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TERMINATION OF PUBLIC PROCUREMENT CONTRACTS UNDER TURKISH LAW

 

TERMINATION OF PUBLIC PROCUREMENT CONTRACTS UNDER TURKISH LAW

 

I.Introduction

Contracts made by the administration by applying the public procurement procedure with real or legal persons in order to meet the needs for goods, services or other kinds of actions are called “public procurement contracts”. During the establishment, implementation and termination of these contracts, the fact that the Administration is in a financially stronger position compared to private law persons and the public procurement contract prices are very high make the legal problems between the administration and private law persons more complex.

In order to minimize this complexity, Turkish legislation has been aligned with the procurement legislation of international organizations such as the European Union and the World Trade Organization.  This report is prepared to enlighten the issues regarding the termination of public procurement contracts on the basis of Turkish legislation and Turkish judicial decisions.

II.Applicable Law to Public Procurement Contracts and Relevant Legislation

To begin with,  it should be clarified to what extent the administrative law principles apply to the public procurement process and to what extent the principles of private law are applicable. The doctrine and case law in this regard concur on that administrative law principles, which foresee certain privileges for the administrative authorities shall be applied until the signing of the contract; whereas the principles and rules of private law in which the administrative authority and the private person are equal parties to a private commercial relationship shall be applied after the signing of the contract.

Reflecting this view, there are two main regulations in Turkish Law that can be applied to disputes regarding public procurement contracts between the administration and private law persons. First of these regulations is [1]Law No. 4734, which provides the administrative law provisions applied until the establishment of the contract. The second one ise Law No. 4735[2], which includes private law provisions that apply to the enforcement and termination of the contract.

Since the purpose of the Law No. 4734 is to determine “the principles and procedures to be applied in the procurements to be made by public institutions and organizations” and because the unlawful unlawful acts and transactions of the administration in this procurement process are likely to affect other persons, the administrative law provisions of the Law No. 4734 regarding the procurement process should be applied. In short, the Public Procurement Law No. 4734 introduces provisions regarding the stage before the establishment of the contract.

After the procurement is finalized and the contract is established, the Public Procurement Contract Law No. 4735 will be applied, which contains provisions regarding the establishment and content of the contract and is entirely based on private law principles.

 

III. Legal Nature of Public Procurement Contracts

The nature of public procurement contracts should be explained before proceeding with the evaluation of the termination of public procurement contracts. Paragraph 3 of Article 4 of Law No. 4735 is as follows:

“Parties of public procurement contracts made under this Law have equal rights and obligations in the implementation of the provisions of the contract. Articles contrary to this principle cannot be included in the procurement document and contract provisions. This principle is taken into consideration in the interpretation and implementation of the law. ”

In the light of this provision, there is no discussion that public procurement contracts are private law contracts; it is strictly prohibited for administrative authorities to incorporate terms contrary to the equality principle. As a matter of fact, Article 36 of Law No. 4735 states that the provisions of the Turkish Code of Obligations shall be applied if there is no provision in the law, and reinforces the fact that public procurement contracts are private law contracts in which the parties are equal and the administrative authority has no further rights stemming from sovereignty.[3]

In line with this, the idea that these contracts are private law contracts is also accepted in the case law. Among many decisions in this regard, the 15th Civil Circuit of the Court of Cassation, in its decision numbered E.2011/1338 and K.2011/8089, ruled that the defense of non-performance (by the other party), originally regulated in the Code of Obligations, can also be applied to public procurement contracts, which indicates that these contracts are private law contracts.

IV. Ending of the Public Procurement Contract

Public procurement contracts, like every contract, may end with the performance of the obligations of the parties. This process, which results in the normal ending of the contract with the performance of the undertaking by the contractor, is completed with the final acceptance process for works subject to public procurement legislation.

Apart from ending by performance, the contract may also end for other reasons as well. Termination due to the default of the parties in fulfilling their obligations is among these reasons. More specifically, the subject of this report is just/unjust termination of public procurement contracts.

In these cases, issues such as the method to be followed for termination, the obligations of the parties, and claims for losses and damages are of great importance. For this reason, the grounds for the termination of the contract, the procedure, the rights and obligations of the parties, the legal consequences are all regulated in detail in the Public Procurement Contracts Law, the Turkish Code of Obligations and the General Specification for Construction Affairs.

V.Termination of the Public Procurement Contract

Before evaluating the termination of public procurement contracts, the concept of “termination of contracts” should be elaborated, since as indicated above, the public procurement contracts are not exempted from the general principles of the law of obligations. One of the reasons that ends a continuous contractual relationship effective to the future is “termination”. The right to terminate a contract may stem from the law as well as the contract between the parties. It should be emphasized that termination (unlike revocation/withdrawal) has proactive consequences rather than retrospective effects. For this reason, receivables and debts that were born before termination in a terminated contract preserve their existence and validity.[4]

For public procurement contracts; it should be noted beforehand that important issues like the termination period, the method of termination, and reasons for just termination may vary depending on the specific terms on which the parties agreed upon. However, it should also be noted that most contracts include such termination clauses as well as the law. In the practice of termination, the actions prior to the receipt of the termination notice are evaluated within the scope of the execution of the contract, and the contract ends with a forward effect after the termination notice has reached or the termination deadline expires. [5]

The declaration of termination must be notified directly to the addressee. In public procurement contracts made between consortiums or business partnerships and the administration, the termination notice must be addressed to the coordinator partner or pilot partner. Termination statements made to private partners do not result in the termination of the contract by termination.[6]

For the reasons for termination of the public procurement contracts, the provisions of the law numbered 4735 should be taken into consideration. Termination reasons arising from the contractor and regulated in the Law No. 4735 can be listed as; unauthorized transfer of the contract; the death, bankruptcy, serious illness, arrest or conviction of the contractor; the contractor’s financial insolvency, the default of the contractor; the contractor’s unlawful acts and behavior during the execution of the contract, the contractor’s forbidden acts and behaviors before the contract.

 

A.Justified Termination

 

  1. Pursuant to the third section of the Public Procurement Law No. 4735, the administration may rightfully terminate the public procurement contract in the presence of the following reasons:

1.1  Contractor’s transfer of the contract without the consent of the administration:

Transfer of public procurement contracts occurs when a contractor transfers his rights and obligations based on the public procurement contract to another contractor. In cases where the contract is transferred, the new contractor will continue to be responsible under the same conditions as the contract will continue. Transfer of public procurement contracts regulated in Article 15 of the Law No. 4735 is as follows :“The contract can be transferred to someone else with the written permission of the procurement authority in compulsory situations. However, the conditions in the first procurement must be sought for transfer receivables. In addition, other contracts cannot be transferred or taken over by the same contractor within three years following the transfer date of a contract, excluding transfers made due to a change in name and status. Contracts transferred or taken over without authorization, or contracts transferred or taken over within three years following the date on which a contract is transferred are terminated, and the provisions of articles 20, 22 and 26 shall apply to the transferor and the transferee ”.

As understood from the clear wording of the article, the contract cannot be freely transferred with the will of the parties. The law made the transfer of the contract possible only in compulsory cases with the permission given by the administration before the transfer. In addition, a contractor who transfers a public procurement contract may not transfer or take over another contract within three years.

In the event the public procurement contracts are transferred without obtaining permission or without complying with other procedural conditions, the contract is ended by termination or rescission, depending on whether the contract is a contract of instantaneous performance or a contract of continuous performance. In this case, the final or additional guarantees are updated and recorded as revenue, the transferor contractor is prohibited from participating in public tenders temporarily.

 

1.2.Termination of the contract due to the death, bankruptcy, serious illness, arrest

or conviction of the contractor:

This issue is regulated in Article 17 of the Public Procurement Contracts Law. In the event of the death of the natural person contractor or the termination of the legal personality of the legal person contractor, the contract may be terminated by the administration. In this case, the guarantees are paid to the heirs. However, the administration may decide to transfer the contract to the heirs, provided that the heirs apply to the administration within 30 days from the date of death and provide additional guarantees.

In the event of the contractor’s bankruptcy, the contract is terminated and the contractor’s performance bond and additional guarantees are updated and recorded as a revenue, but a decision to prohibit him from temporarily participating in public tenders cannot be taken.

In the event that the contractor fails to fulfill its commitment due to severe illness, detention or a sentence restricting its freedom, the commitment may continue, provided that a proxy who will be accepted by the relevant administration is appointed by the contractor within thirty days following the occurrence of this situation. If the contractor has lost his capacity to act, a proxy may be appointed in his place according to general provisions. If these provisions are not implemented, the contract may be terminated by the administration.

Pursuant to Article 18 of Public Procurement Agreements, “In the commitments made by joint ventures, death, bankruptcy, serious illness, detention, being sentenced to a punishment restricting freedom or dissolution of one of the persons forming the joint venture does not prevent the continuation of the contract. However, if one of them is notified to the administration as a pilot or coordinator partner, in cases of bankruptcy, serious illness, detention, conviction to a liberty restricting punishment or dissolution, depending on whether the pilot or coordinator partner is a real or legal person, the contract shall be terminated and actions are taken in accordance with Articles 20 and 22, except for prohibition.”  In case of death of the pilot or coordinator partner, the work is liquidated and the performance bond is returned. In the event of the death, bankruptcy, serious illness, arrest, sentence of a liberty restricting punishment or dissolution of one of the partners other than the pilot or coordinator partner, the other partners fulfill the commitment by undertaking the responsibilities of the partner, including the guarantee.

1.3.Financial insolvency of the contractor:

Under Article 19 of the Public Procurement Contracts Law, in the event that the contractor notifies in writing with the reasons (other than force majeure) that he will not be able to fulfill her commitment due to financial insolvency, the performance bond and additional performance bonds, if any, are recorded as revenue without the need to protest, and the contract is terminated and the account is liquidated according to general provisions. In order for the contract to be terminated by the administration by this method, it is checked whether the contractor’s financial insolvency occurred after the establishment of the contract.

1.4.Termination of the contract due to the default of the contractor:

This issue is regulated in the Clause a of the 1st paragraph of Article 20 of the Public Procurement Contracts Law. In this context, the conditions listed below must be completed cumulatively in order to rightfully terminate the contract:

– Contractor’s failure to fulfill its commitment specified in the scope of procurement documents and contract provisions.

– Contractor’s non-fulfillment of its commitment despite a written warning by the administration stating that the commitment in the contract provisions is deficient or erroneous and that the administration has given a grace period of at least 10 days.

If the above-mentioned conditions are met, the performance bond or additional performance bond (if any) are updated and recorded as revenue without the need to protest.

Thus, in the decision number 2016/9326 E. and 2019/5035 K of the 23rd Civil Chamber the Court of Cassation, the provision regarding the termination of the contract without the need to protest is stated as follows:

“Since the action in question is included in the scope of prohibited acts, it was decided to dismiss the case on the grounds that there is no need for a notification for the termination of the contract in accordance with Article 20 / b of Law No. 4735.”

1.5.Termination of the contract due to the contractor’s unlawful acts and behavior during the execution of the contract:

Prohibited acts and behaviors are regulated in Article 17 of the Public Procurement Law No. 4734 and Article 35 of the Law No. 4735. Pursuant to subparagraph b of paragraph 1 of Article 20 of Law No. 4735, “If it is determined that the contractor has committed prohibited acts or behaviors listed in Article 25 during the execution of the contract, the contract is rightfully terminated. In this case, without the need to protest, the performance bond and the additional performance bond (if there is) is updated and recorded as revenue.”

According to Article 25 of Law No. 4735, it is forbidden to perform the following acts and behaviors:

– Cheating, promising, threatening, using influence, gaining interest, agreement, extortion, bribery, or attempting to corrupt the contractual transactions through other means.

– To issue, use or attempt to fake documents.

– Using fraudulent materials, tools or methods during the performance or delivery of the contractual work, making incomplete, faulty or defective manufacturing contrary to the rules of science and art

– Damaging the administration while fulfilling its commitment.

– To use their knowledge and experience to the detriment of the administration or to act contrary to the provisions of Article 29.

– Failing to fulfill its commitment in accordance with the procurement document and contract provisions, except for force majeure.

– Transferring or taking over the contract in violation of the provision of Article 16

1.6.Termination of the contract due to the contractor’s prohibited actions and behaviors before the contract:

The prohibited acts and behaviors specified in Article 17 of the Public Procurement Law No. 4734 must be committed by the contractor before the contract. These acts and behaviors performed before the contract must be determined by the administration while the contract is being executed. Article 21 of the Law numbered 4735 regulates that the administration will exercise its right of termination in this case. However, in accordance with the 2nd paragraph of the same article, “On the condition that at least 80% of the commitment has been completed and there is a public interest in the completion of the commitment, the administration, without terminating the contract, can ask from the contractor to fulfill its commitments and the contractor becomes obliged to fulfill its commitments when; a) There is not enough time for the re-procurement of the remaining part of the commitment due to its urgency, b) It is not possible to make the commitment to another contractor, c) The contractor’s prohibited act or behavior does not prevent the contractor from completing the commitment.” In this way, although the same contractor completes the work, the contractor is prohibited from participating in public tenders for a period of 45 days.

 

2.In addition to the termination reasons listed above and caused by the contractor, there are some specific termination reasons which are regulated under the Public Procurement Contracts Law and  cannot be attributed to both parties. These reasons are listed below:

 

2.1.Termination of the public procurement contract due to the emergence of force majeure:

Force majeure removes the responsibility of the person due to the disappearance of the causal link in the damages arising in cases where it is not possible for the person to foresee and take measures. Article 10 of the Public Procurement Contracts Law specifically regulates the concept of force majeure. In the said article, force majeure reasons are listed as natural disasters, legal strike, general epidemic, declaration of partial or full mobilization. However, in the same article, the possibility for the administration to expand this concept is provided with the expression of “similar cases to be determined by the institution when it is necessary”. In order for the said cases to be accepted as force majeure, it is mandatory that they are not caused by a fault of the contractor, that they are in a nature to prevent the fulfillment of the commitment, that the contractor is not able to remove this obstacle, that the contractor notifies the administration in writing within twenty days following the occurrence of the force majeure, and it is certified by the authorities.

In case of force majeure that is under the scope of the Law No. 4735, the contractor is relieved of his obligation to fulfill his debt.

 

2.2.Termination of the contract when it is understood that the work cannot be completed even with increased work:

While the concept of “work increase” was not included in the original version of the Public Procurement Contracts Law No. 4735, it is now regulated in Article 46 of the Law No. 4964, which amends the former. Accordingly, if it is understood that the work cannot be completed within the envisaged period, even though the work increase concept is employed, the contract may be terminated.

 

2.3.Termination of the contract due to work decrease:

According to the last paragraph of Article 24, the contractor has to complete the work for those which can be completed with a price less than 80% of the contract value. In this case, as for the actual expenses and the contractor profit, 80% of the contract price and 5% of the price difference between the contract prices and the amount of the work that he has completed will be paid to the contractor over the prices on the temporary acceptance date.

 

3.In addition to those listed above, due to the fact that public procurement contracts are in the nature of private law contracts, the reasons for termination of contracts that are regulated in the Turkish Code of Obligations can also be applicable. These reasons are: acquittal, performance, renewal, exchange, unification of the creditor and debtor titles, objective impossibility and the lapse of time. Furthermore, the contract may be terminated in cases of default of the administration, poor performance, impossibility due to the administration’s fault. However, these situations are not covered by this report and therefore will not be examined in detail.

 

B.Unjust Termination and Consequences

Termination of the contract by the administration for any reason other than the reasons attributable to the contractor listed above, that are regulated under the Turkish Code of Obligations or the Law on Public Procurement Contracts; and for reasons for which both parties are not liable will result in unjust termination.

As explained above, since public procurement contracts are considered as private law contracts, the evaluation of the results of unjust termination should be made according to the general provisions of the Turkish Code of Obligations. Likewise, there is no special regulation in the Public Procurement Contracts Law regarding the consequences of unjust termination.

Pursuant to the Turkish Code of Obligations, if the contract is terminated unlawfully, the party that unlawfully terminates the contract is obliged to cover the damages of the other party. As a matter of fact, in its decision numbered 2015-1253 E. and 2020-2986 K., the Council of State Approved the decision of the Civil Court of First Instance that the contractor should be compensated the damage incurred due to unjust termination from the administration.

Another consequence of unjust termination is related to the banning from participating in public procurement tenders. As explained in detail above, in case the contract is terminated by the administration, the contractor may be banned from public tenders. However, if the contract is unjustly terminated by the administration, the contractor will not be banned from public procurements. As a matter of fact, the 13th Chamber of the Council of State stated this issue in its decision dated 07.07.2020 as follows:

“Considering that it was decided to determine that the contract was unjustly terminated by the defendant party, there was no compliance with the law in the proceedings regarding the prohibition of the plaintiff from participating in public procurements on the grounds that the plaintiff did not fulfill its obligations arising from the contract. “

VI. Conclusion

As can be seen, there are many ways to terminate public procurement contracts. Although the administration seems to be the stronger party in such contracts, in the event of unjust termination of the contract by the administration, the contractor always has the opportunity to compensate for its damages. The contractor will not be aggrieved by arbitrary and unilateral actions of the administration.

[1] The Public Procurement Law

In Turkish : Kamu İhale Kanunu

[2] The Public Procurement Contracts Law

In Turkish: Kamu İhale Sözleşmeleri Kanunu

See the official text: “https://www.mevzuat.gov.tr/MevzuatMetin/1.5.4735.pdf”

[3] Vedat Buz, Establishment and Conditions for Validity of Public Procurement Contracts, Ankara, 2007 p.68

[4] Fikret Eren, Law of Obligations General Terms, Ankara, 2016, p.1286

[5] Decision of Court of Cassation for 15th Circuit dated19.01.2012  numbered, 2010/5414 E.and 2012/178K.

[6] Dursun Ali Demirboğa, Termination of Public Procurement Contracts, Ankara, 2013,  p. 64-65

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