The Contractor’s Right to Seek Adaptation of Contracts for Work and the Impact of the Covid-⁠19 Outbreak on Contracts for Work (İstisna) and Public Procurement Contracts

Covid-⁠19, which started in the city of Wuhan in the People’s Republic of China and spread around the world, led many governments to take extraordinary measures because it is highly contagious and life-threatening. In Türkiye, the first case was seen on March 10, 2020, and since that date measures such as the temporary closure of some workplaces, the suspension of classes at schools, the suspension of judicial time limits, weekend curfews, the obligation to wear masks in public spaces and travel bans have been implemented. Accordingly, this extraordinary situation, which affects the entire population and its social existence, can be described as a social disaster. The measures taken by both governments and individuals because of this extraordinary change of circumstances have also affected economic life. In this context, a number of problems are being experienced in the performance of contracts signed by the parties.

Article 470 of the Turkish Code of Obligations No. 6098 (TBK), titled “Contract for work – Definition”, sets out the definition of the contract for work.

“A contract for work is a contract whereby the contractor undertakes to produce a work and the client undertakes to pay a price in return.”

This article will focus on the increase of the remuneration, the extension of the time for performance, changes to the manner of performance or other adaptations required by the situation, and, where adaptation is not possible, the termination of the contract, which THE CONTRACTOR may request because of an unforeseen event in lump-sum contracts for work (istisna) as set out in the TBK.

The client’s right to request adaptation of the contract will not be the subject of this article. Where the client requests adaptation because of unforeseen circumstances that have arisen, it is not TBK Art. 480/para. 2 but Art. 138, the general provision of the TBK on adaptation, that should apply.

1. What is the concept of a lump-sum price in contracts for work, and are there distinctions within the lump-sum price itself?

While Article 470 of the TBK defines the contract for work, the concept of a lump-sum price in contracts for work is regulated in Article 480 of the TBK, titled “Lump-sum price”. This provision regulates the concept of the lump-sum price and the circumstances in which adaptation may be requested in lump-sum contracts for work.

“If the price has been set as a lump sum, the contractor is obliged to produce the work for that price. Even if the work has required more labor and expense than foreseen, the contractor may not request an increase in the price set.

However, if circumstances that could not be foreseen at the outset, or that were foreseeable but not taken into account by the parties, prevent the work from being produced for the lump-sum price set by the parties or make this extremely difficult, the contractor has the right to request the judge to adapt the contract to the new conditions or, if this is not possible or cannot be expected of the other party, to rescind the contract. Where the rules of good faith so require, the contractor may only exercise the right of termination.

Even if the work has required less labor and expense than foreseen, the client is obliged to pay the full price set.”

In contracts for work concluded on a lump-sum basis, the client’s obligation is to pay the price agreed by the parties, that is, a specific amount of money. However, the parties may also agree that another performance be rendered instead of money. For example, in construction-for-flats agreements (land share in exchange for construction), the client’s obligation is to transfer the land share. In such cases, where another performance is owed instead of money, the client’s obligation is also regarded as a “lump sum” if the agreed performance has been determined definitively (fixed).

Lump-sum contracts for work can themselves be divided into groups. They can be classified as overall (turnkey/fixed) lump-sum price, lump-sum price based on unit prices, and variable (global) lump-sum price. To touch briefly on these concepts:

Overall (turnkey/fixed) lump-sum price: This refers to a single, fixed price determined by the parties for the completion of the work.

Lump-sum price based on unit prices: This is the type of lump-sum price in which the amount to be paid to the contractor is determined on the basis of the prices of the units that make up the work. Here, the work is carried out in units such as meters, kilos, liters or pieces, and the price to be paid per unit is determined definitively by the parties in advance.

Variable (global) lump-sum price: This applies where the parties agree that, if the cost of the work increases depending on a condition that is likely to occur in the future (for example, depending on a possible rise in the exchange rate or in inflation), the lump-sum price set may also increase by a certain amount or rate.

2. What does adaptation mean in lump-sum contracts, which lump-sum contracts for work can be subject to adaptation, and is it possible to adapt contracts because of the outbreak?

One of the general rules accepted in Turkish law is the principle of pacta sunt servanda (ahde vefa). Under this principle, the parties must perform their contractual obligations exactly as they stood at the time the contract was concluded. However, in some cases, insisting on performance exactly as agreed may upset the balance between the parties and lead to unjust results.

“Although it is understood that some payments were not made to the plaintiff sub-subcontractor because the defendant subcontractor could not collect payment from the contractor and the client, who are not parties to the action, since the price was agreed in the contract as a turnkey lump-sum price, the subcontractor-contractor is obliged to do the work for the agreed price; in the absence of the conditions for adaptation, it cannot request an increase or adaptation of the price, and likewise, since the client is obliged to pay the agreed lump-sum price, it cannot request a reduction of the price even if the work required less labor and expense.” (Court of Cassation, 15th Civil Chamber, Docket No. 2019/3693, Decision No. 2020/101, 16.1.2020)

In its most general sense, adaptation can be defined as the partial or complete reconsideration of contracts in line with new conditions because of changed circumstances, either by mutual agreement of the parties or through a court action. This institution, which is an exception to the principle of pacta sunt servanda, is used as a last resort (ultima ratio) in special cases where its conditions are met.

“(...) is in the nature of an extraordinary condition which the parties did not anticipate in advance or, although they foresaw it, did not consider likely to occur, and a reasoned report open to review should have been obtained from a newly constituted panel of qualified court-appointed experts on whether, by way of adaptation, the lump-sum price in the contract had to be increased and the time extended and, if adaptation was required, on its amount and the period by which the time had to be extended; the court should then have assessed whether the provision of Article 480/II of the Turkish Code of Obligations No. 6098 was to be applied and rendered a decision on the claims in accordance with the outcome; instead, accepting the action on the basis of an incomplete examination was not correct, and it was found appropriate to reverse the judgment.” (Court of Cassation, 15th Civil Chamber, Docket No. 2016/442, Decision No. 2016/2507, 2.5.2016)

While adaptation may be requested in overall (turnkey/fixed) lump-sum price contracts and in lump-sum price contracts based on unit prices, the situation is somewhat more complicated in variable (global) lump-sum price contracts. In variable (global) lump-sum price contracts, where it is agreed that cost increases that may occur in all or certain expense items will be reflected partly or fully in the agreed price, it may be concluded that the possibility of adapting the contract is closed with respect to those changes whose economic consequences will automatically be reflected in the price under the contract, and to the extent of this possibility granted in favor of the contractor. However, the Court of Cassation (Yargıtay) does not accept as a lump-sum price a maximum value set by the parties without making it subject to any condition, and states that in this case the price will be calculated in accordance with the provision of TBK Art. 481. Therefore, in variable (global) lump-sum price contracts, the maximum rate to which the increase or decrease in the contract price caused by increases in cost items will be limited should be stated explicitly.

Article 481 of the TBK, titled “Price according to value”, regulates situations in which the price of the work has not been determined in advance.

“If the price of the work has not been determined in advance or has been determined approximately, the price is determined by reference to the value of the work at the place and time it was produced and to the contractor’s expenses.”

In lump-sum contracts falling within the scope of this provision, the price may not have been determined in advance, or it may have been determined approximately. While it is clear that there can be no question of adaptation in contracts where the price has not been determined in advance, in contracts for work agreed at an approximate price, the contractor may request adaptation under TBK Art. 480/para. 2 if the cost estimate falls excessively below the approximate price.

Considering the global effects of the outbreak, situations may have arisen in concluded contracts in which the basis of the transaction has collapsed, the balance between the performances has been disrupted, excessive difficulty of performance has occurred, or the purpose pursued by the contract will be frustrated. Adaptation becomes relevant in contracts where such situations have occurred. However, a separate assessment must be made for each contract.

“Nor can it be said that performance of the obligation has become impossible in this short-term contract. A prudent merchant could well overcome the economic difficulty by taking the necessary measures in this short-term obligational relationship. In this case, accepting the judge’s intervention in the contract would be contrary to the rules of equity and objective good faith.” (Assembly of Civil Chambers of the Court of Cassation, Docket No. 2001/15-402, Decision No. 2001/459, 30.5.2001)

“ (...) According to the principle of pacta sunt servanda, a contract must be applied exactly as it stood when it was concluded, and its provisions must be complied with. The rule of adherence to contract, as a requirement of legal security and of the principle of honesty and good faith, is one of the fundamental principles of contract law. In contracts involving reciprocal performances, the balance existing between the performances may be upset to a large extent, to an unbearable degree to the detriment of one of the parties, by an extraordinary change in economic conditions; and it is in cases such as war, economic crises shaking the country, extraordinary rises in the inflation curve, shock devaluation or a significant fall in the value of money, which excessively upset the balance between the performances, that a conflict arises between the principle of adherence to contract and the principles of contractual justice, and strict adherence to the contract comes to create a situation contrary to the rules of justice, equity and objective good faith. To eliminate these unjust results, the basis mostly relied on today in Swiss-Turkish law is to find a solution in accordance with the principle of good faith; and it is when the balance between the performances is turned upside down by extraordinary changes, making performance of the obligation difficult and perhaps even impossible, that the "collapse of the basis of the transaction" comes into play. In such cases, within the framework of the concept of imprévision or clausula rebus sic stantibus, it may be requested that changes be made to a concluded contract, that is, that the judge intervene in the contract.” (Assembly of Civil Chambers of the Court of Cassation, Docket No. 2001/15-402, Decision No. 2001/459, 30.5.2001)

However, where the extraordinary situation that has arisen makes the production of the work impossible not financially but factually or legally, TBK Art. 480/para. 2 will not apply. This is because that provision does not govern situations in which producing the work has become technically or legally impossible. The scope of the provision is limited to cases in which, although completing the work, in other words performing the contractor’s obligation, is still possible, the increased cost prevents the obligation from being performed or makes performance excessively difficult.

3. What are the conditions for adaptation in lump-sum contracts for work?

Where the price in a contract for work has been determined in advance as a lump sum, it cannot, as a rule, be changed. However, if circumstances arise that could not be foreseen in advance, the contractor may request adaptation of the contract to the changed conditions or rescission of the contract (TBK Art. 480/para. 2). Accordingly, the conditions for adaptation and rescission of the contract can be listed as follows:

1- The occurrence of an extraordinary situation that could not be foreseen at the outset or that, although foreseeable, was not taken into account by the parties;

The legislator allows the contractor to invoke TBK Art. 480 para. 2 not only in situations that the parties could not foresee but also where there are situations that, although foreseen, were not taken into account. Accordingly, TBK Art. 480 para. 2 will also apply where the parties could foresee an extraordinary situation but assumed that it would not occur, or thought that even if it occurred it would have no effect on the contract. However, there can be no question of adaptation in situations that were foreseen and whose occurrence could be known.

“(...) that the price was set as a lump sum of 299,000 TL; that, because the contract was of the lump-sum price type and also taking into account Article 6.12 of the technical specifications, the plaintiff’s claims that insurance premiums had risen extraordinarily, that a difficulty of performance had arisen and that it had terminated the contract for just cause were unfounded; that it was foreseeable that insurance premiums could increase over time; that the technical conditions annexed to the contract contained provisions on this; and that the conditions for adaptation set out in Article 138 of TBK No. 6098 were not met (...)” (Court of Cassation, 11th Civil Chamber, Docket No. 2019/3113, Decision No. 2019/7489, 25.11.2019)

2- The extraordinary situation that has arisen preventing the work from being carried out or making it excessively difficult;

The effects of the extraordinary situation that has occurred will be determined by taking into account the economic and actual situation of the contractor in the present case, in other words, subjectively. In some cases, the extraordinary situation and the cost increase that have arisen may, under the principle of good faith, make performance of the obligation something that cannot be expected of the contractor, whereas for another contractor with greater means, completing and delivering the work may be bearable.

“However, in the present case, there is no question of the balance between the performances being turned upside down by extraordinary changes, of performance of the obligation becoming difficult, or of the basis of the transaction collapsing. The legal conditions required to adapt the sale price by way of a reduction have not been met. Despite this, it was not correct for the court to render a judgment partially accepting the action.” (Court of Cassation, 15th Civil Chamber, Docket No. 2005/3590, Decision No. 2005/3557, 14.6.2005)

3- The contractor not being responsible for the occurrence of the extraordinary situation;

For the event that makes performance difficult to be attributable to the contractor, it is not necessary for it to result from the contractor’s “fault” in the technical sense. What matters here is that the contractor’s act breaks the causal link between the extraordinary situation that has occurred and the excessive difficulty of performance. In other words, the contractor can be held responsible if the difficulty of performance in which the contractor finds itself arose not as a result of the extraordinary situation but as a result of its own conduct.

4- The contractor having notified the client of the extraordinary situation that has occurred;

When the extraordinary event occurs, the contractor must notify the client immediately. If notification is delayed, adaptation under TBK Art. 480 para. 2 may be requested only for the work carried out between the date of notification and the date of completion of the work. For the work carried out up to the date of notification, it will not be possible to request adaptation.

5- The contractor not having waived its rights under TBK Art. 480 para. 2 or limited these rights;

“The plaintiff is a merchant. Under Articles 12/3 and 20 of the Turkish Commercial Code, every merchant must act like a prudent businessperson in all activities relating to its business. The continuous currency adjustments in the country’s economy and the resulting price increases are a fact known not only to a cautious merchant but even to ordinary citizens. A merchant who has accepted the fixed-price principle in the contract cannot invoke imprévision. (Decision of the 11th Civil Chamber of the Court of Cassation dated 27.6.1979, No. 3352/3442 – Istanbul Bar Journal) Moreover, since Article 9 of the contract provides that the contractor will not ask for more money on grounds such as price rises after the tender date (exceptions excluded) and increases in transport costs and workers’ wages, the parties foresaw these situations in advance and also took them into account. For this reason, Article 365/2 of the Code of Obligations cannot be applied. (Decision of the Commercial Chamber of the Court of Cassation dated 20.9.1943, Decision No. 1653; M. Şahap Arıç, Commercial Code Annotated According to the Case Law of the Court of Cassation, page: 646; and decision of the Assembly of Civil Chambers of the Court of Cassation dated 6.11.1957, No. T. 76 E. 82; and decision of the Assembly of Civil Chambers dated 16.1.1963, No. T. 28 E. 2 K. – Senai Olgaç – Law of Obligations, Various Types of Contracts VI, Contract for Work (istisna akdi), pages 494-497) The contractor may waive the right set out in Article 365/2 of the Code of Obligations. It is also possible for this waiver to be made in advance. Nor is it contrary to Article 20 of the Code of Obligations and Article 23 of the Civil Code. Since the parties accepted in their contract (Article 9, Article 15 of the tender specifications) that termination or an increase in the price could not be pursued, their contract must be considered valid. However, when assessing whether there is excessive difficulty and a situation exceeding the usual risk of a contractor, the judge must also take into account the social and economic situation of the contractor. (Prof. Dr. Haluk Tandoğan – Law of Obligations, Special Obligational Relationships – 1983, page: 108) Excessive difficulty arising from the lack of prudence of a person who does not act like a careful merchant cannot be regarded as an "unforeseeable" situation either.” (Court of Cassation, 15th Civil Chamber, Docket No. 1983/3155, Decision No. 1984/380, 14.2.1984)

However, according to the view we share, under the rule that clauses restricting rights are to be interpreted narrowly, clauses limiting the contractor’s rights under TBK Art. 480 para. 2 must also be interpreted narrowly. In this context, the use in the contract of expressions such as “the agreed price is final” or “the agreed price cannot be changed” should not, on its own, be interpreted as meaning that the parties have eliminated the right to request adaptation of the price.

6- The obligation must not have been performed, or must have been performed with a reservation (by reserving the right);

If the contractor is to request adaptation because of unforeseeable circumstances, it is important that the additional cost/work resulting from the unforeseeable circumstance be incurred/performed with a reservation. Otherwise, it will not be possible to request adaptation in respect of the additional cost incurred.

“It is understood from the content of the statement of claim and the contents of the file that, before the action, the plaintiff completed and delivered the work, and that, during performance, the plaintiff did not request adaptation of the contract to the changed conditions and did not make any reservation. In this case, whereas the court should have dismissed in its entirety the action for a receivable arising from the cost increase caused by the ground structure being different from that determined at the tender stage, which the court accepted as being in the nature of an adaptation of the contract, on the ground that adaptation cannot be requested since the performance was rendered without reserving the rights arising from the excessive difficulty of performance, it was not correct to accept the action on the basis of an incorrect assessment, and it was found appropriate to reverse the judgment.” (Court of Cassation, 15th Civil Chamber, Docket No. 2018/3543, Decision No. 2019/3495, 16.9.2019)

“For adaptation of the contract to changed circumstances and conditions to be requested, in addition to the other conditions, the performances must not yet have been rendered. If a party to the contract has performed its obligation without making a reservation despite the changed circumstances and conditions, then, by performing, it has indirectly shown that it had the strength and means to fulfill it and that it accepted its obligation despite the changed conditions; therefore, as a rule, it cannot request adaptation of the contract. In the present case, since the plaintiff completed the work and delivered it to the defendant client by drawing up a provisional acceptance report, and since at the time of delivery (in the provisional acceptance report) there was no reservation regarding adaptation either, it is not possible for it to request adaptation.” (Court of Cassation, 15th Civil Chamber, Docket No. 2015/1637, Decision No. 2015/5752, 13.11.2015)

Some authors in legal doctrine also require, as a further element, that the extraordinary event that has occurred be permanent. In our view, this is not a condition. What matters is not the permanence of the extraordinary situation but its effect. Even if the event that has occurred is not permanent, TBK Art. 480 para. 2 will also apply if it makes the performance of the contractor’s obligation financially impossible or excessively difficult.

4. What rights can the contractor claim in the context of adaptation, and how is a penalty clause agreed in the contract affected by adaptation or rescission of the contract?

The purpose of adaptation is to ensure the continuity of the contract. Termination can only be considered as a last resort. Both TBK Art. 480/para. 2 and Art. 138 (Excessive difficulty of performance) refer to the adaptation of the contract to the new conditions. Accordingly, adaptation may involve not only an increase in the remuneration but also, unlike under the former Code of Obligations No. 818, an extension of the time agreed in the contract or a narrowing of the scope of the performance.

When deciding on a price increase, the judge should not place all the cost increases caused by the extraordinary event on the client, but should strike a balance between the parties. This is because the purpose of TBK Art. 480 para. 2 is limited to bringing a cost increase that has become so heavy that the contractor cannot bear it down to a level the contractor can bear. Otherwise, the provision would in effect become accident or disaster insurance taken out in favor of the contractor.

If adaptation is not possible, then rescission will come into play in contracts with instantaneous performance, and termination of the contract in contracts with continuous performance. Here, the right to adaptation of the price is a primary right, whereas the right of rescission or termination, which can be exercised only where adaptation is not possible, is a secondary right. Therefore, a contractor who is not satisfied with the adaptation decided by the judge cannot rescind the contract on the basis of TBK Art. 480 para. 2.

If the client has paid any amount to the contractor up to the moment the contract is rescinded, it may claim it back under the provisions on unjust enrichment. In return, if, up to the moment it rescinds the contract, the contractor has carried out some permanent work on which work can be continued, it may make a claim against the client in respect of that work under the provisions on unjust enrichment. However, we should point out that, in the event of rescission, the amount the contractor may claim for the work it has done is limited to the labor and material costs it has incurred. In other words, the contractor will not be able to claim any profit for the part it has completed, because profit does not fall within the scope of the provisions on unjust enrichment. TBK Art. 480 para. 2 states that, where the principle of good faith so requires, the contractor may only exercise the right of termination. In the case of termination, unlike rescission, the contract ends not retroactively but with prospective effect. Since the contract ends with prospective effect, the contractor will be able to receive payment for the work completed up to the moment of termination on the basis of the price set in the contract.

Where the obligation subsequently becomes impossible for a reason for which the debtor cannot be held responsible, performance of the penalty clause set in the contract cannot be claimed either. Article 182 of the TBK, titled “Amount, invalidity and reduction of the penalty”, provides that performance of the penalty clause cannot be claimed if the obligation becomes impossible without the debtor’s fault.

“TBK Art. 182: The parties may freely determine the amount of the penalty. If the principal obligation is invalid for any reason or, unless otherwise agreed, has subsequently become impossible for a reason for which the debtor cannot be held responsible, performance of the penalty cannot be claimed. The invalidity of the penalty clause, or its subsequently becoming impossible for a reason for which the debtor cannot be held responsible, does not affect the validity of the principal obligation. The judge reduces ex officio any penalty clause that the judge considers excessive.”

5. What is the impact of the Covid-⁠19 outbreak on contracts for work in which the public sector is the client, and can termination of public procurement contracts or an extension of time be requested?

Under Presidential Circular No. 2020/5, published in Official Gazette No. 31087 of April 2, 2020, a number of measures were also taken regarding contracts executed under Public Procurement Law No. 4734. According to the Presidential Circular, in contracts for work in which the administration is the client, the contractor has been given the power to request adaptation of the contract through administrative procedures without resorting to the courts.

“(...) In contracts signed as a result of tenders conducted under Public Procurement Law No. 4734 of January 4, 2002 (including its exceptions) and under arrangements exempted from that Law, applications stating that the performance of the work that is the subject of the contract has become temporarily or permanently, partially or completely impossible because of the Covid-⁠19 outbreak shall be made by contractors to the administration that is party to the contract, together with documentation of this situation. (...) If, as a result of the assessment made by the administration, it is established that the following conditions are met together, namely that the situation that has arisen is not due to a fault attributable to the contractor, that it is of a nature preventing the contractor from fulfilling its contractual obligations, and that the contractor is unable to remove this obstacle, it may be decided to grant an extension of time or to terminate the contract.”

According to the Court of Cassation and legal doctrine, force majeure is an extraordinary event that occurs outside the activity and business of the liable person or the debtor, that leads absolutely and inevitably to the breach of a general norm of conduct or of an obligation, and that can be neither foreseen nor resisted.

Article 10 of the Public Procurement Contracts Law, titled “Force majeure”, lists the cases of force majeure:

“The cases that may be accepted as force majeure are set out below:

a) Natural disasters.

b) Lawful strike.

c) General epidemic disease.

d) Declaration of partial or general mobilization.

e) Other similar cases to be determined by the Authority where necessary.

Including situations such as granting an extension of time or terminating the contract, for the cases set out above to be accepted as force majeure by the administration, it is mandatory that they are not due to a fault attributable to the contractor, that they are of a nature preventing fulfillment of the undertaking, that the contractor has been unable to remove this obstacle, that the contractor notifies the administration in writing within twenty days following the date on which the force majeure occurred, and that they are documented by the competent authorities.”

Article 10 of Public Procurement Contracts Law No. 4735, referred to in the Circular, provides that the contractor must notify the administration in writing within 20 days following the date on which the force majeure occurred.

If the conditions for resorting to adaptation are met but adaptation is not possible, rescission of the contract will then come into play. Article 23 of the Public Procurement Contracts Law, titled “Termination of the contract due to force majeure”, regulates the liquidation and the status of the securities received where the contract is terminated due to force majeure.

“If the contract is terminated due to force majeure, its account is liquidated in accordance with the general provisions, and the performance security and additional performance securities, if any, are returned.”

Att. Taha Hüseyin Çebi

Trainee Att. Batuhan Özata

This article is a general assessment prepared in accordance with the legislation in force on its date of publication; it does not constitute a legal opinion. This English text is a translation of the Turkish original; in case of any discrepancy, the Turkish version prevails.