Turkish Law Blog
Delay Penalties in Public Procurement Contracts
Article 20 of the Public Procurement Contracts Law is about the contractor who is in breach with the public procurement contract. Accordingly, it is stated that in case that the contractor fails to perform the contractual work in accordance with the contract or the tender documents or fails to complete the works in due time, a delay penalty as stated with the tender documents shall be applicable.
Delay penalty is a material sanction for the Contractor who is in breach with the public procurement contract, when the Contractor fails to perform the works in accordance with the contract or within the specified time. Regarding the public procurement contracts, the Public Procurement Contracts Law numbered 4735 shall be applied with priority in case of breach of contract. According to the Article 36 of the Public Procurement Contracts Law, when there is no provision stated with this Law, the provisions of Code of Obligations shall be applicable.
Definition of Penalty Clause and Types of Penalty Clauses
Penalty clause shall refer to the obligation to be performed by the obligor in case it fails to fulfill its main obligation wholly or as required. The function of the penalty clause is to force the obligor to comply with its contractual obligations. Therefore, the delay penalty is a penalty clause, as well. In Turkish Code of Obligations (“TCO”), numbered 6098, Article 179 and the following articles are in relation to the penalty clauses.
Article 182/2 of the TCO states that “In case that the main obligation is impossible or has become impossible for a reason that the obligor cannot be held responsible for, the performance of the penalty clause cannot be asked for if there is no provision to the contrary.” Accordingly, the delay penalty is an obligation that is dependent on the main obligation.
As a result of this clause, in case that the performance of the contractual works cannot be commenced due to the reasons that are not attributable to the contractor, the delay penalty shall not be applicable. In case that the commencement of the works is delayed due to the reasons attributable to the contracting entity, such as the failure of hand-over of the site or refusing to accept the goods/services provided by the obligor despite the offer of the obligor, the delay penalty will not be applied since there is no failure attributable to the contractor.
Similarly, due to the dependent nature of the penalty clause, if the main obligation becomes invalid due to the performance, release, set-off or novation, the secondary obligations as penalty clause become invalid as well.  In other words, if the obligor is not held responsible for the impossibility of the performance in accordance with the Article 136 of TCO, it shall be released of the penalty obligation as well.
However; the nullity of the penalty clause shall not affect the validity of the main obligation due to the secondary nature of the penalty clause.
On the other hand, whether the default of the obligor is a requirement or not; for the fixed term obligations the non-performance of the obligation on the due date is sufficient enough for the penalty clause to be applicable.
The relationship between the penalty clause and the damage is regulated under Article 180 of the TCO. Accordingly, it is stated, “The performance of the penalty clause is required even if the creditor has no damage. If the damage of the creditor exceeds the penalty, s/he may not claim the exceeding amount if s/he does not demonstrate the failure of the obligor.” In other words, to claim the performance of the penalty clause, the presence of an actual damage is not required. It reflects the penalty clause’s security nature. If the damage of the creditor is greater than the penalty, the creditor shall not claim the exceeding amount unless s/he demonstrates the failure of the obligor. Therefore, the contracting entity is not required to have damage to claim for the delay penalty in public procurement contracts. The contracting entity is entitled to claim for the delay penalty even if it has no damage at all.
The penalty clauses are categorized in three different types which are elective penalty clause, the penalty clause attached to performance and the forfeit penalty. The elective penalty clause is regulated under Article 179 of the TCO. Accordingly, unless the contract has any provision to the contrary, the creditor may require whether the performance of the obligation or the performance of the penalty clause. It should be kept in mind that the creditor may use its right only if the obligor has failed to perform its obligation.
The penalty clause attached to the performance is regulated under Article 179/2 of TCO. Accordingly, if the penalty is determined for the non-performance of an obligation at the specified date and time, the creditor may ask for the performance of the obligation together with the penalty unless s/he waives his right clearly or accepts the performance without making any reservation.
The forfeit penalty is regulated under Article 179/3 of TCO. In that case, the obligor is entitled to terminate the contract by performing the penalty in the agreement.
Delay Penalty in Public Procurement Contracts
There is no specific provision stated under Public Procurement Contracts Law which defines the legal nature of delay penalties. On the other hand, there are the below stated provisions which are in relation to delay penalties:
- According to the Article 20 under the title of “Termination of the Contract by the Contracting Entity”; “In case the contractor fails to perform its obligations in compliance with provisions of the contract and tender documents or fails to complete works within the period as prescribed, and such state of affairs continues to persist despite contracting entity’s warning clearly stating reasons for warning and offering at least 10 days ‘advance notice, with penalty for delay to apply on the basis of the ratio as stated in the tender document”, “performance security along with supplementary security, if any, shall be entered into accounts as revenue, without need for filing a protest, and the contract shall be terminated with any accounts thereof being wound up in accordance with general provisions.”
- Also, Article 7 of the Public Procurement Contracts Law numbered 4735 under the title of “Matters That Must Be Covered in the Contracts” states that “It shall be mandatory to cover the issues listed below in the contracts to be made under this Law: ... n) Penalties applicable in case of delays...”. It is clear that a delay penalty on the basis of the ratio as stated in the tender document can be applicable under this provision for the contractor who fails to perform its obligations in accordance with the contract.
Other than the Public Procurement Contracts Law numbered 4735, Regulation on Implementation of Work Procurements, Regulation on Implementation of Service Procurements and the form contracts also include regulations regarding the delay penalties.
For instance, Article 29 of the Regulation on Implementation of Work Procurements in relation to delay penalties is as follows:
“The duration of the work and the time extension
(1) In case that the works are not completed and made ready for the provisional acceptance on the date as stated with the contract, the daily delay penalty shall be applied for each delayed day at the ratio stated with the contract. ...”
Additionally, Article 41/b of the Regulation on Implementation of Work Procurements and Article 44/a of the Regulation on Implementation of Service Procurements shall include the below mentioned articles in relation to the delay penalties for the deficiencies that are inspected during the provisional acceptance by the provisional acceptance committee:
“In relation to the deficiencies inspected by the acceptance committee, in case that such deficiencies are not remedied within the specified time period by the contractor, upon the completion of this period, a delay penalty at the ratio to be calculated as regards to the delay penalty stated with the contract shall be applicable for each delayed day and the provisional acceptance date is extended to the date that the deficiencies are remedied and completed....”
This delay penalty is different than the delay penalty stated with the contract because this delay penalty will be calculated and applied for the deficiencies that are inspected during the provisional acceptance by the acceptance committee. In other words, the ratio of the delay penalty will be determined by the contracting entity unilaterally after the signing of the contract. Lastly, we would also like to remind that the same provision stated above shall also be applicable for the final acceptance deficiencies as well.
Delay Penalties in Form Contracts
The contracting entity shall organize the tender documents. The form contract is an integrated part of the tender documents within this scope. The related contracting entity shall determine the delay penalty when preparing the form contract. The contracting entity has the discretional power; however, the form contracts include some explanations and limitations which may not be subject to any change. For each procurement type the delay penalty regulations are different. For instance, for the Form Contract for Procurement of Goods Article 34/2 states that “The contracting entity shall determine and write the delay penalty ratio for each delayed calendar day on the form contract to be not less than %0,01 of the contract value or higher than % 2 of the contract value.” If the work subject to the procurement includes “partial acceptance”, similarly, the contracting entity shall include the following sentence in the form contract: “In case that the contractor fails to complete the works subject to partial acceptance on the specified date, the contracting entity shall issue a 10 days written notice and apply the delay penalty in the ratio of % ..... (here the amount to be not less than %0,01 or higher than % 2 which is stated above will be included) of the value of works subject to partial acceptance.”
According to the Article 17 of Form Contract for Procurement of Services, the contracting entity shall determine a daily delay penalty to be not higher than % 1 of the contract value. Additionally, the overall delay penalty to be applied by the entity shall in no case be higher than 30 % of the contract value. In other words, the form contract includes a limited cap for delay penalties for procurement of services.
For the procurement of the works the contracting entity shall determine and write the delay penalty ratio for each delayed calendar day on the form contract to be not less than %0,03 of the contract value or higher than %0,06 of the contract value. Also, similarly, if the works are subject to partial acceptance, the delay penalty amount will be calculated considering the value of the works subject to partial acceptance.
Common Queries Regarding the Application of the Delay Penalties
The type of the penalty clause applied under public procurement contracts is a highly discussed issue. Some accept them as “penalties attached to the performance”. However, regarding the Supreme Court Practices, the delay penalties regulated under the Public Procurement Contracts Law numbered 4735 shall be interpreted differently from the delay penalties regulated under the Turkish Code of Obligations and it should not be accepted as penalties attached to the performance. Civil Chamber Department No. 13 of the Supreme Court states in its Decision 2015/ 33181 E. and 2015/36796 K. dated 15.12.2015 the following explanation in relation to the delay penalties in public procurement contracts:
“...The contracting entities subject to Law No. 4735 are performing a public service. The procurements are part of this service. If the procurement and delivery of goods are in delay, it causes to disruption and delay of services which causes the public to suffer from this. Therefore, when interpreting the delay penalties under such contracts, the nature of the contracting entities stated above shall be taken into consideration. The claimant had to wait for 10 days before the termination notice due to the contract and the administrative specification and granted with the right to claim for the delay penalties before the termination. In this case the penalty agreed between the parties is suitable to the nature of the Law numbered 4735 and there is no place to apply the provisions stated for the penalties attached to performance regulated with the Turkish Code of Obligations. ...”
According to the Article 20 of the Public Procurement Contracts Law; the contracting entity shall grant the contractor with a cure period to be not less than 10 days who failed to complete the works in due time and for this period the delay penalty will be processed. So, the minimum period to be granted which is 10 days, is clearly defined under the provision. However, the maximum time period to be granted by the contracting entity is not defined under the Law. Therefore, it is doctrinally accepted that this period shall be determined by the entity considering the capacity and willingness of the contractor to complete works. A longer period than required shall conflict with the principle of proportionality, on the other hand, a shorter period than required may prevent the contractor performing the works.
An important issue according to this article is that the entity must issue a written 10 days’ notice to the contractor in order to terminate the contract and put the contractor in default even if the contract includes a due date. At this point, Public Procurement Contracts Law differs from the Turkish Code of Obligations because according to the Code of Obligations, the creditor is not required to send a default notice to the obligor if the contract has due date.
Another highly discussed issue is whether or not the entity must send a written notice to apply delay penalty if the entity is not in the intention of terminating the contract when the contractor is in delay except the time extension situations. According to the Chamber of Accounts; the entity must send a notice only if it intends to terminate the contract, however, issuing written notice to apply delay penalty is not required. If the works are not completed in due time as stated with the contract, the delay penalty shall begin to process. However, the Supreme Court is in the opinion that the delay penalty period is limited with the period stated with the notice. The Decision of the Supreme Court Assembly of Civil Chambers dated 28.03.2011 and numbered 2001/13-289 E., 2001/299 K. is referenced and adopted in many decisions of the Supreme Court. Civil Chamber Department No. 13 of the Supreme Court states in its decision dated 10.03.2015 and numbered 2014/19831 E., 2015/7516 K. stated the following:
“...The delay penalty of the claimant had to be limited with 30 days as stated with the written notice considering the contract and the administrative specification. However, the acceptance of a delay period for 147 days is against the rules and procedure,”
The ratio of the delay penalty in case of increase or decrease of the works during the project period was another question in dispute. However, the Public Procurement Authority has clarified this issue with its Decision dated 13.04.2016 and numbered 2016/DK. D-59 stating that the delay penalty amount must be calculated based on the first contract value without considering the increase in the works.
Lastly, we would like to generally mention about the delays in case of the force majeure and delays occurred due to the failure of the entity. Article 10 of the Public Procurement Contracts Law is in relation to the force majeure. Accordingly, the force majeure events are;
(a) Natural disasters.
(b) Legal strikes.
(c) Epidemic cases.
(d) Announcement of partial or general mobilization.
(e) Other similar circumstances that may be determined by the Authority when necessary.
In case of force majeure the reason that the obligor cannot be held responsible due to the occurrence of subsequent impossibility.The impossibility may be permanent or may be partial and result in delay in the project. Therefore, if the contractor is granted with time extension due to the force majeure, no delay penalty will be applicable for the delayed period. Similarly, if the delay is due to reasons attributable to the entity, no delay penalty shall be applicable. Article 29 of the Regulation on Implementation of Work Procurements states that “In case that the entity fails to perform its contractual obligations (such as delivery of site, approval of the projects, approval of the time schedule, payment disabilities etc.) without the fault of the contractor that it constituted an obstacle in fulfilling the contractual obligations, that the contractor could not afford to remove such obstacle, the contractor is granted with time extension depending on the restrictive reasons and the essence of the works to be completed, for a period to be not less than the delayed period.” There are similar provisions in Procurement of Goods or Services Form Contracts in relation to time extension due to force majeure or reasons attributable to entity, as well.
The legal nature of the delay penalties in public procurements are based on the penalty clause regulated under Turkish Code of Obligations. Therefore, when an ambiguity arises on the applicability of the delay penalty in public procurements, firstly the Public Procurement Law, Public Procurement Contracts Law and the related regulations shall be reviewed. If there is no provision stated with this Laws and Regulations, the provisions of Code of Obligations shall be applicable. However, as stated with the decisions of the Supreme Court, the delay penalty applied under the Law No. 4735 is still different than the penalty clause regulated under TCO due to the contracting entities’ specific nature considering their obligation to perform public service.
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