incomplete. The contractor may claim both positive and nega- tive damages.

There is nothing precluding the employer to carry out the remaining works by itself of via another contractor, after fulfilling its obligations arising out of the termination for inconvenience. Principles of good faith and venire contra factum proprium should be observed.

Termination

18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

Under Turkish law, construction contracts are classified as contracts for works and services, therefore the provisions of TCO applicable to the termination of the contracts will be applied to the termination thereof unless the parties have agreed otherwise. As a principle, the parties are at liberty to regulate the termination provisions in their contract.

A construction contract may be terminated by the employer pursuant to general provisions:

• As per article 475 of the TCO, the employer may terminate the contract due to defects in the construction.

• The contract may be terminated by the employer without a cause upon full compensation and indemnification of the contractor as per article 484 of the TCO.

• As per article 485 of the TCO the contractual relationship may be deemed terminated due to impossibility of performance attributable to the employer.

• As per article 486 of the TCO the contractor’s loss of ability to complete the works or the death of the contractor will result in termination.

As per article 475 of the TCO, the employer, under circumstances where the contractor is found liable for the defects in the construction may (i) withdraw from the contract, if it becomes evident that the works will be performed in a manner that are defective or otherwise deviates from the contract or the works are so defec- tive that the employer cannot equitably be expected to accept them (ii) ask for the reparation of the works free of charge or at the risk and expense of the contractor (iii) may request a reduction of the contract price (iv) claim damages in accordance with general provisions of the TCO.

Unless the parties’ agreement provides otherwise, the employer that terminated the contract will be only entitled to damages.

Partial termination of a contract is also possible in accordance with the general provisions of the TCO.

19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

Yes, complementary provisions of the TCO apply. Please refer to the response to question 18.

20. What limits apply to exercising termination rights?

Other than contractual limitations, parties to a contract are bound to act in good faith and not to exercise their rights in an abusive manner.

Completion

21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

Under Turkish law, the works are only deemed to be complete once the contractor has duly executed whole agreed works under the construction contract and delivered them to the employer accordingly. The mere taking of beneficial possession of the works and the start of use by the employer is not considered comple- tion of the works as long as the works are not duly completed.

According to article 477 of the TCO, once the completed work has been expressly or implicitly approved by the employer, the contractor is released from all liability, save in respect of defects that could not have been discovered on normal inspection or those that were deliberately concealed by the contractor. Implicit approval is deemed where the employer refrains from inspecting the work and giving notice of any defects.

22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

According to article 477(1) of the TCO, the employer’s acceptance relieves the contractor from liabilities arising from visible defects. The acceptance can be made explicitly and implicitly. Unless the contract provides otherwise, taking over the work (physically) is construed as acceptance. Employer before accept- ance has the statutory burden to examine visible defects. If the examination is omitted or executed poorly, the work will be deemed accepted as it is (ie, with the defects). The claims for latent defects may be raised later.

Liquidated damages and similar pre-agreed sums (‘liquidated damages’)

23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

The concept of liquidated damages is not regulated specifically under Turkish law, which is why it is hard to determine the difference between liquidated damages and penalties.

Performance of a contract means the full and due performance of the obligations thereunder. The debtor who fails to fulfil a debt that is possible and due on time is delayed in execution. If certain conditions are met, this delay is described as “default of debtor”. In other words, the default of a debtor is a qualified delay of the debtor in performance and the debtor is liable for damages.