Introduction
Construction contracts have the characteristics of work contracts since they involve the creation of works. Work contracts are regulated under Article 470 of the Turkish Code of Obligations (“Code no. 6098”) and defined as follows: “A work contract is a contract where the contractor undertakes to create a work, and the owner undertakes to make a payment in return.” Therefore, the parties to this contract are the contractor who commits to produce a work and the owner who compensates the contractor in return.
The basic elements of a work contract are the work description, the payment terms, and the performance schedule.
Nature of Contract Termination
Termination refers to the right to end a continuous liability relationship with prospective effect. Therefore, as a rule, all dealings and acts performed until the termination remain valid. A valid termination takes effect upon being notified to the other party and does not require any declaration of acceptance by the other party.
Owner’s Wrongful Termination
The contract between the parties often lays down the terms of rightful termination by the owner. Even if the contract has no such terms, the general rules of Code no. 6098 and the relevant case law may serve as a reference in this respect.
Accordingly, a work contract may be terminated for the following reasons: unreasonable excess of the approximate price, force majeure, impossibility of performance, death or bankruptcy of the contractor, defective performance of the work or delay in the specified delivery period, and termination without cause by way of full compensation by the owner.
Under Article 484 of Code no. 6098, which regulates termination in return for compensation, the owner has the right to terminate a contract without cause by paying compensation. The owner is therefore obliged to pay for the work done up to that point and compensate the contractor for all damages incurred as a result of the termination. Even if at fault, the owner may still exercise the right of termination under the law.
However, in this case, the contractor may claim the damages incurred due to the wrongful termination. These damages include loss of profits arising directly from the termination. In other words, the owner terminating the contract without cause must compensate the contractor for (i) the work completed until termination, (ii) materials, labor and other associated costs, and (iii) damages arising from the loss of profits the contractor would have gained with the completion of the work.
Here, another important point is that the contract must be terminated before the completion of the work. If the work has been completed as per the contract and the owner has not taken delivery of the work, “default of creditor” occurs. In this case, the contractor can receive payment by handing over the work.
The owner is obliged to notify the contractor of its intention to exercise the right of termination under Article 484 of Code No. 6098. The notice of intention must have the nature of termination of the contract. Any declaration that only withdraws or limits some of the contractor’s authorizations or warns the contractor does not constitute an intention to terminate, and the contract will be deemed in effect.
Termination is an irrevocable declaration, and once the contract is revoked, this declaration cannot be changed and will have its full effect from the notification. If the owner gives a notice of termination without cause or compensation, it will bear the burden of proof to prove that it has a reason not to compensate.
The Court of Appeals’ case law states, “The owner may terminate the contract with prospective effect, even if it is in return for land share and even if the other party opposes, provided that the owner pays for the work done up to that point and compensates the contractor for all damages. There is no need for a court decision for this.” Thus, the owner may terminate the contract without a court decision.
In case of termination, the value of the work performed by the contractor will be determined by the method agreed in the contract. If the contract does not specify a method for calculating the remuneration or provides for an estimated cost, the value may be determined as per the law based on the value of the work and its costs. The calculation methods include deduction and addition.
In the deduction method, the savings achieved by the contractor due to ceasing the work (e.g. savings in material and personnel costs) and the profit obtained by finding other work by ceasing the work are calculated, and the compensation is found by deducting this amount from the contractor’s total earnings.
In the addition method, the loss is calculated by adding the contractor’s actual expenses (such as materials, personnel, etc.) until the time of termination to the net profit that the contractor would have made if the work had been completed.
The owner may demand the delivery of the work done (even if not completed) until termination. In this case, the owner may also request the contractor to deliver the materials for which it has paid but which have not yet been used in the construction.
With the owner’s termination of contract, the contractor will be released from the obligation to complete the work and will no longer have the right to demand remuneration for the remaining part of the work. However, in this case, the contractor has the right to claim damages.
However, the owner may not know the exact amount of compensation due to the contractor and the parties may not have reached an agreement in this regard. In this case, disputes regarding the amount of compensation may be resolved in court. Generally, the upper limit of compensation is considered to be the amount that the contractor would be entitled to if the work was completed and delivered in full.
Conclusion:
Although the owner may exercise the right to terminate the contract without cause under the law, the use of this right will create an obligation to compensate the damages of the contractor. Therefore, the owner should foresee all possible consequences before making a decision. As such, the parties to a work contract should seek legal assistance at every step.
Birgi Kuzumoğlu, Partner
