Construction and Engineering Law in Turkey

Kesikli Law Firm accepted to become an author for Construction & Engineering Law – Turkey Chapter of International Comparative Legal Guides 2015.

This article appeared in the 2015 edition of The International Comparative Legal Guide to: Construction & Engineering Law; published by Global Legal Group Ltd, London.” (ICLG)

The guide is now live on International Comparative Legal Guides site at ICLG

This chapter provides an overview of Construction & Engineering Law in Turkey.

Here is the content of the guide:

1 Making Construction Projects

1.1 What are the standard types of construction contract in your jurisdiction? Do you have contracts which place both design and construction obligations upon contractors? If so, please describe the types of contract. Please also describe any forms of design-only contract common in your jurisdiction. Do you have any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)

Parties usually draft and negotiate their own construction contracts. However, FIDIC form contracts are also used, especially where “project finance” is involved. In cases where specialised technical expertise (e.g. in power plant construction projects) is required, employers tend to use a separate engineering firm, and contract with such engineering firm for the basic and detailed engineering works of the facility or occasionally for “owner’s engineering” services. EPCM is also another option where the owners prefer to cut their costs, splitting the Engineering, Procurement and Construction works and management of the project. This comes with a trade-off: it may be very difficult to determine the responsible party in case of performance deficiencies. Further, it should also be noted that splitting the contracts with different contractors might not be a good idea if project finance is sought for the project.

Apart from the abovementioned contract types, there are standard forms of construction contracts (usually not negotiable) which are used for public tenders under Public Procurement Law No. 4734.

1.2 Are there either any legally essential qualities needed either to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations), or any specific requirements which need to be included in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?

Contractual freedom is in place under Turkish law. Parties are not obliged to reduce their agreement to writing to make it valid and binding. Basically, the parties can create a legally binding contract orally for certain issues provided that there is an offer followed by an acceptance which demonstrates that the parties’ wills are reciprocal and coherent. Accordingly, construction contracts are not required to be in written form to be legally binding and valid, subject to certain exceptions. Construction contracts that impose a transfer of ownership of the constructed immovable on the contractor (such as construction contract in return for flat) must be executed in written form before a notary public to be legally binding and valid. Nevertheless, it is always recommended that construction contracts be drafted in written form for the purposes of evidencing.

1.3 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.

Letters of intent are commonly used at the very beginning of almost all corporate and project development deals. Clauses relating to confidentiality, exclusivity and cost sharing are generally binding.

1.4 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors all risk insurance?

There is no statutory insurance (except the employer’s obligations relating to employee’s social security registration and payment of employees’ premiums). In practice, the following insurances are usually obtained:

• Contractors All Risk Insurance.

• Employer’s Liability Insurance, which covers bodily injuries and death of workers.

• Third Party Liability Insurance, which covers any damage to third party property or individuals caused by employees or tools used in construction.

• Advance Loss of Profit Insurance (for owner’s possible losses due to delay of the project).

  1.5 Are there any statutory requirements in relation to construction contracts in terms of: (a) general requirements; (b) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (c) tax (payment of income tax of employees); or (d) health and safety?

There are certain legal restrictions on subcontracting and qualifications of the labour to be employed on site. For example, labour law does not permit contractors to use subcontractors unless the relevant work requires technological specialisation due to the specific nature of such work. There are strict health and safety rules and regulations that must be complied with by the contractors.

1.6 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability is complete?

As a rule of law, the contract price for the works becomes due when the contractor delivers the construction to the employer. In practice parties, using their freedom of contract, tend to determine payment structure otherwise as the nature of construction works requires so. Accordingly, the employer may retain part of the purchase price as “retention money” to be released on conditions designated under the contract. It is common practice for owners to retain a certain percentage of the progress payments / milestone payments until the works reach temporary acceptance or substantial completion. While not very usual, parties may also agree that the retention money be released upon the expiration of the defects liability period in the absence of any other financial guarantees.

1.7 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee performance, and/or company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such bonds and guarantees?

Yes, it is very common. Employers typically require an irrevocable, unconditional, on-demand performance bank guarantee and defects liability bank guarantee from the contractor.

1.8 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that until they have been paid they retain title and the right to remove goods and materials supplied from the site?

Contractors try to keep the ownership of the major equipment and supplies until their price is entirely paid. This approach would be applicable where such equipment and supplies are separable from the construction. (For example: the turbines or boilers in a power plant construction are separable items). However, in most project finance deals, the banks require the transfer of ownership at an earlier stage, so that the contractor’s approach is not accepted. Parties tend to agree on an appropriate payment structure to protect the contractor in terms of its cash-flow.

Removing goods and materials supplied from the site is another issue. In most of the construction contracts in which we have been involved, the owner does not allow the contractor to remove goods and materials from the site without its approval.

2 Supervising Construction Contracts

2.1 Is it common for construction contracts to be suspended on behalf of the employer by a third party? Does any such third party (e.g. an engineer or architect) have a duty to act impartially between contractor and employer? Is that duty absolute or is it only one which exists in certain situations? If so, please identify when the architect/engineer must act impartially.

An engineer or architect is not normally authorised to suspend the works. It is very common that suspension rights of the employer are set forth in construction contracts. The employer can use such right through its duly authorised representatives.

Furthermore, governmental authorities may also suspend works due to occupational health and safety matters or certain other legal restrictions.

2.2 Are employers entitled to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?

The “pay when paid” concept is commonly used. However, we are of the opinion that the validity and enforceability of such concept is open to discussion under Turkish law.

2.3 Are the parties permitted to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss suffered?

The concept of liquidated damages is recognised under Turkish law on an academic level. However, in practice the concept of “penalty” is commonly used. Unlike the common law jurisdictions, setting forth penalty provisions under contracts is permissible. In cases where the parties designate a penalty clause, the party failing to fulfil its penalty-related obligations completely and/or properly, is under obligation to pay a penalty amount to the other party even if there is no damage incurred as a result of such failure. Courts do not have a duty to examine whether the sum to be paid is a genuine pre-estimate of loss. The sum of the penalty might be wholly unrelated to the amount of the financial loss suffered. However, courts have the power to decrease the amount of penalties under certain circumstances. In addition, parties must use their rights (including their rights relating to penalties) under the contract or at law in good faith.

3 Common Issues on Construction Contracts

3.1 Is the employer entitled to vary the works to be done under the contract? Is there any limit on that right?

It is always recommended to employers that “variation” clauses be explicitly set forth in their construction contracts. One of the obvious limits on that right is that the employer must use such right “acting in good faith”. Another restriction is that the drafting party cannot be granted the right to unilaterally change the contract provisions in favour of itself in cases where such contract includes general transaction conditions.

In practice, construction contracts typically restrict the employer’s right to vary the work where the varied work constitutes an unrelated work or where the employer omits the contractor’s scope and gives it to others.

3.2 Can work be omitted from the contract? If it is omitted, can the employer do it himself or get a third party to do it?

This means a change in contract. In the absence of an explicit provision under the contract, the employer does not have such a right, and the employer must pay the lost profit of the contractor if it omits such work or performs such work itself or through a third party.

The employer is entitled to omit the construction work from the contractor during the construction in case it is obviously understood that the construction will be deficient and contrary to the construction contract for any reason attributable to the contractor. In such case the employer can hire a third party to complete the remaining part of the construction and the contractor will bear all additional costs and damages incurred by the employer in completion of the construction.

3.3 Are there terms which will/can be implied into a construction contract?

In particular, applicable provisions of Turkish Code Obligations, Turkish Civil Code, Turkish Commercial Code can be implied into construction contracts.

3.4 If the contractor is delayed by two events, one the fault of the contractor and one the fault or risk of his employer, is the contractor entitled to: (a) an extension of time; or (b) the costs occasioned by that concurrent delay?

Concurrent delay is not explicitly regulated under the law, but contributory negligence is. Accordingly, parties are encouraged to deal with this matter under their contracts.

In the absence of an explicit provision under the contract, we are of the opinion that an analysis must be made to determine whether the relevant lost time and additional costs were caused solely due to employer’s risk or contractor’s fault or whether there is any contributory negligence in question. The contractor may thereafter be entitled to claim for an extension of time and its additional costs to the extent that the fault or risk of the owner contributed thereto.

3.5 If the contractor has allowed in his programme a period of time (known as the float) to allow for his own delays but the employer uses up that period by, for example, a variation, is the contractor subsequently entitled to an extension of time if he is then delayed after this float is used up?

There is no specific provision under Turkish law regarding this issue. However, we are of the opinion that if the employer uses up even a grace period or a risk margin of the contractor, then an extension of time would be claimed for that.

3.6 Is there a limit in time beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and from what date does time start to run?

There are several statutes of limitations designated under the Turkish Code of Obligations (“TCO”) applicable for different claims and situations. There are specific statutes of limitations for construction contracts:

• for claims arising out of construction contracts (excluding claims arising from situations where the contractor does not fulfil its obligations completely or properly due to its gross negligence), the statute of limitations is 5 (five) years;

• for defects in the construction (which is an immovable property), the statute of limitations is 5 (five) years which starts to run from the date the contractor delivers the construction; and

• for defects in the construction attributable to the gross negligence of the contractor, the statute of limitations is 20 (twenty) years from the date of delivery of the construction regardless of whether the construction is qualified as a movable or immovable property.

  3.7 Who normally bears the risk of unforeseen ground conditions?

In practice the employer bears the risk arising from unforeseen ground conditions. The contractor may claim adaptation of the contract to be adapted to new conditions. Parties sometimes agree on sharing the risks (i.e. the contractor bears the relevant additional costs and the employer bears the extension of time risks).

3.8 Who usually bears the risk of a change in law affecting the completion of the works?

In practice the employer bears the risks arising from changes in law. The contractor may claim for adaptation of the contract to the new conditions.

3.9 Who usually owns the intellectual property in relation to the design and operation of the property?

The Law on Intellectual and Artistic Works No. 5846 (“Law No. 5846”) deems construction projects as one of the literary and scientific works and creator of such construction projects is deemed as the “author”. As per Law No. 5846, the author of the project owns the intellectual property in relation to the design and operation of the construction works. The contractor, engineer or designer can be the author of the construction project as the case may be. Employers must require the contractors to assign to the employers the ownership and/or financial rights pertaining to the relevant intellectual property rights.

3.10 Is the contractor ever entitled to suspend works?

It is very common that suspension rights of the contractor are set forth in the construction contracts. The employer’s failure to pay or failure to fulfil its material obligations arising out of the contract is the main basis of such right.

3.11 On what grounds can a contract be terminated? Are there any grounds which automatically/or usually entitle the innocent party to terminate the contract? Do those termination rights need to be set out expressly?

The following events (amongst others) may give rise to a termination subject to certain procedural and other conditions: (i) if the approximate amount which is determined by the parties at the very beginning of the work is exceeded; (ii) if the construction is t as a result of an unforeseen event; (iii) if the execution of the work has become impossible as result of an unforeseen event related to the employer; (iv) if the contractor dies or loses its ability to complete the construction as a result of a reason not attributable to the contractor; (v) if the contractor is in delay; (vi) if there is a material defect in the construction which is identified by the employer on the delivery date of construction; and (vii) if unforeseen events or events which were anticipated by the parties but that were not taken into consideration, prevent or complicate the construction to be completed at the fixed lump-sum price.

Apart from the aforesaid circumstances, the employer may unilaterally terminate the contract without a reason, in which case the employer will have the obligation to pay for the performed works and to compensate the contractor’s entire losses due to termination.

While these are some of the legal grounds for termination set out under the law, we recommend that parties set out their own terms and conditions relating to termination, in consideration with the legal requirements and the particulars of each specific project.

3.12 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give the injured party? Is it usual/possible to argue successfully that a contract which has become uneconomic is grounds for a claim for force majeure?

The concept of force majeure is known in our jurisdiction.

In case of a force majeure event, the parties are relieved of their affected obligations to the extent that the affected party proves that it is affected by the force majeure and its consequences.

In certain cases, the contract may become uneconomic as a result of an event of force majeure, in which case a successful force majeure claim can be made. However, the contract’s becoming uneconomic should not be considered as a sole basis of an event of force majeure itself, but an inevitable consequence of an event of force majeure.

3.13 Are parties which are not parties to the contract entitled to claim the benefit of any contract right which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the original contracts in relation to defects in the building?

As per the rule of privity of the contract, contracting parties are entitled to claim rights and fulfilment of obligations against each other. However, in cases where there is a contract made for the benefit of third parties who are not the parties to the contract, the relevant third parties would be entitled to claim for the relevant benefits of such contract.

The example given in the question is a different case and the answer to the question is controversial. We are of the opinion that the second or subsequent owner of the building may need to be assigned the relevant rights and benefits of the owner in relation to the defects liability to be able to claim against the contractor.

3.14 Can one party (P1) to a construction contract which owes money to the other (P2) set off against the sums due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off?

Yes, to the extent that both parties’ payment obligations are due. There are certain legal restrictions on the right of set-off which requires creditor’s consent. For example, duty of restitution or payment obligation arising out of a delivered good may only be set-off with the consent of the creditor.

3.15 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine?

Both parties have an obligation to act in good faith towards each other. Specifically, the contractor must perform its works in due regard to the owner’s rightful interests and with due diligence (care) and loyalty as per the law.

3.16 Where the terms of a construction contract are ambiguous are there rules which will settle how that ambiguity is interpreted?

Under Turkish law, ambiguous terms of any contract are interpreted by means of focusing on parties’ true and mutual intentions. The wording or terminology used mistakenly or to hide parties’ true intentions under a contract would not be taken into consideration in its interpretation.

Furthermore, for standard form contracts that are unilaterally and abstractly prepared by one party for its later utilisation in more than one transaction, the Code of Obligations introduces the “general transaction conditions” concept (“GTC Concept”), which is similar to the contra proferentem rule. As per the provisions of the Code of Obligations regarding the GTC Concept, if there is an ambiguous term in non-negotiable standard form contracts (i.e. tender documents and contracts prepared by the Public Procurement Authority or a bank, insurance company or private company), this term will be construed against the drafting party and in favour of the other parties.

3.17 Are there any terms in a construction contract which are unenforceable?

Terms and conditions of a contract which are immoral and/or contrary to public order, mandatory provisions of the TCO and personal rights, will be deemed as invalid and consequently as unenforceable.

As per the general rule of law, the invalidity of these terms does not affect enforceability of the entire contract. However, in case it is understood from the interpretation of the contract that such contract would not be executed without those invalid terms, then the entire contract will be deemed as invalid.

3.18 Where the construction contract involves an element of design and/or the contract is one for design only, are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in respect of his work?

Under Turkish Law, the designer must fulfil its obligations in compliance with its objective duty of care. Contractor’s liability arising out of its duty of care is determined based on an objective standard to be expected of a prudent contractor undertaking similar works in accordance with the applicable professional and technical rules.

Objective duty of care obligation does not constitute the sole liability of the designer. Designer’s liability is not limited by law. However, the market practice is to limit designer’s liability with the contract price. Further, it is common in power plant construction projects to expect the designers to provide “performance guarantees” for the performance values of the power plant in terms of design deficiencies.

4 Dispute Resolution

4.1 How are disputes generally resolved?

The most common method used in Turkey for resolution of disputes arising from legal relationships between Turkish companies is litigation before the local courts.

On the other hand, international arbitration is the most preferable method in cases where there is a foreign element in relation to the project (i.e. one or more of the parties being foreign companies or the project being financed by foreign banks, funds or other foreign sources) in place.

4.2 Do you have adjudication processes in your jurisdiction? If so, please describe the general procedures.

There is not a detailed legal background for adjudication process under Turkish law. However, freedom of contract allows the parties to define an adjudication process under their contracts similarly as stated under the Article 20 of FIDIC Silver Book- Conditions of Contract for Engineering, Procurement and Construction/Turnkey Projects.

4.3 Do your construction contracts commonly have arbitration clauses? If so, please explain how arbitration works in your jurisdiction.

Yes, in almost all of the international construction projects in which we have been involved, we drafted detailed arbitration clauses. International arbitration is the one of most common alternative dispute resolution methods used in our jurisdiction for international projects.

Basically, there are two main laws regulating domestic and international arbitration. If a dispute does not include a foreign element and the place of arbitration is stated as Turkey then the relevant procedures set forth under Civil Procedure Law No. 6100 will be applied.

If the dispute includes a foreign element and the place of arbitration is stated as Turkey, then International Arbitration Law No. 4686 will be applicable.

Both procedures settled under the aforementioned laws provide that if there is a valid arbitration agreement between parties and any party files a lawsuit in relation to a dispute arising from the contract in question, the defendant party will be entitled to raise an objection of arbitration, in which case the lawsuit would be dismissed.

Rules set forth under the aforesaid laws are ad hoc rules and these laws have similar structures to those of the UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006 (“Model Law”). Under said laws, parties can choose the applicable law and/or rules to their arbitration procedure and they can appoint arbitrator(s). Following the appointment of the arbitrator(s), parties shall submit their statement to the arbitrator(s) within the time period agreed by the parties or determined by the arbitrator(s). Unless otherwise agreed by the parties, the arbitration tribunal decides by majority of votes. Parties may challenge the arbitral awards and file a lawsuit for its annulment within 30 (thirty) days before the court located at the seat of arbitration, on several grounds that are stated under the aforementioned laws.

4.4 Where the contract provides for international arbitration do your jurisdiction’s courts recognise and enforce international arbitration awards? Please advise of any obstacles to enforcement.

Turkey is a party to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (“the Convention”). Accordingly, in any commercial dispute arising in connection with the contract under which the parties have agreed to resolve such dispute through arbitration, a final arbitral award rendered out of Turkey and within the territory of a state which is a party to such Convention will be recognised and enforced by Turkish courts without re-examination of the merits of the case, subject to the criteria and the procedures set forth in the said Convention and subject to the arbitrability of any such disputes under Turkish law. The applicant shall provide the following documents to the Turkish court:

1. a) the original or a duly certified copy of the arbitration agreement or the arbitration clause; and
2. b) the duly authenticated original award or a duly certified copy of the formal enforceable final arbitral award having binding force as an arbitration award.

The aforementioned documents must be submitted to the Turkish court together with their official translation (certified by a Turkish notary public or Consul General) into the Turkish language.

In principle, the recognition and enforcement of an arbitral award may also be rejected at the request of the party against whom it is invoked, if that party furnishes to the competent authority where the recognition and enforcement is sought, with proof several issues set forth under the Article V of the Convention and the International Private Law and Civil Procedure Law No. 5718. It is also noteworthy to mention that if an arbitration award is annulled, such arbitration award may not be enforced.

4.5 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction?

The recognition and enforcement of foreign court judgments have been regulated by and Civil Procedural Law No. 5718 (“Law No. 5718”). According to Law No. 5718, decisions regarding civil lawsuits rendered by foreign courts can be enforced by the courts of Turkey provided that (i) such decision is finalised according to the law of the state of the court, (ii) there is reciprocity between the Republic of Turkey and the state where the judgment was rendered, (iii) the judgment is rendered on matters not falling within the exclusive jurisdiction of the Turkish courts or, conditional upon being contested by the defendant, the judgment is not given by a state court which has accepted itself as competent even if there is not a real relation between the court and the subject or the parties of the lawsuit, (iv) the court decree is not expressly contrary to public order, and (v) the person against whom enforcement is requested has not objected to the enforcement before the Turkish Court on the grounds that such person was not duly summoned pursuant to the laws of that foreign state or to the court that has given the judgment, or was not represented before that court, or the court decree was rendered in his/her absence.

For recognition of foreign court judgments all aforementioned conditions, except reciprocity, will also be applicable.

4.6 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of how long proceedings are likely to take to reduce: (a) a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal.

Courts of first instance in Turkey are subdivided into general courts and special courts. General courts consist of civil courts of first instance and courts of peace. As per Article 2 of the Civil Procedure Code No. 6100, disputes relating to assets and immaterial rights are heard before the courts of first instance, regardless of the amounts involved or the subject of the dispute.

The civil courts of first instance comprise a number of specialised courts which include commercial courts, labour courts, courts of intellectual and industrial property rights, maritime courts, land register courts, consumer courts, and family courts.

The court which hears and resolves the dispute, is determined in accordance with the claims of the parties, however commonly disputes arising from construction contracts are heard before commercial courts.

Following the submission of the petition by the parties (for each reply petition parties have 2 (two) weeks for submission), the court will conduct a preliminary investigation, investigation and hearing. Within 15 days after the receipt of court’s decision, any party who has a legal interest may apply to the Court of Appeal for re-investigation of a first-instance court decision to the extent that such decision is appealable. There are also other legal means (ordinary and extraordinary legal remedies) to challenge the first instance court’s decisions.

It is not possible to state a specific time for decisions of both the court of first instance and the Court of Appeal, due to the fact that each and every lawsuit or proceeding may vary depending on the complication and detail of each particular dispute.

Disclaimer:

Information in this document is for general information purposes only and should not be construed as legal advice or a substitute for legal counsel. Lawyers at Kesikli Law Firm assume no liability or responsibility for the accuracy of any information provided herein. Legal advice should be sought about your specific circumstances. As information changes rapidly, the user is strongly advised to verify any information before relying on it. It is important that you get specific advice prior to making any decisions on your business transactions. No person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.

@Kesikli Law Firm