Turkey's construction industry
Despite all the domestic, regional and global challenges of recent years, Turkey remains an important regional power and is active in bilateral relations and at international platforms. Being a G20 Member State, Turkey has the 18th largest economy, is the 28th largest export economy and the 59th most complex economy in the world, according to the Economic Complexity Index.
The main driving industries of the Turkish economy are agriculture, construction, manufacturing and the service industry. The Turkish construction industry's employment ratio is around 7 per cent and its gross national product ratio is 6 per cent.
The Turkish construction industry is not only influential locally, it is also one of the most competitive and dynamic industries worldwide. Forty Turkish construction companies are ranked in list of Engineering News Record 2016 Top 250 International Contractors - seven of them ranked among the top 100. With such numbers, Turkey is the second-largest construction nation after China. Operations of Turkish contractors are spread widely, over 100 countries, the majority of which are in Russia and CIS countries, the Middle East and North Africa.
The Turkish government provides full support to the industry. With the aim of improving international competitiveness and integrating regional potential to the national economy, governmental incentives have been introduced to boost the sector. Within this scope, a number of incentives such as VAT exemption, exemption from customs duty, tax reduction, social security premium support for employer's share, interest support, social security premium support (employee's share), income tax withholding, allocation of the place for investment and VAT refund are granted by the Turkish government.
The infrastructural transformation of major cities in Turkey is also one of the reasons for the rise of the construction industry. During 2006-2015, the amount of infrastructure investments totalled US$140 billion in Turkey. According to the statistics of the General Directorate for Infrastructure Investment of the Ministry of Transport, Maritime Affairs and Communication, five major railway projects, 21 port projects and 15 airport projects have been completed in the past 11 years; 21 railway projects and 15 airport projects are pending; and 15 port projects are in tender processes. These were all extremely large projects and have been or are still being constructed with involvement of major international construction companies and financing institutions. The following are some examples of major infrastructure projects in Istanbul:
- Istanbul's Third Airport Project at a cost of €22.2 billion;
- Canal Istanbul Project at a cost of US$5.5 billion;
- Haydarpaşa Port Project at a cost of US$5 billion;
- Istanbul Finance Centre Project at a cost of US$4.5 billion;
- Three-Level Subsea Tunnel Project at a cost of US$3.5 billion;
- Ataköy Marina Project at a cost of US$1.5 billion; and
- Haliç Port Project at cost of US$1.4 billion.
Similar projects are being carried out all around Turkey by various governmental authorities.
The Ministry of Health is supervising 31 hospital projects, which are implemented under the public-private partnerships model.
The legal framework in relation to construction contracts assists the industry. The relevant legislation is being adapted to the rapidly developing changes. In addition, the Turkish Court of Appeal has a dedicated Division, the 15th Division, which has handled the appellate review of construction disputes of all kinds for many years. These are not purely contractual disputes - the Division is also responsible for reviewing construction arbitration-related issues. Therefore, there is a relatively established case law and legislatorial system for construction contracts in Turkey.
The same can also be said for the arbitration regime. Despite some of the rather debatable recent decisions of the 13th Civil Division of the Court of Appeal in relation to public policy issues in arbitration, Turkey's arbitration system is aligned with the rest of the world. Arbitration is on the rise in Turkey, and, following the establishment of the Istanbul Arbitration Centre, the government also promotes arbitration as a dispute resolution mechanism. Recently, a circular was issued by the Turkish Prime Ministry that encourages governmental authorities to choose arbitration in their contracts.
Legal framework for construction contracts in Turkey
There are no standalone regulations with respect to construction contracts. The legal framework for construction contracts and other relevant legal issues find their roots in numerous pieces of legislation:
- the main legislation is the relevant provisions of the Turkish Code of Obligations No. 6098 (TCO), namely Articles 470-486 under the ‘Agreement for Work' Section. While these provisions are being applied to all types of agreements for work, they are applicable for construction contracts that constitute a subcategory. Most of these provisions are not mandatory, and the freedom of contract principle governs the implementation. Usually, construction contracts are drafted in a detailed way and are not silent in relation to the contractual terms. In circumstances where the contract is silent, the relevant provisions of the TCO, as the general legislation, and other relevant laws may apply to the interpretation of matters where the contract does not regulate such matters;
- issues such as right of construction (superficies right) and ownership following the completion of the construction are regulated under the Turkish Civil Code;
- Zoning Law No. 3194 regulates all planning activities and structures to be constructed inside and outside municipal boundaries, urban land project areas, cadastral records and boundary conflicts;
- Environment Law No. 2872 governs general binding factors in construction contracts, such as licences and permits, environmental standards and rules that should be obeyed in construction plans and projects;
- in construction works of government institutions, the following laws may be relevant:
- Public Procurement Law No. 4734 and State Bidding Law No. 2886, which govern tenders of governmental authorities;
- Law No. 3996 on Commissioning Certain Investments and Services within the Framework of Build-Operate-Transfer Model, which is applicable for build-operate-transfer projects and construction works that are based on special know-how and high expense;
- 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, which is applicable for Ministry of Health's public private partnership construction and renovation projects; and
- other laws in relation to construction works of governmental authorities may also be relevant depending on the identity of the contracting governmental authority.
General characteristics of a construction contract (form requirements and parties)
Construction contract is an onerous, consensual, instantly executional and a mixed type of agreement. Under Turkish law, there are no specific form requirements for the validity of a construction contract; yet, in practice, in particular for large-scale construction projects, the parties often execute written contracts and sometimes in official form. Parties may either incorporate into their contract an internationally recognised form such as FIDIC terms, or agree on their own conditions and terms based on the necessities of the project. Only certain agreements require specific form requirements or specific requirements for validity of certain clauses, such as an arbitration clause.
The construction contract is signed by the employer and the contractor. Under Turkish law, consortiums and joint ventures may also be a party to a construction contract. In general, the contractor is free to subcontract the construction. In situations where the construction contract restricts subcontracting or the work is based on the personal skills of the contractor, such as in cases where the employer has special benefit in construction work that will be specifically done by the contractor and not by a third person, or the work includes properties that depend on the contractor itself, the contractor may not subcontract the construction.
Obligations of the parties
Obligations of the contractor
In general, the contractor has the obligation and responsibility of performance of the works. This performance shall be done in compliance with the construction contract. Moreover, pursuant to the TCO, the contractor has the following obligations:
- the contractor shall comply with the delivery schedule while performing the work;
- the contractor shall start the work on time and conduct it with the same level of work;
- damages and expenses might arise due to delays, and these are under the responsibility of the contractor;
- the performance shall also be in compliance with the required permits and land rights, as well as with relevant health and safety regulations and social security obligations. Liability of the contractor persists for failures regarding breach of such permits and rights;
- the principle of care is essential along with the principle of loyalty while fulfilling this duty. A reasonable standard of care is expected from the contractor, and the contractor shall protect and regard the interest of the employer and shall not act against the employer's benefit; and
- according to Article 356/3 of the TCO, unless it is agreed otherwise, the contractor shall provide its own equipment and supplies, and as a result, the price of equipment cannot be added to the price determined in the agreement.
When it comes to the issue of subcontraction, essentially it should be noted that subcontractors are not a third party of the main construction contract. Unless provided otherwise in the agreement, the employer does not have any obligation that arises from the contract towards the subcontractor. However, in case of a failure to pay social security payments of the employees, the related amount might be directly claimed from the employer in accordance with the Social Security Act. Following the payment, the employer may claim these amounts back from the contractor. The contractor has the liability of services, equipment and material payment to each subcontractor, and the contractor should notify the employer at the occurrence of any dispute. It is the contractor's duty to ensure that the subcontract is consistent with the terms and conditions of the main contract.
Obligations of the employer
The main duty of the employer is the payment of the price. The parties may freely determine the form of the contract price, for example, as lump sum or as unit price under the agreement. For the lump sum, the payment is previously fixed as an exact amount. Even if the work costs more than the agreed fixed price, or more work is required to complete the project, the contractor has to perform the works and cannot request more than the amount agreed. In order to balance the parties' rights and obligations, Turkish law provides that in case of unanticipated and unforeseeable conditions the court might exceptionally decide to raise the lump-sum price or cancel the contract depending on the specifics of each case. The contract price may also be determined as a unit price, or in other words as a bill of quantity. The TCO states that in circumstances where the consideration price is not previously determined, it will be fixed based on the work and expenses undertaken by the contractor.
In cases of partial performance, as a rule, pursuant to Article 484 of the TCO, provided that the consideration of the partial work is paid and all the damages of the contractor are compensated, the employer may terminate the contract. In return of the partial payment, the employer may request delivery of partial work performed by the contractor.
General conditions for validity of an arbitration clause under Turkish law, and arbitrability of construction contracts
Conditions for validity of an arbitration clause
Under Turkish law, as a condition for validity, arbitration agreements must be in writing. In line with the UNCITRAL Model Law on International Commercial Arbitration, Article 412 of the Turkish Civil Procedure Law No. 6100 (CPL) and Article 4 of Turkish International Arbitration Law No. 4686 (IAL) provide that an agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication, or in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another.
One of the other essential elements for the validity of an arbitration clause is the parties' clear and precise intention to arbitrate their disputes. According to the Court of Appeal, an arbitration clause must be clear and precise; in other words, the will of the parties to arbitrate must be clear and there must not be an optional choice of court proceeding. Option to litigate should not be granted to one, both or all parties to the agreement.
The other conditions for validity of an arbitration clause under Turkish law are that:
- the arbitration clause should relate to an existing relationship; and
- if a contract containing an arbitration clause is signed by a representative of a party, the proxy given to the representative should include an express authority for the representative to sign an arbitration clause on behalf of such party.
While these are the general conditions for validity of an arbitration clause under Turkish law, additional conditions may be required in relation to an arbitration clause contained in a contract executed by a governmental authority. This is because, in principle, all the contracts of a governmental authority are considered as administrative contracts and administrative contracts cannot contain an arbitration clause unless otherwise provided by laws. Therefore, disputes arising from administrative contracts may only be resolved by administrative courts. To this effect, it is important to check whether any relevant legislation allows a governmental authority to execute a contract that contains an arbitration clause.
There are limits to arbitrability under Turkish law. According to Article 1 of the IAL, disputes regarding rights in rem (real rights) on immoveable properties in Turkey and disputes that are not subject to the will of both parties are not arbitrable. The same rule prevails for arbitrations held under the CPL, which applies to disputes where there is no foreign element within the meaning of the IAL and where the place of arbitration is designated as Turkey.
In principle, disputes arising from construction contracts are arbitrable under Turkish law. Nevertheless, the Court of Appeal decided that, although relevant to a construction contract, disputes in relation to cancellation and registration of title deed are not arbitrable. In another dispute regarding division of flats in a construction that has been done on the basis of a construction contract in return for flats, the Court of Appeal decided that the dispute was not arbitrable because it related to title deed registration.
Multi-tier arbitration clauses in construction contracts
Construction contracts are, by nature, complex contracts where several disputes may arise between parties throughout the project. In large-scale construction projects that are built in Turkey, parties often have disputes but only a small number of these disputes end up in arbitration. In practice, Turkish employers and contractors have familiarised themselves with pre-arbitration procedures such as engineer, dispute adjudication board (DAB), mediation, etc., and the successful exhaustion of these procedures, as well as the parties' efforts to avoid disputes, positively affect the number of disputes.
The Turkish Court of Appeal has dealt with the issue of multi-tier arbitration clauses on different occasions. The High Court approached the issue from validity perspective and examined the effect of multi-tier dispute resolution clauses on the validity of the arbitration clause, and as a result decided that multi-tier dispute resolution clauses are valid under Turkish law. It is the parties' right arising from their contract to first wait for the exhaustion of the pre-arbitration procedures.
In a decision dated 17 December 1987, the 15th Civil Law Division of the Court of Appeal discussed the effect of a multi-tier path on the validity of the arbitration clause. The Court came to the conclusion that if parties apply to mediation, reconciliation, engineer or another expert to settle their disputes but fail to find an amicable way, then they may commence arbitration as a last resort. The fact that the parties apply to pre-arbitration procedures before arbitration does not have any effect on the validity of the arbitration clause. In principle, the Court of Appeal looks for an undisputable will of the parties to refer their disputes to arbitration. The clauses that give the parties the options to litigate and arbitrate are deemed invalid by the High Court. However, according to the Court of Appeal, multi-tier arbitration clauses that enable the parties to apply to mediation, engineer, etc., before arbitration do not jeopardise the will of the parties to arbitrate.
In a Commercial Court decision that was approved by the Court of Appeal, the Commercial Court stated that:
as stated in the agreement, the dispute shall be firstly be referred to the engineer before initiating arbitration proceedings and settled by the engineer. After the engineer delivers his decision, the parties can apply to arbitrator if desired so by them. However, this provision does not invalidate the arbitration clause. Regardless of the parties' application to the engineer, the dispute shall be ultimately resolved by arbitrators. The pre-arbitral procedure [recourse to engineer before arbitrator] and the decision given by the engineer are not binding for the parties. The dispute should be resolved by the arbitrator as the relevant clause [application to the engineer] does not invalidate the arbitration clause.
In a case regarding extending the duration of a construction contract executed as per the FIDIC Red Book (1987), where the Turkish courts had competence to hear disputes arising from such contract, the Court of Appeal decided as follows:
it is a known fact that under FIDIC Contracts claims for time extension are subject to strict form requirements and the request for time extension can be examined in case the form requirements are complied with. Besides, as per Article 287 of Code of Civil Procedure, the Clauses 44, 53 and 67 of the contract are accepted as an evidence agreement between the parties … This being the case, the first claims of the plaintiff should be examined and evaluated as per Articles 44 and 53.3 of the contract, and the claims where one submission was made should be considered as per Articles 53.4 and 67 of the contract.
In this case, the Court of Appeal acknowledges that in the event the parties agreed to finally settle their disputes by arbitration, the relevant clauses for referring to the engineer are considered as a written evidence agreement rather than a step before arbitration or litigation.
Enforcement of arbitral awards
Foreign arbitral awards
The main piece of legislation on the enforcement of arbitral awards in Turkey is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 1958 (NY Convention). An arbitral award resolved in a contracting state would be enforceable in Turkey under the NY Convention. In addition, International Civil and Procedural Law No. 5718 (Law No. 5718) may also apply to the enforcement case, which in essence follows the NY Convention. Law No. 5718 applies if the award is issued by a non-contracting state of the NY Convention.
In order to enforce a foreign arbitral award in Turkey under the NY Convention, the claimant party must seek an enforcement decision from a Turkish court. The court's examination of the application is limited to the procedural issues, or requirements, set forth in the NY Convention; thus, the court is not allowed to review or re-examine the merits of the case. The grounds for refusal of enforcement are stipulated in the NY Convention; and the court, therefore, can only refuse enforcement if the respondent party successfully challenges enforcement on one of those grounds.
Domestic arbitral awards
The enforcement of arbitral awards issued by an arbitral tribunal sitting in Turkey is subject to two different laws. Provisions of the IAL apply to arbitral awards issued in Turkey with a foreign element or where the provisions of the IAL have been adopted by the parties or the arbitral tribunal, whereas the provisions of the CPL are applicable to arbitral awards without a foreign element within the meaning of the IAL and where the seat of arbitration is in Turkey.
As per Article 15 of IAL, only an annulment action (action to set aside) can be initiated against an arbitral award. The grounds to set aside the arbitral award mostly resemble those set forth in the UNCITRAL Model Law on International Commercial Arbitration and the NY Convention. Accordingly, an arbitral award can be set aside in cases of the following:
- if the requesting party proves that:
- the counterpart to the arbitration agreement does not have the capacity to sue or the arbitration agreement is not valid according to the law chosen by the parties to apply to the arbitration agreement, or according to Turkish law if the parties did not choose any applicable law;
- the procedure of appointment of arbitrators agreed by the parties has not been followed;
- the award has not been given within the period of arbitration;
- the arbitral tribunal lacked jurisdiction, or wrongfully declined its jurisdiction;
- the award is not related to the subject matter of the arbitration agreement or the award does not embrace all issues that referred to arbitration, or was made in excess of powers;
- the arbitration proceedings were not conducted according to the agreement of the parties, or, in absence of such an agreement, with the provisions of the IAL, and this default affects the substance of the award;
- the rule of equality of the parties was not complied with; or
- if the court ascertains that:
- under Turkish law, the dispute is not arbitrable; or
- the award is in breach of public policy.
Among the conditions cited above, experience shows that parties often rely on public policy issues in actions for setting aside.
There is no definition of public policy under Turkish arbitration laws. According to the prevailing opinion in the legal writings, the breach of public policy should be explicit and while determining whether or not there is a breach of public policy, the judge should use his or her discretion to prevent irreparable harm. The judge should use his or her discretion by taking into consideration the specifics of each case. To that effect, the breach of public policy should be explicit and should be evaluated as a norm that is beyond systematic differences. In general, public policy is defined as the set of rules that determines the fundamentals of a society in respect of political, social, economic, moral and legal issues and that protects fundamental interests of the society. When it comes to international arbitration, the judge should apply criteria that would suit the practice of international arbitration rather than domestic litigation.
The decision of the Joint Chambers of the Court of Appeal, which is a binding decision for all levels of Turkish courts, dated 10 February 2012, 2010/1 E, 2012/1 K, sets important guidelines for the courts in determining a breach of public policy and states that:
whether or not the actual consequences of enforcing a foreign court decision would breach Turkish policy public should be evaluated, one should not evaluate the law applied in the foreign court decision and the criteria taken into account in the application of such law ... The enforcement of foreign court decision should be rejected if the consequences that will arise as a result of enforcement would breach Turkish public policy. One cannot examine whether the law applied to the merits of the foreign court decision breaches Turkish public policy ... In most cases, it would be deemed that a breach of a mandatory rule of Turkish law would constitute a breach of Turkish public policy; however, it is not possible to say that all foreign court decisions which violate a mandatory Turkish law rule would also violate Turkish public policy.
In a much-debated decision of the 13th Civil Chamber of the Court of Appeal, the high court evaluated an appeal that was lodged in accordance with Article 15 of the IAL, and examined an arbitral award that was against the favour of three Turkish governmental authorities. This decision is relevant to parties that sign a contract with Turkish governmental authorities because:
- the arbitral award that was evaluated in this decision was between a Turkish global system for mobile communications (GSM) operator and three Turkish governmental authorities;
- the place of arbitration was Istanbul. The arbitration was governed by International Chamber of Commerce (ICC) Rules and the IAL;
- the underlying dispute arose from a concession agreement signed between the GSM operator and a governmental authority;
- the arbitral award dealt with whether or not certain income items of the GSM operator fall within the base of the monthly payment that the GSM operator had to make to the state entities in accordance with the concession agreement;
- the arbitrators awarded that the disputed income items did not fall within the base of the monthly payment that the GSM operator had to make to the state entities;
- the state entities filed an action for set aside of the arbitral award on the basis that the award breached Turkish public policy;
- the local court dismissed the requests of the state entities and decided that there was no breach of public policy; and
- the Court of Appeal, which reviewed the file after the appeal application, decided that ‘the arbitral award is against Turkish public policy because it is against the characteristics of the concession agreement, the Turkish State's purpose to generate a continuous income, mandatory rules of law and public interest.'
In reaching to this conclusion, the Court of Appeal stated that:
in case there are objections raised by one of parties in relation to breach of public policy, it may be necessary to analyse the merits of the arbitral award in part in order to evaluate the public policy issues.
This decision has been severely criticised in the legal writings. It is stated by one of the eminent scholars on Turkish international arbitration practice that:
the issues discussed within the decision relate to the merits of the arbitral award and they are outside the scope of the action to set aside. In addition, the use of breach of public policy to review the merits of the arbitral award does not fit the interest which is sought to be protected with the concept of public policy.
This was not the first time the 13th Division relied on the same reasoning to examine the merits of an arbitral award in part. In the decision dated 9 July 2015, No. 2014/27460 E, 2015/23707 K, in relation to enforcement of a foreign arbitral award (ICC award), 13th Division reversed the decision of the first instance court on the basis that:
in order to determine whether or not the foreign arbitral award, enforcement of which is sought, breaches Turkish public policy, and therefore, to determine whether the award can be enforced in Turkey, the concrete case should be analysed from a tax law perspective. Therefore, the local court had to obtain an expert report from a panel of three tax law specialists.
The High Court quoted the above-mentioned reasoning in this decision too. Therefore, the explanations above in relation to public policy in annulment actions also prevail for the public policy criteria in enforcement of foreign arbitral awards as the Court of Appeal applies more or less the same public policy criteria for both proceedings.
 Serdar Paksoy is senior partner and Simel Sarıaliog˘lu is a senior associate at Paksoy.
 Eren, Fikret, Borçlar Kanunu Açısından İnşaat Sözleşmeleri, I˙nşaat Sözleşmeleri (Construction Contracts in respect of the Code of Obligations), Banka ve Ticaret Hukuku Araştırma Enstitüsü, Third Edition, 1996, p. 57.
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 Article 4 of IAL.
 Article 503 of TCO.
 Court of Appeal 15th Civil Law Division, 18 June 2007, No. 2680/4137.
 Court of Appeal 15th Civil Law Division, 13 December 1990, No. 4306/5400.
 Akıncı, Ziya, Milletlerarası Tahkim (International Arbitration), Fourth Edition, Istanbul 2016, p. 105.
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 Istanbul 5th Commercial Court of First Instance, 12 October 1994, No. 1994/571 E., 1994/1212 K. (approved by Court of Appeal 15th Civil Law Division, 7 February 1995, No. 295/578).
 Court of Appeal 15th Civil Law Division, 17 September 2002, No. 2001/5595 E., 2002/3931 K.
 Gökyayla, Cemile Demir, Yabancı Mahkeme Kararlarının Tanınması ve Tenfizde Kamu Düzeni (Public Policy in Recognition and Enforcement of Foreign Court Decisions), First Edition, Ankara 2001, p. 135.
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 Akıncı, p. 281.
 13th Civil Law Division of the Court of Appeal dated 23 February 2016, No. 2013/16287 E., 2016/5292 K.
 Akıncı, pp. 282-285.