Contractor's/Subcontractor's Default

Contractor's/Subcontractor's Default | Izmir Efes Law Firm

Construction contracts based on land-for-construction agreements are frequently encountered in practice. Under these contracts, the contractor undertakes to construct a building on the landowner's land, while the landowner undertakes to transfer the agreed-upon independent units to the contractor.

In a construction contract in exchange for a share of the completed building, the contractor's failure to complete the work on time is referred to as default. If the contractor fails to fulfill their obligations under the contract, they will be considered in default, and the landowner will be liable for the damages. TBK According to Article 125, the landowner may exercise one of their optional rights. In case of default by the contractor, the landowner may demand specific performance and compensation for delay, waive performance and compensation for positive damages, or terminate the contract and demand compensation for negative damages.

What is default?

Generally, default is a legal situation arising from the debtor's failure to perform a debt that is due and payable, even though it is not impossible to perform. In other words, it is the debtor's inability to properly fulfill their obligation in terms of time. Since there is no specific provision regarding default in a construction contract in exchange for a share of the property, the relevant general provisions of the Turkish Code of Obligations apply. The contractor's failure to complete the construction within the specified time also constitutes default. Let's examine the conditions:

• The Debt Becoming Due

Maturity means that the creditor can demand the performance of the obligation. In construction contracts based on a share of the completed building, the completion time is usually specified. These periods generally start from the date the construction permit is obtained. The maturity condition is fulfilled when the completion date of the construction period specified in the construction contract in exchange for a share of the completed building arrives.

• The Possibility of Performing the Obligation

If performance of the obligation is impossible, the contractor will not be considered in default. The impossibility must be existing and continuous. Examples of impossibility of performance include planning construction in an area where the zoning status has not been finalized, or entering into a construction contract on jointly owned land without unanimous consent. The condition of the possibility of performance is sought after the contract is concluded.

• Warning

A notice can be defined as a declaration of intent by the creditor to the debtor, demanding payment of the debt. The legal nature of a notice is that it is "an act similar to a legal transaction."86 Since a notice is not considered a legal transaction, the formal requirements sought in legal transactions are not required for a notice. Therefore, the formal requirements applicable to a contract for the construction of a building in exchange for a share of the land are not necessary for a notice. However, in cases where there is a special provision, the notice must be made in accordance with the required form of validity. According to Article 18, paragraph 3 of the Turkish Commercial Code, for a notice to be valid between merchants, it must be made through a notary, by registered mail, or by telegram. The content of the notice must clearly indicate that it was sent with the intention of putting the debtor in default.

According to Article 117 of the Turkish Code of Obligations, a notice of default is generally required. The landowner informs the contractor of the delay in performance and demands that the obligation be fulfilled by a specified date. The landowner may also grant or request a suitable extension of time.

In some cases, there is no need for a warning at all; these situations are regulated in Article 124 of the Turkish Code of Obligations. The first is when giving a deadline is useless. For example, if the contractor fails to start construction on time, explicitly states that they will not complete the construction, abandons the project, etc. Another is when the performance becomes useless for the landowner. The last is when the debt is tied to a definite due date. In these cases, the landowner can exercise their rights arising from the default without giving a warning. In other words, exceeding the time frame stipulated for the construction is considered exceeding the delivery due date for the contractor.

• Landowner's Readiness to Perform

The landowner must be ready to perform the obligation and must not be in default. If the landowner, for example, has undertaken to transfer the land shares but has failed to do so, they cannot demand delivery of the independent unit from the contractor.

What is partial default by a contractor?

For partial default to occur, the obligation must be divisible, or a portion of a multiple agreed-upon obligation must have been fulfilled. While the landowner cannot be compelled to accept partial performance, there is no obstacle to accepting it in their own best interest. However, if the landowner does not benefit from the full performance of the obligation, and it would cause significant difficulties for the contractor, and the offered partial performance is close to the total obligation, the landowner's refusal would be contrary to objective good faith principles. In such a case, default and its consequences will apply to the unfulfilled portion. However, the landowner will return the consideration for the accepted partial performance to the contractor. That is, since the obligation to transfer the land share is a divisible obligation, the landowner must transfer the land share in proportion to the portion fulfilled.

Consequences of Contractor's Default for the Landowner

If the contractor defaults, the landowner may exercise one of the optional rights granted to them. These are:;

Claim for Specific Performance and Compensation for Delay

In accordance with Article 113 of the Turkish Code of Obligations, the landowner may demand the completion of the construction, and also reserves the right to claim compensation for damages.

Furthermore, if the contractor fails to fulfill their obligation, the landowner can apply to the court to be authorized to act on their behalf. In this way, the landowner can find a new contractor in accordance with the original contract and have them complete the construction. For the construction to be completed by the landowner or a third party, the contractor's personal characteristics should not be important in the work, and personal performance should not be necessary; otherwise, the landowner will have to withdraw from the contract. Regarding compensation for delay, the contractor must be at fault, this must have caused damage to the landowner's property, and there must be a causal link between the damage and the delay.. According to Supreme Court rulings and court practices, it is not even necessary for delay compensation to be agreed upon in the contract. The damages incurred by the landowner due to the delay are actual damages and lost profits. Actual damages are the losses directly suffered by the landowner based on their expectation of receiving their performance on time. Lost profits are the benefits they planned to obtain. According to the decisions of the General Assembly of the Supreme Court regarding compensation for delay, there should be no upper limit on compensation for delay.

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