1. INTRODUCTION
EPC (Engineering, Procurement, and Construction) contracts are hybrid agreements that entrust the contractor with the entire scope of engineering, procurement, and construction processes, and are commonly used in large-scale projects, particularly in the energy, infrastructure, and industrial sectors. The 2017/3456 E., 2019/5678 K. decision of the 15th Civil Chamber of the Court of Cassation emphasizes the hybrid nature of EPC contracts, stating that due to their mixed structure, they may be subject to both work contracts and sales contract provisions. These contracts anticipate the execution of the entire project by a single contractor on a turnkey basis. While the project owner expects to receive a completed project that meets the established quality standards, budget, and timeline, the contractor is expected to assume extensive obligations during the design, procurement, and construction stages.
As EPC contracts transfer a significant portion of the risks to the contractor, balancing the rights and obligations is crucial. Protecting the contractor from adverse effects arising from delays, design changes, or force majeure events is essential for ensuring fairness in the contract. The provisions that protect the contractor under EPC contracts are evaluated not only within the framework of the contract but also in light of the Turkish Code of Obligations, the Turkish Commercial Code, and any other relevant legislation applicable depending on the nature of the work. This article examines the contractual and legal provisions that benefit the contractor under EPC contracts, in light of the decisions of the Court of Cassation.
2. LEGAL MECHANISMS PROTECTING THE CONTRACTOR
2.1. Force Majeure Provisions
According to Article 136 of the Turkish Code of Obligations, if the performance of a debt becomes impossible due to reasons for which the debtor cannot be held responsible, the debt ceases to exist. In EPC contracts, force majeure events are considered to be situations that occur beyond the contractor's control, are unforeseeable, and are inevitable. The elimination of the contractor's liability in cases of force majeure is of vital importance for the fair execution of the contract.
In the 2018/3456 E., 2020/2310 K. decision of the 15th Civil Chamber of the Court of Cassation, force majeure is defined as "natural disasters, war, epidemics, and similar extraordinary events," with the contractor bearing the burden of proving the occurrence of the force majeure event. Additionally, it was emphasized that the contractor must provide timely information about the beginning, duration, and effects of the force majeure event. Including provisions in the EPC contract that account for unforeseeable and uncontrollable events such as natural disasters, war, or strikes serves as a legal mechanism to limit or eliminate the contractor's liability in such cases.
2.2. Exceptions to Delay Penalties
Delay penalties are compensation to be paid to the project owner in case the contractor fails to complete the work within the agreed timeframe. For these penalties to apply, the delay must be caused by the contractor. However, if the delay is caused by the project owner's fault, administrative authorities, or force majeure events, the contractor cannot be held responsible for the delay penalty.
Indeed, in the 2019/3456 E., 2020/1245 K. decision of the 15th Civil Chamber of the Court of Cassation, it was clearly stated that delays caused by the late issuance of permits, approvals, or consents by administrative authorities cannot be attributed to the contractor, and therefore, the contractor cannot be held responsible for the delay penalty.
Delays caused by administrative authorities are not limited to the late issuance of permits and approvals, but also include:
- Changes to zoning plans,
- Incomplete expropriation processes,
- Waiting for decisions from the preservation board due to the discovery of archaeological remains,
- Delays in obtaining official approvals for utilities such as electricity, natural gas, water, or telecommunications connections,
- Incompletion of environmental impact assessments (EIA) or other technical reviews.
Furthermore, delays caused by the project owner's fault are also exempted from the contractor's responsibility for delay penalties. Examples of the project owner's fault include:
- Late delivery of the workplace by the project owner,
- Failure to provide necessary project plans, technical drawings, or surveys in a timely manner,
- Lack of preparatory work such as soil analysis or site clearance hindering site delivery,
- Failure to make interim payments according to the contractor's progress,
- Requests for additional work from the project owner, which may extend the contract period,
- Failure to deliver materials on time when the project owner is responsible for material provision.
Therefore, delays caused by administrative authorities or the project owner's fault should be evaluated within the framework of the contractual provisions and the specifics of the case, and it should be acknowledged that delay penalties cannot be applied in cases of delays not attributable to the contractor.
2.3. Payment Guarantees and Advance Payments
In EPC contracts, payment guarantees are provided to protect the contractor's rights in case the project owner fails to fulfill their payment obligations. Advance payments provide the contractor with cash flow at the beginning of the project, while performance bonds reduce the contractor's financial risks.
In the 2020/2310 E., 2021/3456 K. decision of the 15th Civil Chamber of the Court of Cassation, it was recognized that if the project owner fails to make advance payments on time, the contractor has the right to refuse performance.
2.4. Design Approval and Revision Rights
In EPC contracts, if there are deficiencies or errors in the design and projects provided by the project owner, the contractor has the right to notify the project owner of these deficiencies and request necessary revisions. In the 2020/3456 E., 2021/4567 K. decision of the 15th Civil Chamber of the Court of Cassation, it was ruled that the contractor cannot be held responsible for defects in projects executed according to the employer's instructions.
2.5. Claims for Extension of Time and Price Adjustments
Article 138 of the Turkish Code of Obligations provides for the adjustment of contract terms based on the principle of excessive performance difficulty. According to this principle, if the performance of the contract becomes unbearable for one party due to extraordinary situations that arise after the contract is concluded and were unforeseeable or, even if foreseeable, were not taken into account, the party may request the court to adjust the contract.
In this regard, the contractor may request additional time and price adjustments due to extra demands from the project owner, changes to the project, or unforeseen conditions. Particularly, economic fluctuations, cost increases, significant currency fluctuations, or extraordinary events like pandemics are considered factors that severely complicate the performance of the contract.
In the 2022/1278 E., 2023/3456 K. decision of the Court of Cassation, it was emphasized that in cases of unforeseen extraordinary situations or situations that were disregarded despite being foreseeable, the contract must be adjusted. This decision serves as a precedent for the contractor's claims for additional time and price adjustments.
Court decisions indicate that excessive price increases for essential inputs such as steel, cement, labor costs, natural disasters, epidemics, and delays caused by administrative authorities should be assessed within the scope of excessive performance difficulty.
However, for claims of additional time and price adjustments to be valid, the contractor must promptly inform the project owner of these requests and substantiate them with appropriate evidence. Otherwise, the contractor may be deemed to have waived these rights.
2.6. Dispute Resolution Methods
In EPC (Engineering, Procurement, and Construction) contracts, it is crucial to resolve disputes quickly and effectively to ensure the uninterrupted continuation of the project and prevent cost and time loss for the parties. Given the high budgets and long durations of these projects, disputes must be resolved by experts in a faster manner than traditional judicial processes.
In this regard, arbitration is a frequently preferred method of dispute resolution in EPC contracts, providing significant advantages to the parties, such as expertise, confidentiality, flexibility, and binding decisions. In Turkish law, arbitration is regulated under the International Arbitration Law No. 4686 and the Civil Procedure Code No. 6100, and the parties can agree in their contract to resolve disputes through arbitration instead of court proceedings.
3. CONCLUSION
EPC (Engineering, Procurement, and Construction) contracts are hybrid agreements that entrust the contractor with the engineering, procurement, and construction processes and transfer a significant portion of the risks to the contractor. In these contracts, the contractor assumes broad responsibilities from the design phase to procurement and construction, while the project owner's main expectation is the completion of the project on a turnkey basis, in accordance with the established quality, budget, and schedule.
As the nature of EPC contracts transfers most of the risks to the contractor, it is of paramount importance to balance the rights and obligations between the parties to ensure the contract is fair and enforceable. As discussed in this article, various legal mechanisms are in place to protect the contractor under EPC contracts. These include force majeure provisions that relieve the contractor of liability in cases of unforeseeable events beyond their control, exceptions to delay penalties, payment guarantees, and advance payments.
Moreover, the contractor is protected through design approval and revision rights, claims for extension of time and price adjustments due to unforeseen circumstances, and dispute resolution methods such as arbitration, which offer more efficient and expert solutions. Legal provisions, such as the excessive performance difficulty principle under the Turkish Code of Obligations, further safeguard the contractor's rights in cases of economic or other unforeseen hardships.
Ultimately, the implementation of EPC contracts requires careful attention to legal provisions that protect the contractor's interests. Arbitration or alternative dispute resolution mechanisms should also be incorporated to resolve any disputes swiftly and effectively, ensuring that the contractor's rights are adequately safeguarded throughout the project.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
