What is an International Construction Contract?

If the parties to a contract have different nationalities or residences in different countries, or if the subject matter of the contract, service, or payments cross the borders of a country, that contract is international in nature. Additionally, contracts that do not carry foreign elements in terms of personal or geographical aspects or are not connected to multiple legal systems also have an international character to the extent that they concern international trade and/or international investment.

What are the Basic Characteristics of International Construction Contracts?

International construction contracts are generally high-value, long-term, and complex projects. One party is usually a foreign government entity, and the other party is a contracting company or companies with headquarters in another country. Frequently, the employer is a public institution of a developing country, while the contractor is a company from an industrialized country.

What are the Main Elements to Consider When Preparing International Construction Contracts?

The main elements include ensuring the parties have the capacity to enter into contracts, preparing the contract in written form, selecting the applicable law, determining the dispute resolution method, ensuring clear and precise contract language, defining force majeure situations, and determining risk distribution.

How is the Contracting Capacity of the Parties Determined?

The parties to an international construction contract must have the capacity to enter into contracts according to their own national laws. Whether the parties are competent or not should be evaluated according to the foreign legal system to which they are subject. Especially:

The legal capacity and capacity to act of natural persons:

• Subject to the law of the country of their citizenship
• Determined according to the law of the country of domicile or habitual residence
• According to Article 8 of the Turkish Private International Law and Procedural Law, the capacity of natural persons is subject to their national law

The legal capacity and capacity to act of legal entities (companies):

• Subject to the law of the place where the administrative center is located
• Determined according to the law of the place of establishment
• According to Article 8/4 of the Turkish Private International Law and Procedural Law, the capacity of legal entities is subject to the law of the administrative center in their statute
• Turkish Law is applied to the capacity of foreign legal entities whose actual administrative center is in Turkey

It is important to know whether the parties have active and passive litigation capacity and who the authorized organs or persons are for representation and incurring debts. Especially in contracts with foreign state institutions, it is necessary to explicitly state in the contract that the counterparty waives judicial immunity. Therefore, it is of great importance for the parties to examine each other’s authorization documents or signature circulars during the negotiation phase or at the time of contracting.

What are the Formal Requirements in International Construction Contracts?

Although contracts are not subject to any form in principle, it is important that international construction contracts are prepared in writing and in detail. This can prevent future disputes and reduce proof problems.

The construction contract made between the landowner and the contractor in exchange for land must be made in official form for validity, as it aims to transfer real estate ownership. Indeed, a contract containing the obligation to transfer immovable land to the contractor must be made in official form to be valid.

In case of contracting in an electronic environment, a secure electronic signature should be used. However, legal transactions that laws subject to official form or a special ceremony, as well as guarantee contracts, cannot be carried out with a secure electronic signature.

In practice, parties make large and important construction contracts in writing and even in official form. In contracts made with electronic data interchange (EDI) or fax text, since there are often no signatures in the texts or the signatures are not original, especially such signed texts are copies; in terms of procedural law, they are only considered a beginning of evidence. It is not possible to accept signature photocopies as valid signatures according to our law.

Additionally, the formal requirements of the country where the contract is made and the country where it will be performed should be taken into account. Because sometimes the formal requirement provided in the law of the place of performance may serve entirely to protect public order, and contracts in different forms may not be considered valid.

Why is the Choice of Applicable Law Important?

The choice of law applicable to the contract determines how issues not regulated in the contract will be resolved, the scope of the rights and obligations of the parties, and which legal system will be applied in case of a dispute. When this choice is not made, in case of a dispute, the judicial authority will determine the applicable law according to its own conflict of laws rules.

What are the Basic Obligations of the Contractor in International Construction Contracts?

The basic obligations of the contractor are:

• Performing the work personally or having it performed under their management
• Performing the work with loyalty and care
• Providing the necessary tools and equipment
• Starting and continuing the work on time
• Covering damages
• Delivering the work on time
• Obligation to inform the owner

What are the Basic Obligations of the Owner?

The basic obligations of the owner are:

• Paying the price of the work
• Providing the necessary materials
• Informing about dangerous situations of the material or the item left for repair
• Inspecting the work
• Notifying if there are defects

How is the Subcontracting Relationship Regulated?

The subcontracting agreement is by nature a construction contract, and the main contractor makes this contract not on behalf of the owner but in their own name and account. The subcontractor acts as an independent, not dependent, assistant of the main contractor and has certain professional expertise in the subject they have undertaken.

The main contractor does not have the authority to supervise and oversee the subcontractor. However, according to some views, it is possible for the subcontractor to work under the management and supervision of the main contractor if it is agreed in the contract or required by the nature of the work.

The owner has no right to give instructions to the subcontractor, nor does the owner have any right to demand from the subcontractor to produce and deliver the work. The owner can make claims against the subcontractor only according to tort provisions if the conditions are met.

The subcontractor’s obligation to create and deliver the construction work is not to the owner but to the main contractor. Since there is no contractual relationship between the owner and the subcontractor, the owner has no obligation to pay any fee to the subcontractor.

In the main contractor’s liability to the owner for the actions of the subcontractor:

• The subcontractor is considered the auxiliary person of the main contractor
• The main contractor is liable if they are at fault in selecting or instructing subcontractors
• The main contractor can escape liability for the subcontractor’s action only by proving that they could not be considered at fault if they had committed such an action themselves

The subcontractor can use the statutory lien right against the owner for the fee receivable from the main contractor due to working on the building constructed on the owner’s land, and can request the registration of this right. This right exists regardless of whether the assignment of the work to the subcontractor is permissible or not.

How is the Contract Language Determined?

Preparing the contract in a language that both parties know in common is the most appropriate method. Today, for practical reasons, English is mostly preferred as the language of international commercial and economic contracts.

How is the Dispute Resolution Method Determined?

Alternative resolution mechanisms are particularly needed in resolving disputes arising from international construction contracts. The judicial authority to be applied in case of dispute should be clearly stated in the contract. In this context:

• The court of the state in which one of the parties is a national can be chosen as the judicial authority
• An international institutional arbitration court can be preferred
• An ad hoc arbitration court can be designated
• When arbitration is chosen as the way to resolve disputes, it should be taken into account that if there is no explicit provision in the contract, the adaptation of the contract to changing conditions by the arbitrators or its termination cannot be accepted as easily as in official courts

Particularly important issues:

• Mechanisms should be provided to ensure that disputes related to construction projects can be resolved quickly, if possible at the site when they arise
• The execution of the final decision in the country where the parties’ assets and receivables are located should be considered
• Harmony should be ensured between the chosen judicial authority and the applicable law
• Issues such as the place of arbitration, language of arbitration, applicable arbitration rules, and number of arbitrators should be clearly stated
• If one of the parties is a state or state institution, the issue of judicial immunity should be specially regulated

In addition, alternative dispute resolution methods such as mediation and conciliation can be provided for in the contract, and a condition can be imposed that litigation or arbitration cannot be resorted to without resorting to these methods. This can ensure the continuation of commercial relations between the parties and reduce litigation costs.

What are FIDIC Contracts?

These are standard contract forms prepared by FIDIC (Fédération Internationale des Ingénieurs-Conseils). There are different types of contracts for construction works, electrical and mechanical works, design-build, and turnkey projects.

How is the Payment Method Determined?

In international construction contracts, parties can freely decide on the payment method within the framework of the foreign exchange regime of the payment country. In practice, the following payment methods are mainly used:

1. Letter of Credit: One of the most secure payment methods, it is a system in which banks mediate and protect both parties.
2. Advance Payment: This is a payment made at the beginning of the work, usually applied as a certain percentage of the total price.
3. Documentary Payment: This is a system where payment is made against the submission of specified documents.
4. Payment Against Goods: These are payments made against the completion of certain stages of the work.
5. Barter: These are payments made through the exchange of mutual goods or services.
6. Acceptance Credit Payment: This is a system that provides the opportunity for deferred payment.
7. Joint Account: These are payments conducted through a joint account.

When determining the payment method in the contract, the following issues should be considered:

• Foreign exchange regime restrictions of countries
• Financial situation and credibility of the parties
• Size and duration of the project
• Financing sources (international credit institutions, etc.)
• Tax and fee obligations
• Exchange rate risks and protection methods

In addition, the currency in which payments will be made, how exchange rate changes will be managed, interest rates to be applied in case of delay, and if there are conditions and guarantees regarding advance payments should also be clearly regulated in the contract.

What are the Termination Cases of Construction Contracts?

The reasons for terminating a construction contract can be detailed as follows:

1. Termination by Performance: The contract ends due to performance when the contractor completes and delivers the construction that it has undertaken to build on time, in accordance with the contract and without defects, and the owner fully pays the contracted fee on time.
2. Exceeding the Estimated Cost: If the estimated cost, which was approximately determined in advance with the contractor, is exceeded excessively without the influence of the owner, the owner has the right to withdraw from the contract both during the construction and after the completion of the construction.
3. Unilateral Termination by the Owner: The owner can unilaterally terminate the contract before the completion of the construction work, provided that it pays the price of the completed part and compensates the contractor’s entire loss. In this case, the owner does not need to have a just cause.
4. Impossibility: If the performance of the construction work has become impossible (if the work has perished) as a result of an unexpected event or an action of the owner or contractor, the construction contract ends.
5. Contractor’s Withdrawal from the Contract: The contractor can withdraw from the contract if the owner fails to fulfill its obligation to provide materials or land or to pay the fee, or if the owner fails to accept the construction work presented to it by the contractor.
6. Contractor’s Default: If the contractor does not start the work on time or delays the performance of the work contrary to the contract, or if, without the fault of the owner, the construction is delayed to such an extent that it will not be possible to complete it on time despite all predictions, the owner can withdraw from the contract without waiting for the time specified for delivery.
7. Defective Performance: If the construction work is severely defective or contrary to the contract to such an extent that the owner cannot use it and cannot be forced to accept it according to the rules of equity, the owner can withdraw from the contract either by refusing to accept the construction work or after accepting the work.
8. Extraordinary Circumstances: If extraordinary events that could not be foreseen in advance or were foreseen but not taken into account by both parties emerge later and prevent or extremely complicate the construction of the work, the judge, using his discretionary power, either increases the agreed fee (i.e., adapts the contract to the changing conditions) or terminates the contract.

Each of these termination cases affects the rights and obligations of the parties in different ways, and it is important to clearly regulate the consequences of these situations in the contract.

Why is the Use of Standard Contract Forms Important?

Standard forms provide a common understanding between parties familiar with different legal systems, shorten the negotiation process, and ensure uniformity in practice. Standard forms prepared by organizations such as FIDIC, ICE, World Bank are widely used.

How is Contract Financing Arranged?

For financing international construction projects, which generally involve large amounts, loans can be obtained from international organizations such as the World Bank, International Development Agency, European Investment Bank. In this case, it is necessary to comply with the standard forms and rules of the relevant organization.

How Are Guarantees Arranged?

Types of guarantees used in international construction contracts are generally grouped under three main headings:

Bid Bonds:

• These are guarantees taken to ensure that the bidding company does not withdraw its offer or avoid signing the contract
• Determined as a certain percentage of the bid price
• Valid until the bid is concluded

Performance Bonds:

• These are guarantees that the contractor will complete the work in accordance with the contract
• Determined as a certain percentage of the contract price
• Generally valid until final acceptance
• The quality of the work and timely completion are guaranteed

Advance Payment Bonds:

• These are guarantees taken for advance payments made by the owner
• Issued for the amount of the advance
• Released in proportion to the use of the advance in the work

In the arrangement of these guarantees, the standards set in the International Chamber of Commerce’s (ICC) brochure titled “Uniform Rules for Contract Guarantees” are widely used. The following aspects of guarantees should be clearly regulated in the contract:

• Form and content
• Validity periods
• Compensation conditions
• Release conditions
• Qualifications of the guaranteeing institution
• Language of guarantee letters
• Applicable law and related matters

Additionally, since guarantee letters from local banks are often required in public tenders in developing countries, the difficulties that international contractors may experience in this regard should be taken into account, and counter-guarantee mechanisms should be established if necessary.

For effective use of guarantees, necessary organization should be made regarding:

• Timely submission of guarantees
• Regular monitoring of periods
• Obtaining extensions when necessary
• Fulfillment of release conditions
• Taking precautions against the risk of unfair compensation

How is Work Control and Supervision Carried Out?

The owner or the consulting engineer acting on behalf of the owner controls whether the work is carried out in accordance with the contract and technical specifications. The scope and manner of using the control authority should be clearly stated in the contract.

The owner may give various direct or indirect instructions to the contractor during the construction of the work. These instructions may be related to:

1. The construction work itself
2. The manner in which the construction work is carried out
3. Materials to be used in construction
4. Selection of subcontractors

The contractor is obliged to personally create the construction work they have undertaken or to have it done under their management. This obligation is based on the idea that the contractor’s personality, personal ability and competence are important in the construction contract.

The provision in the law regarding the contractor’s obligation to perform the work personally or have it done under their management is not mandatory. The parties can agree otherwise. For example:

• The contract may stipulate that all or part of the construction work be given to a subcontractor
• Giving the work to a subcontractor may be completely or partially prohibited in the contract

The supervision and control authority of the owner or the consulting engineer acting on their behalf covers ensuring that the work is carried out in accordance with technical specifications and projects, performing quality control, and monitoring compliance with the work program. How these authorities will be exercised, which tests will be performed, approval and acceptance procedures should be regulated in detail in the contract.

How is Material Supply Arranged?

The parties can freely determine in the construction contract which party will be responsible for providing raw materials such as sand and stone, and semi-finished materials such as iron, cement, and lime to be used in the construction of the work. Land and plans are not considered materials in this sense.

In a regular construction contract, the owner provides the material, while the contractor creates the construction work. In a construction work delivery contract, the contractor both provides the material and creates the construction work. Since it is understood from the relevant articles of the Code of Obligations that the obligation to provide material belongs to the owner as a rule, in case of doubt, the contractor’s obligation to provide material should be rejected.

The contractor is responsible for the material they provide according to the provisions of warranty against defects and encumbrances. If the material is provided by the owner, the contractor must take care of this material, use it carefully and protect it, and immediately notify the owner upon detecting defective material. If material remains at the end of the work, the contractor is obliged to return the remaining material to the owner.

The obligation to insure the material used in construction belongs to the owner in principle. However, if otherwise stipulated in the contract, the obligation to insure may belong to the contractor. In addition, in urgent cases where the material is exposed to a special danger, the contractor must insure the material on behalf of the owner at the owner’s expense.

The contractor is obliged to account to the owner regarding the material. The parties can determine the details of this accounting obligation in the contract. The contractor is obliged to return the remaining material provided by the owner at the end of the work. Remaining material refers to any material that is not an integral part of the constructed work.

If it is discovered during the performance of the work that the material provided by the owner or the land given by them is defective, or if situations arise that endanger the proper or timely execution of the construction work, the contractor is obliged to notify the owner immediately, otherwise they will have to bear the negative consequences themselves.

How is the Work Program Prepared?

The work program is one of the most critical elements of international construction contracts and should be prepared to include the following details:

The start and end dates of the work should be clearly defined. Intermediate terms and critical dates should be clearly defined in the contract. Procedures for preparing and updating the work program should be specified in detail.

For delay cases:

• Scope and amount of penalties
• Method of calculating delay damages
• Daily, weekly, or monthly delay penalties
• Total delay penalty limit

Situations where time extensions can be granted:

• Force majeure
• Delays caused by the owner
• Delays caused by administrative authorities
• Unexpected physical obstacles
• Work increases and changes

Additionally, bonuses to be given in case of early completion should also be regulated in the contract. The relationship between the work program and progress payments, cash flow projections, and mobilization program are also important parts of the work program.

The work program should be updated periodically, and how these updates will be made, approval procedures, and the obligations of the parties should be clearly stated in the contract. The critical path method should be used in program updates, and delays and acceleration measures should be reflected in the program.

How Are Change Requests Managed?

The owner’s authority to request changes, notification of change requests, evaluation process, determination of price and time effects should be clearly regulated in the contract.

How Are Temporary and Final Acceptance Arranged?

The construction work that has been completed and created in accordance with the contract must be delivered by the contractor to the owner. For immovable construction works, a registration process is carried out in the land registry before delivery.

If the owner unjustly refuses to accept the construction work, they become in default according to the provisions of the creditor’s default. In this case, works that can be deposited may be deposited by the contractor.

With the delivery of the construction work:

• Benefits and damages on the work pass to the owner
• The owner’s obligation to inspect and notify arises
• The contractor’s payment claim becomes due

The parties determine the delivery time of the construction work in the contract. In practice, it is observed that parties make penalty clause and bonus agreements regarding delivery time. Thus, the contractor will be obliged to pay a penalty if the construction work is not delivered at the agreed time. On the other hand, if the contractor delivers the work before the agreed date, the owner will be obliged to pay the agreed bonus.

The contractor’s responsibilities continue during the warranty period that begins after provisional acceptance. The contractor is obliged to remedy defects that appear during this period. With the final acceptance to be made at the end of the warranty period, the contractor’s warranty responsibility ends. However, liability for hidden defects continues.

The contractor must transfer the ownership of the constructed work to the owner and must diligently perform the obligations arising from the construction contract and protect the interests of the owner.

How Are Occupational Safety and Environmental Protection Arranged?

Occupational safety and environmental protection issues are important components of international construction contracts. Especially after 2003, these issues have gained more importance with the Equator Principles accepted by the world’s largest financial institutions. These principles aim to ensure that construction projects financed by lending institutions develop in a socially responsible and environmentally sound manner.

Obligations regarding occupational safety and environmental protection should be regulated in detail in contracts. In this context, national and international standards to be complied with, the environmental legislation of the host country, and regulations regarding occupational health and safety should be clearly stated. In addition, environmental impact assessment reports, occupational safety risk analyses, and responsibilities related to these should also be included in the contract.

Although the contractor’s capacity to influence environmental aspects in traditional construction activity is limited by the technical criteria and conditions determined by employers and their consulting engineers, today environmental and social standards have become important criteria in providing international financing. Therefore, environmental protection measures, waste management, noise control, protection of air quality and similar issues should be regulated in detail in contracts, and sanctions to be applied in case of non-fulfillment of these obligations should be clearly stated.

How Are Insurance Obligations Arranged?

The obligation to insure the materials used in construction belongs to the owner in principle. However, if the contract stipulates otherwise, the obligation to insure may belong to the contractor. Especially in urgent cases where the material is exposed to a special danger, the contractor must insure the material on behalf of the owner at the owner’s expense.

Insurance obligations in international construction contracts should be arranged under the following headings:

• All-risk insurance (construction insurance against all risks)
• Employer’s liability insurance
• Third-party liability insurance
• Professional liability insurance
• Transport insurance
• Workers’ insurance
• Machinery and equipment insurance

In insurance policies:

• Insurance amounts
• Insurance period
• Coverage scope
• Deductibles
• Insurance premium payment obligation
• Damage notification and compensation procedure
• Selection of insurance company
• Co-insured parties
• Recourse rights

such matters should be clearly stated. In addition, validity conditions of policies, renewal procedures, and procedures to be performed in case of cancellation should also be regulated in the contract.

How Are Contract Annexes Arranged?

In international construction contracts, contract annexes are considered an integral part of the contract and are of great importance. These annexes generally include detailed documents such as technical specifications, projects, drawings, work schedule, price schedules, quantities, unit price descriptions, quality standards, organization chart, and key personnel list. In the preparation of contract annexes, special attention should be paid to ensure that they are compatible with the main contract and that there are no contradictions within themselves.

In case of contradiction between contract annexes, it should be clearly stated in the contract which document will be applied with priority. Generally, this order of priority is arranged as: main contract text, special technical specification, general technical specification, projects, unit price descriptions, and other annexes.

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In addition, issues such as how new projects will be added in case of changes to projects, and which will prevail in case of conflict with existing projects, should also be regulated in the contract.

The procedure to be followed when changing contract annexes or adding new annexes, authorized persons and approval authorities should also be specified in the contract. Especially in long-term projects, since it may be necessary to make changes to the annexes due to technological developments or changing needs, how this process will be managed should be planned in advance. Making all changes in writing and signing by the parties is important in terms of preventing possible disputes.

How to Ensure Control of the Employer’s Financial Status?

Controlling the employer’s financial status is critical in large-scale international construction projects. Generally, the employer, especially if it is a public institution of a developing country, will not be able to or prefer not to finance the construction project from its own resources. In this case, the following ways are followed for project financing:

1. Obtaining Credit from International Financial Institutions:

• World Bank (International Bank for Reconstruction and Development- IBRD)
• International Development Association (International Development Association-IDA)
• European Investment Bank (European Investment Bank-EIB)
• European Development Fund (European Development Fund-EDF)

2. Providing Financial Guarantees:

• Bid guarantees
• Performance guarantees
• Repayment guarantees
• Letter of credit arrangements
• Bank guarantee letters

3. Contractual Measures:

• Determining the rights to be granted to the contractor in case payments are not made on time
• Obligation to periodically report the employer’s financial status
• Right to stop work in case the employer fails to fulfill financial commitments
• Termination rights in case of payment difficulties
• Identification of alternative financing sources

4. Regular Financial Audit:

• Periodic control of the employer’s financial situation
• Regular audit of project financing
• Monitoring whether payments are made on time
• Early detection of financial risks and taking necessary measures

Clearly regulating these control mechanisms in the contract is of great importance for the financial sustainability of the project.

What Are the Issues to Consider in Contract Negotiations?

In international construction contract negotiations, it must first be ensured that the parties have the capacity to enter into contracts. For this purpose, it is of great importance that the parties examine each other’s authorization documents or signature circulars during the negotiation phase or at the stage of concluding the contract. Parties have to evaluate the existence of the legal capacity of the counterparty according to the foreign legal system to which they are subject.

As soon as an agreement is reached on the essential elements of the contract, a confirmation letter bearing the signatures of the persons authorized to represent and bind the parties should be exchanged. According to Article 23 of the Turkish Commercial Code, the confirmation letter enables verbal agreements or agreements made by telephone, telegraph or telefax to be bound to a written text. If no objection is made to the confirmation letter within a certain period, the text of the letter acquires the quality of a written contract between the parties.

During the negotiations, the most appropriate method is to prepare the contract in a language known jointly by the parties. Today, English is mostly preferred for practical considerations as the language of international commercial and economic contracts. In addition, it is important to make confidentiality agreements in the negotiations, to keep regular minutes of the negotiations and to clearly determine the binding nature of preliminary agreements.

In contract negotiations, the methods of resolving disputes that may arise in the future (court or arbitration) should also be clearly determined. Especially if one of the parties is a state or state institution, the issue of judicial immunity needs to be clarified and necessary waiver declarations should be obtained. In addition, the enforceability of the decisions of the chosen dispute resolution method in the countries where the parties’ assets and receivables are located should also be taken into consideration.

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