Defective and Incomplete Performance in the Construction Contract in Turkish Law

DEFECTIVE PERFORMANCE AND INCOMPLETE PERFORMANCE IN TURKEY’S CONSTRUCTION CONTRACTS

Before addressing the issues of defective performance and incomplete performance in the construction contract based on revenue-sharing, it would be beneficial to discuss what a revenue-sharing construction contract entails. It is a type of contract that is not defined and regulated in the Turkish Code of Obligations No. 6098, but has evolved through practice. The contract has been described by the General Assembly of the Court of Cassation as an agreement in which the contractor, also known as the builder, undertakes the construction work on the landowner’s land by providing the financing themselves, and the landowner promises to transfer a portion of the independent section ownership in the building as payment.

If the contractor fails to fulfill the construction work they have undertaken in terms of the agreed-upon specifications, it may be considered a breach of obligation. However, if defects are found in the completed structure, the contractor may be held responsible for the defects. The purpose of this article is to provide information about the landowner’s rights arising from the contractor’s liability for defects. The distinction made is important due to differences in the applicable provisions and the landowner’s rights.

DEFECTIVE PERFORMANCE IN CONSTRUCTION CONTRACTS WITH FLOOR SHARING

In construction contracts with floor sharing, the independent units and common areas within the structure will be evaluated as a whole, encompassing all agreed-upon characteristics that may arise in any form, not limited to only those. In cases where an assessment is made based on the principles of honesty and the requirements of commercial life, and it is concluded that the quality is necessary for the intended use of the structure, it can be referred to as a defect.

Regarding the nature of the agreed-upon deficiencies in the contract, the provisions specified in the contract and its annexes, as well as the plans, designs, and technical specifications, should be taken into account within this scope. This scope can arise from common points of agreement between the parties, as well as for the qualities that the contractor undertakes to provide solely through a declaration of will, whether or not it affects the intention of the landowner to enter into a contract or the use of the structure; it will be binding in any case and will entail liability for defects. However, it should be strongly emphasized that the contractor’s liability for defects is limited to the qualities of the structure and applies until delivery. Promises made after delivery, such as rental income, cannot be evaluated within this scope. At this point, the provisions of the warranty agreement will come into effect.

Any situation that is contrary to the required qualities or quantities, that affects the value and expected benefits for the intended use of the structure, or that significantly diminishes them, will fall within this scope as a defect caused by elements not stipulated in the contract. In such cases, it can be argued that the contractor has assumed at least a medium-quality delivery obligation with regard to these characteristics.

TYPES OF DEFECTIVE PERFORMANCE IN CONSTRUCTION CONTRACTS WITH FLOOR SHARING

Material Defect – Legal Defect

A material defect refers to a physical flaw existing in the structure, which relates to the agreed-upon or necessary qualities specified in the contract.

A legal defect indicates non-compliance with limitations arising from public law sources, such as usage or safety standards.

Open Defect – Hidden Defect

Open defects are flaws that the landowner detects through an immediate examination of the structure as soon as it becomes feasible according to the normal course of business after the delivery. The landowner is obligated to notify the contractor within a reasonable period. The expiration of the rights related to timely defect notification starts from the delivery date and expires after five years, regardless of the nature of the defective work, unless the contractor has gross negligence, in which case it becomes twenty years.

Hidden defects, on the other hand, are flaws intentionally concealed by the contractor after the acceptance of the work and cannot be detected during a proper examination. When a hidden defect is discovered, it must be promptly reported to the contractor. Within a five-year statute of limitations period from the discovery of the hidden defect, the contractor can be held liable for this defect.

Significant Defect – Less Significant Defect

A significant defect refers to a flaw that renders the work substantially defective to the extent that the landowner cannot use it or cannot reasonably be compelled to accept it according to principles of fairness and is also contrary to the contractual provisions. This type of defect grants the landowner the right to terminate the contract, making it significant.

In the case of less significant defects, the landowner has the option to request a price reduction or remediation of the defect.

Essential Defect – Secondary Defect

Defects existing at the time of delivery of the work are considered essential defects.

Other defects that arise subsequently due to the defect present at the time of delivery are considered secondary defects. The significance of these defects lies in the applicability of liability provisions against defects caused by the defect existing at the time of delivery.

CONDITIONS FOR CONTRACTOR’S LIABILITY ARISING FROM DEFECTIVE PERFORMANCE

Delivery of the Constructed Building

The first condition for the landowner to invoke liability provisions against the contractor for defects is the delivery of the constructed building. Liability provisions cannot be invoked for defects identified before the delivery.

In floor-sharing construction contracts, delivery refers to the notification by the contractor that the work has been completed. This notification by the contractor can be explicit or implicit. An implicit delivery can be demonstrated by the contractor completing the actual construction work on the land and leaving the premises.

Defectiveness of the Delivered Building

For the landowner to invoke liability provisions against the contractor within the framework of defect liability, there must be a defect found in the independent units/common areas during the inspection conducted after the delivery of the building or a defect that arises later for hidden defects.

Landowner’s Obligation to Inspect and Notify

Inspection and notification are crucial for the landowner to exercise the rights granted to them under defect liability provisions. After the delivery of the work, the landowner must inspect the work as soon as it becomes feasible according to the normal course of business and, if any defects are found, notify the contractor within a reasonable period. Otherwise, if the landowner neglects to conduct an inspection and make a notification, they will be deemed to have accepted the work. The inspection can be conducted by the landowner without the involvement of an expert unless specified in the contract or custom, and it should be carried out in a timely and diligent manner.

In the notification, the landowner is obliged to clearly specify the defects identified in terms of type and nature. Failure to comply with the notification obligation by merely expressing dissatisfaction will result in the failure to fulfill the notification burden.

RIGHTS OF THE LANDOWNER IN CASE OF DEFECTIVE PERFORMANCE IN THE CONSTRUCTION AGREEMENT

In cases where the contractor is responsible for the defect in the work, the landowner can exercise one of the following optional rights:

– The right to terminate the contract if the work is defective to an extent that the landowner cannot use it or cannot be compelled to accept it in accordance with fairness, or if it is contrary to the contractual provisions to the same extent.

– The right to retain the work and request a reduction in price proportionate to the defect.

– If it does not require excessive expense, the right to request free repair of the work at the expense of the contractor, while reserving the landowner’s right to claim compensation in accordance with general provisions.

Termination of the Contract

1. Conditions for the Exercise of the Right to Terminate the Contract

For the landowner to exercise the right to terminate the contract, the defect in the structure must be such that the landowner cannot use it or cannot be compelled to accept it in accordance with fairness, to the extent necessary to fulfill the agreed purpose of use and suitability criteria. It should be noted that a structure that is suitable for the mentioned purpose of use, but possesses any other qualification determined subjectively at the request of the landowner, is not sufficient to fulfill this condition. This unsuitability must be to an extent where, according to fairness, the landowner is not expected to accept the structure, and the defect cannot be eliminated by repair without requiring excessive expense. Similarly, if the constructed structure is contrary to the contractual provisions or in cases where there is no provision in the contract, the defect must be of such importance that the landowner cannot use the structure or cannot be compelled to accept it.

The exercise of this right has been limited by the legislator. If the structure is built on the landowner’s immovable property and dismantling it would cause excessive harm, the landowner cannot exercise the right to terminate the contract; instead, they must resort to other optional rights. Whether the restrictive provision will hinder the exercise of the right to termination will be determined by examining whether the defects completely eliminate the possibility of use or create a dangerous situation.

2. Exercise of the Right to Terminate the Contract, Lawsuit for Termination of the Contract

The right to terminate the contract has the effect of nullifying the contract as if it had never been concluded, with a unilateral declaration of will that must be reached, and it can be said that it results in the termination of the obligation for unfulfilled performance and the emergence of the obligation to return for fulfilled performances. The landowner can explicitly express their intention to terminate without being subject to any form or condition, and it can also be used implicitly, such as requesting the return of the land share from the contractor. In this regard, it can be said that there is no need for the acceptance of the contractor or the court for the exercise of the right to terminate the contract; however, according to the Supreme Court, since the validity of construction agreements in return for land shares is subject to formal requirements, if the party wishing to terminate the contract does not accept it and objects, they will need the decision of the judge, i.e., they will be able to terminate the contract with the decision of termination (rescission) at the end of the lawsuit for “termination of the contract” filed in court. The court will first discuss whether the party requesting termination is justified; if justified, it will decide to terminate the contract, otherwise, it will reject the lawsuit and keep the contract in force. As a result, the termination of construction agreements in return for land shares will only be possible with a court decision, unless the parties’ wills align.

3. Consequences of the Exercise of the Right to Terminate the Contract and Lawsuit for Cancellation and Registration of Title Deed

With the exercise of the right to terminate the contract, the registration made for the transferred immovable properties before termination will become fraudulent, and if the landowner has asserted the right to termination through a lawsuit, the cancellation of the title deed can also be decided in this lawsuit. If the right to termination has been used during the lawsuit, the landowner may also assert the cancellation of the title deed and its registration in their name through a lawsuit.

Right to Request Price Reduction

In the case of a defective construction, the landowner has the right to retain the structure and request a price reduction proportionate to the defect. This right is exercised through a unilateral declaration of will and does not require the acceptance of the contractor or a court decision. The exercise of this right results in the deduction of the reduction amount from the landowner’s debt to the contractor, which is the amount of the land share. If the transfer of ownership has already been made during the construction phase, the landowner can claim restitution due to the contractor’s failure to fulfill their obligations in accordance with the contract by not adequately performing the work, within a five-year statute of limitations period.

Right to Request Remediation of the Defect

Conditions for Exercising the Right to Request Remediation of the Defect

For the landowner to exercise the right to request remediation of the defect, the defects in the construction must be capable of being remedied through repair, and the remediation activities of the contractor must not require excessive expense. The evaluation of whether these conditions are met will be made by considering the ratio of the benefits that the landowner will obtain from the remediation of the defect to the labor and material costs that the contractor will incur during the remediation activities. If there is no disproportion in these benefits, the landowner can exercise the right to request remediation of the defect.

Exercise of the Right to Request Remediation of the Defect

The right to request remediation of the defect should be exercised by the landowner through a unilateral declaration of will, typically through a notice, and upon receipt of the landowner’s notification, the contractor is required to initiate the necessary remediation activities immediately. If the duration for the completion of these activities is not determined by the parties, an objective period will be determined for the preparation and restoration works, and if the parties have agreed upon a period, the expiration of that period will be awaited.

Failure to Remedy the Defect and Contractor’s Default

If the defect is not remedied within the period specified by the parties or notified by the landowner, the contractor will be deemed to be in default without the need for a formal notice. In the event of the contractor’s default, the landowner has the right to demand performance of the obligation and claim compensation for the delay without the need for granting an additional period, or the landowner can immediately notify the contractor that they waive the performance of the obligation and demand the remedy of positive damages resulting from the non-performance or claim compensation for negative damages by rescinding the contract. The exercise of the right to rescission will depend on the fulfillment of the conditions explained above.

Compensation Right for Defective Performance in Joint Construction Contracts

In a joint construction contract, the landowner has the opportunity to claim compensation for the damages suffered due to defective performance, in addition to or independently of their optional rights under general provisions. This compensation claim relates to damages that cannot be remedied despite the exercise of optional rights and includes the loss of expected benefits in the landowner’s assets and personal property, or the loss of earnings. While the compensation claim under general provisions does not depend on inspection and notice prerequisites for the exercise of optional rights, it requires the contractor’s negligent behavior for the compensation claim to be made under general provisions.

Within the framework of the damage caused by the defect, the landowner, if one of their optional rights, such as price reduction or defect remediation, has been exercised, can request compensation for positive damages. If the right of rescission has been exercised, the landowner can demand compensation for negative damages resulting from the rescission of the contract.

INCOMPLETE PERFORMANCE IN JOINT CONSTRUCTION CONTRACTS UNDER TURKISH LAW

The contractor’s delivery obligation in a joint construction contract relates to the entire construction, and incomplete performance refers to the situation where some or all of the works that are necessary for creating a structure that complies with the contract or suitable for its intended use have not been completed. While defective performance refers to non-compliance with the contract in terms of quality after the completion of the work, incomplete performance involves deficiencies in the works that should have been carried out. The landowner incurs an obligation to inspect and notify in the case of defective performance, where the work is not performed properly. However, for incomplete works, they can assert their rights within the general statute of limitations period. In the case of incomplete performance, the landowner has the opportunity to resort to legal remedies based on the non-performance of the contract. In this context, without requiring a notice, within the statute of limitations period, the landowner can:

– Demand the proper performance of the contract by refraining from paying the price.

– Request permission from the court for the completion of the structure, either by the contractor or by themselves or another party, at the expense of the contractor.

– If there is a situation that requires granting a period by putting the contractor in default, wait for the expiration of the period and then:

– Demand the completion of the work and claim compensation for the delay.

– Notify immediately that they waive the performance of the obligation and demand the remedy of the damages arising from the non-performance.

– Request the return of the performed obligations and the remedy of the damages suffered due to the invalidation of the contract.

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