Construction Arbitration: Türkiye - Part 3

24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no “sweep up” provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

As per article 112 of TCO, a reparation is only owed to a creditor (ie, employer), if the fault that resulted in damages is attributable to the debtor (ie, contractor) of the contract, who failed to perform its commitments. In cases where the employer had a role in the emergence or increase in the damage perpetrated by the contractor, the judge may, according to article 52 of the TCO, either reduce or completely remove the reparation owed by the contractor to the employer.

25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

There are two principles for damages under Turkish law: the damage must be fully compensated, and that the compensation cannot be a tool for enrichment.

In cases where the employer had a role in the emergence or increase in the damages perpetrated by the contractor, the judge can, according to article 52 of the TCO, either reduce or completely remove the repara- tion owed by the contractor to the employer.

26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

Turkish law prohibits the enrichment from compensation, which is why, in principle, the defendant is princi- pally only obliged to pay compensation for the liquidated damages. Nevertheless, some special law provisions allow claimants to demand compensation exceeding the mere loss suffered. An example of this is damages quantified by calculating loss of profits.

Assessing damages and limitations and exclusions of liability

27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

In addition to the compensation for the same performance and delay as stipulated in the general provisions regarding the default of the debtor in the TCO, the creditor may refuse the performance of the contract and claim for the indemnification of its positive loss. In one of its decisions, the General Assembly of the Court of Cassation (CoC) defined the positive loss as “the damage arising from the failure to fulfil the contract at all or as it should be” and accepted that the positive damage also includes the loss of profit.

There is no provision regulated under Turkish law for the cases where the lost profits are exceptionally high. To determine the loss of profit or other compensation claims, the court appoints experts or conducts an on-site examination to determine the accurate amount.

28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

As per TCO 475, the employer has several options for the remedy it may seek in cases where the work is technically non-compliant:

• withdraw from the contract where the work is so defective or deviates from the contractual terms to such

an extent that the employer has no use for it or cannot equitably be expected to accept it;

• take delivery of the work without having to wait for completion and reduce the price in proportion to the

defect; or

• require the contractor to rectify the work at his or her own expense, provided that such rectification is

possible without excessive cost to the contractor.
In this situation, it is at the employer’s discretion to decide the way to remedy the defects.

29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

DNPs are usually set forth in the construction contract since there is no obligatory limitation of time ruled by the law. The statutory DNP applicable to a defect depends on the type of defect in question.

According to article 477, 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 which were deliberately concealed by the contractor. Therefore, it is important for employers to carry out a proper examination at the time of acceptance.

Apart from the above, the defects that were not visible at the time of acceptance, including the latent defects should be notified immediately upon their occurrence.

According to article 478 of the TCO, the statute of limitations applicable for immovable works is five years. If there is contractor’s gross negligence, then the employer’s right to claim extends to 20 years from the date of acceptance.

The statute of limitations can be invoked as an objection; however, it will not be taken into regard ex officio by the courts.

30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

Turkish law requires a casual relationship for both direct and indirect loss claims. Accordingly, if there is an adequate casual relationship between the action and the loss; whether direct or indirect, the party causing such damage may be held liable according to the general provisions.

Pursuant to article 475 of the TCO, in cases where the contractor is liable due to the defects in the work, the employer is entitled to exercise one of its rights of choice that are listed in article 475. These are, namely, the recission of the contract, request for a discount at the rate of defect, and request for free repair of the work. In addition to these, the employer is entitled to claim for damages in accordance with the general provisions of the TCO.

According to the main principle set under article 115 of the TCO, contract provisions that are restricting liability for indirect or consequential loss are valid and enforceable unless it has resulted from an action that constitutes gross negligence. Therefore, a construction contract provision excluding liability for indirect or consequential loss, such as loss of profits, will be valid and enforceable provided that the losses do not arise from gross negligence of the injuring party.

GAR Know How Construction Arbitration – Turkey 13

31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

In principle, it is possible to make contracts restricting or excluding liability for direct or indirect losses. The TCO allows parties to limit their contractual liability depending on the negligence level. Any contractual provision that restricts or excludes liability in advance for degrees of fault reaching or exceeding gross negligence is void as per article 115 of the TCO, while provisions limiting liability for direct or indirect losses arising from slight negligence are valid and enforceable.

Moreover, article 116 of the TCO allows the restriction of contractor’s liability resulted from the actions of auxiliary persons regardless of the negligence level. Accordingly, a contract clause excluding the liability of the injuring party for indirect or consequential losses resulted from the actions of auxiliary persons will be valid and enforceable even if it arises from an action that constitutes gross negligence or wilful misconduct.

Liens

32. What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

Article 893(3) of the TCC stipulates that the contractors or subcontractors who have receivables from the property owner or the contractor, may request for a lien on the property on which they performed their work or provided material. Such lien can be registered in the land register starting from the moment that the contractors started to perform their work or provide material for the construction (article 895(1) of TCC) and it must be requested within three months of the completion of the work at the latest (article 895(2) of TCC). However, registration cannot be requested in the event that the property owner shows sufficient security (article 895(4) of TCC).

For a lien registration to be completed, the remuneration claim must be accepted by the property owner or approved by the court. After officially registering the lien, the contractor may then exercise its rights and collect its receivables from the sale of the seized property. It is also important to note that article 896 of the TCC states that the contractors whose lien has been registered on different dates are deemed to be in the same order in terms of their right to benefit from the lien.

Subcontractors

33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

Turkish law does not explicitly regulate or restrict the conditional payment provisions in contracts. In accord- ance with the freedom of contract, parties of a construction contract are free to agree on pay-when-paid scheme and enforce them as long as there is no default or breach according to the principles of good faith. Accordingly, a contractor can collect its payments relying on a conditional payment provision under the general contract, unless there is a default or breach resulting from its own actions.

In its decision dated 1 March 2018 (15th Chamber of the Turkish Court of Cassation’s decision dated 1 March 2018 No. 2016/5713 E. 2018/841 K), the Turkish CoC clarified that it is possible to make a construc- tion contract containing conditional payment provisions. However, the Court drew the lines of the issue by underlining that the subcontractor’s receivable will eventually become due if the conditional amount is not collected from the owner or the relevant third party within a reasonable time.

34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

In principle, it is not possible for subcontractors to claim against the employer for sums due to the subcon- tractor from the contractor since there is no direct relationship between the employer and the subcontractor. Yet such a scenario may be contractually arranged.

35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

As in many other jurisdictions, arbitration is also consensual in Turkey; and the arbitral awards are of inter partes character. Pursuant to article 4 of the Turkish International Arbitration Act No. 4686, the arbitrations agreement shall be concluded in writing.

Principally the parties who did not have explicit written consent to an arbitration cannot be dragged into proceedings unless the substance of the relationship between the signatories requires otherwise. This, in particular, frequently occurs in insurance and guarantee claims.

However, the answer to this question depends on the nature of the substantive agreement and the arbitra- tion agreement between the parties.

Under exceptional circumstances, the arbitration agreement can be extended to non-signatories. The tribunals, to the extent rules allow, have the authority to consolidate two arbitration proceedings if the contracts are deemed to be related.

Given that the vast majority of jurisdictions have adopted UNCITRAL Model Law, the issue would be handled by Turkish courts in a similar fashion to other jurisdictions.

Where the arbitration is seated is of crucial importance while determining the law applicable to the arbi- tration agreement and its extension to third parties.

Third parties

36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

As a general approach, rights under construction contracts exist only between the parties in accordance with the privity of contracts principle. However, in some cases, third parties may also obtain certain rights when the third party is a beneficiary of the contract.

37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

In general, a person who is not a party to a contract cannot be held liable for it under the principles of privity of contract. Therefore, claims in respect of delays, defects or payments raised pursuant to the construction contract do not extend to the affiliates, directors and employees of the contractor.

Contrary to the general approach, in exceptional cases such as the parent company guarantee has given to the employer for all or part of the affiliate’s obligations, then such an affiliate may be held liable. In the same vein, if the contractor as a limited liability company becomes insolvent, its directors also may face claims if they have been in breach of their fiduciary duty.

Limitation and prescription periods

38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

According to article 478 of the TCO, the statute of limitations for bringing a defects claim under a contract of work for an immovable is five years as of the date of delivery. This period may be decreased or increased by the parties but cannot be longer than 10 years, which is the general statute of limitations under the TCO. If the defect in question is caused by a degree of fault exceeding gross negligence, the statute of limitations applicable to the employer’s right to claim increases to 20 years as of the date of acceptance, which cannot be decreased by the parties.

As per article 147(6) of the TCO, the statute of limitations for claims other than defects claims is five years for contracts of work, which includes construction contracts. However, as per article 156 of the TCO, if the debt is acknowledged by the debtor or awarded by a court or arbitral tribunal, a new 10-year period will start, which is the general statute of limitations under the TCO defined under article 146 of the TCO.

As per article 154 of the TCO the statute of limitation is deemed interrupted if the debtor has: acknowl- edged its debt, performed partial payment (including interest), provides a pledge or security. The statute of limitation can also be interrupted through the conduct of the creditor, such interruption occurs if the debtor raises its claim at courts or tribunals or initiates a debt collection proceeding by means of debt execution or an application to bankruptcy administration.

The rules regarding the periods of limitations are considered substantive law. However, the periods of limitations will be only considered by a court or arbitral tribunal upon the respondent’s objection.

Other key laws

39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

There are no distinct regulations concerning construction contracts in Turkish law. However, articles 470–486, under the ‘Agreement for Work’ section of the TCO is the main legislation for construction contracts. In circumstances where the contract is silent, relevant laws, such as the TCO or the Turkish Civil Code apply by virtue of their gap-filling role.

The mandatory provisions of Environment Law, Zoning Law, Public Procurement Law, and State Bidding Law, Law No. 3996 on Commissioning Certain Investments and Services within the Framework of Build-Operate-Transfer Model, Law No. 6428 on Construction, Renovation and the Purchase of Services by the Ministry of Health by way of the Public-Private Partnership Model and Amendments to Certain Laws and Decrees with the Force of Law are reserved.

40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

Foreign laws are applicable to the extent they do not violate Turkish public policy. Public policy in this regard is interpreted narrowly, meaning that a mere violation of a mandatory norm under Turkish law does not amount to a violation of public policy, but rather that a fundamental breach of values upon which the Turkish legal system is based would amount to a breach in this respect. This, however, is a rare situation, in construc- tion projects.

Besides that, technical standards, regulations on work safety, environmental law as well, as the legislation on construction permits, will be directly applicable to the project in question if the project is located in Turkey.