36. TERMINATION OF PERMANENT CONTRACT

LEGAL OPINION^*

Question 1. Please provide clarification of the discussions at the hearing relative to the relevance or irrelevance of the Notice to Correct and the 14 day ‘grace period’ referred to in that Notice, including (1) whether the issuing of such a Notice would prevent a termination under a different provision to Conditions clause 15.2(a); and (2) the significance of the issue by SYE of a response to the Notice to Correct in the form which SYE sent on 30 May 2008.

Whether or not there is any response to the Notice to Correct, it is open to M to terminate the contract under any other contractual mechanism without being required to wait until the expiration of the 14 day period. For instance, according to the contract, contractor’s insolvency is a reason for immediate termination. That is why M may terminate the contract immediately in such a case.

Furthermore, if there is a response rejecting the issues raised in the letter after two days of the Notice to Correct, then it is possible to terminate the contract even under clause 15.2 (a). It is because the party, rejecting the issues raised in the Notice to Correct, manifests an explicit declaration of will. Accordingly, the employer is not obliged to wait until the expiration of the time period. Employer may immediately terminate the contract. In such a case, the contractor party cannot object to this termination claiming that the 14 day period is not finished. Where the contractor objects based on the said argument, his objection constitutes a violation of the article 2 of the Turkish Civil Code. Accordingly, the Tribunal has to reject contractor’s such defense that is against to the Art.2 of the TCC.

I would also like to remind you of the Turkish Code of Obligation art. 358. According to this provision:

 “If the contractor fails to commence works in a timely manner or delays the work in violation of the contract conditions or if the delay occurring outside the contractor’s fault does not allow the contractor to complete the work in a given period despite all estimations, the employer may terminate the contract without having to wait for the time appointed for delivery.”

Therefore, the employer may terminate the contract without having to wait until the expiration of the time period relying on this article.

Question 2. What is the correct legal analysis in Turkish law of the factual circumstances regarding M’s non insistence upon (1) SYE’s provision of the details of their full engineering team, in terms of clause 5b of the SYE Contract; and (2) therefore, of the provision for M’s subsequent approval of such; but rather M’s allowance that the contract proceed on the basis that the Effective Date had occurred.

In the beginning, the parties may contract for a pre-condition to the occurrence of the Effective Date of the contract. Actually clause 5(b) is a pre-condition to the occurrence of the Effective Date of the contract. Within this clause the employer is entitled to ask SYE the names of its Project Manager and to form the engineering team and to submit relevant supporting documents. Accordingly, clause 5(b) gives a right of approval to M. However, M may use its right or not. Also, M can waive its right explicitly or implicitly. In our case, there is not an explicit waiver but we can say there is an implicit waiver. In Turkish law, in doctrine and in practice, the dominant opinion is that the declaration of waiver may be implied.  

The fact that SYE did not perform its liability stated in clause 5(b) gives a right of defense to M and such a defense is technically nominated as a “plea” in Turkish law system. As a rule, a unilateral declaration of will is sufficient for the waiver of the right of plea. Accordingly, it is not possible for the other party to object to such a waiver.

On the other hand, SYE cannot rely on their breach for which they are responsible. Most particularly, on one hand issuing an invoice and receiving the advance payment; on the other hand raising an argument that the contract never reached the Effective Date, is a very distinct contradictory acting. Their contradictory arguments are contrary to the Turkish Civil Code art. 2. Accordingly, the Tribunal has to reject SYE’s defense, that are contradictory to the art.2 of the TCC.

To sum up, I can say that M ‘waived’ the requirement that SYE submit details of its engineering team for approval by M prior to the contract becoming effective.

Question 3. Please provide clarification of the full legal tests in respect of the Turkish law concepts of venire/contradictory actings.

I think that the explanations in my former legal opinion are sufficient. The only matter that can be added on this point is the following:

There is not a legal rule that a person is obliged to behave consistently.  But if one of the parties creates a justified confidence with his behavior on the other party in a contractual relationship, he cannot act contrary to his former behavior and to the confidence that he created on the other party, that is to say he cannot disappoint the other party. Otherwise, his behavior is against to the principle of good faith regulated in the art.2 of TCC.

In our case, let us assume that M did not issue a notice to proceed. The fact that a) SYE remained silent (not sending a notification to M on this point), b) SYE issued an invoice, c) SYE received the advance payment, are not consistent with their argument that the notice to proceed was not issued. All these behaviors of SYE created a justified confidence on M regarding the notice to proceed will no longer be expected. This confidence is objectively justified and has to be protected by law. Therefore, the arguments of SYE which are against (contradictory) to its former behaviors should be rejected by the Tribunal.

Question 4. Please expand upon your explanation of M’s entitlement to its claim for loss of margin, under the first limb of clause 15.4(c), with reference to recovery of positive damages or otherwise, including your explanation of the relevance or irrelevance (in the particular circumstances of the SYE termination) of cases referred to by SYE’s legal representatives during the hearing.

In the Turkish law system, positive damage is described as follows:

The damage that would not have been suffered by the creditor if the debtor had satisfied its obligation as required. Here, in fact, a comparison is made. The position in which the creditor’s assets would be in, if the debtor had satisfied its obligation as required, compared to the position which the creditor’s asset is in on account of the debtor not satisfying its obligation at all or as required. The difference between the two positions constitutes the creditor’s positive damage. Positive damage appears before us as either actual damage or lost profit. Actual damage expresses reduction in the creditor’s assets where lost profit means loss of the opportunity of potential increase in the creditor’s assets. Actual damage emerges either as reduction of asset or increase of liabilities.

Negative damage is the damage that the creditor would never suffer if the contract had never been concluded at all.

The argument of SYE, regarding that M cannot claim positive damages because of the termination, is not correct. At this point, we must explain the following:

Terminating the contract retrospectively and terminating the contract prospectively are two different types of concepts. Each way of termination, legally, has different results. 

If the contract relation (e.g. sale contract) is a contract relation with instantaneous performance, the creditor may terminate the contract retrospectively in case the debtor fails to satisfy its obligation and, in this case, the creditor may claim compensation of its negative damage, (unless the debtor proves that he has no fault in falling into default), namely compensation of its damage which he would not have suffered if such contract had not been concluded (costs related to the establishment of the contract and payment of stamp duty can be indicated examples to this).

However, permanent contract relations are different. If the contract relation is a permanent contract relation – the contract of work also constitutes a mixed temporary / permanent contract relation between the parties according to the Turkish Court of Cassation decisions – then it is not possible to terminate the contract retrospectively. In this case, the contract shall be terminated prospectively. As a natural outcome of this, the party rightfully terminating the contract will be able to claim, as a presumption, compensation of its interest to performance from the defaulting debtor.

In a jurisprudence of Turkish Court of Cassation, 14^th Civil Chamber, dated 05.04.2006, numbered 2006 / 2476 E. 2006 / 4013 K, briefly states as follows:  

 “… In such cases, by reason of the fact that the contract is terminated prospectively, the compensation that the faultless party will claim is positive damage. … ”

Also, regarding this issue, Oğuzman / Öz says that⁽¹⁾:

 “In the permanent contract relations we mentioned that termination of the contract retrospectively is not in question and on the contrary, termination of the contract prospectively is in question. … The creditor, upon the termination of the contract will claim his positive damages from the debtor who is in default by his fault. This positive damage is the loss of benefit upon termination of the permanent relationship before its term.”

Moreover, in the doctrine, Prof. Dr. Turgut Öz who has discussed withdrawal of the employer from the contract of work in his monographic study has made the following explanations⁽²⁾:

“… The general section of the Code of Obligations mostly reflects the rules pertaining to contract relations with instantaneous performance. In particular, the regulation related to the debtor’s default and retrospective effect of the withdrawal of the contract here (Code of Obligations: art. 106-108) renders its implementation impossible for cases of default in permanent contracts. … What generally is accepted is the existence of “termination” also here for permanent contract relations. … While the damages to be claimed upon withdrawal under article 108 is intended for compensation of “negative damage” (negative Interesse), upon termination, compensation of “positive damage” (positive Interesse) namely interest to performance is considered possible. Indeed, the construction that the termination does not prejudice the validity of the contract relation by the moment of termination, does not allow compensation of negative damage which means the damage suffered as a result of the fact that the trust related to validity of the contract has come to nothing. …”

There is also a decision of joint chambers of the Turkish Court of Cassation dated 25.11.1984. In this binding decision, it is said that:  

 “ … It is decided that, in construction contracts that are kinds of the work contract, when the employer terminates the contract for the reason that the contractor does not finish the work on a fixed time by his own fault, the dispute, in principle, should be solved in terms of the TCO art. 106-108, but in the cases in which the nature and characteristic of the circumstance justifies, taking into account TCC art. 2, the termination of the contract will take effect prospectively. … ”

Moreover, as I have explained in my first legal opinion, the provisions of the Turkish Code of Obligations governing debtor’s default are not mandatory. The parties may freely decide the conditions of the debtor’s default and its consequences in the contract within the limits of the principle of freedom of contract. In the present case, the parties have explicitly designated in the contract under which conditions the employer shall be empowered to immediately terminate the contract and under which conditions it shall be entitled to claim compensation for his positive damages (i.e. in terms of clause 15.4).   

Briefly, the parties may make regulations contrary to the articles related to the debtor’s default (TCO art. 106-108). As a matter of fact, it is seen here that the parties regulated the terms and conditions of termination in the present dispute and that the employer has exercised its termination right in accordance with the terms and conditions specified in the contract. For the reason that there are neither any mandatory provisions nor any Court of Cassation binding decisions that prevent the parties from determining the conditions regarding the claim for compensation after the contract is terminated, it is unquestionable that the ‘payment after termination’ clause 15.4 (c) will apply and positive damages can be claimed.

Question 5. Do you have any further comments regarding the Chairman’s thoughts on the concept of faute grave, as follows:

The Chairman: One last thing. I don’t want to appear to be splitting hairs but this is one of these things at the back of my mind and I prefer to put it to everyone so that you know it is at the back of my mind, and I want you to be able to comment on it. When approaching a concept like reckless misconduct this reminds me of something one finds - and I’m sorry to be parochial - in Swiss insurance law. There is a provision under Swiss insurance law that says that if the insured committed in the French a “faute grave”, which could be translated into “reckless misconduct”, it is very difficult to translate, a serious fault, a grievous fault - and I saw from your list of publications that French seems to be a language that you know - then the insurer can either reduce the indemnity that is paid or even refuse to pay an indemnity. That depends on the seriousness of the misconduct. The test that some commentators and some court decisions apply to determine whether there is “faute grave” is the following. The question for “faute grave” is not “he or she should not have done this or that”: the question is “how could he or she have done this?” My question is do you think that is a relevant thing for me to have in the back of my mind, or should I just forget about it? To be more technical, am I putting the bar too high?

The debtor’s fault degree is not important for the liability of him. As a rule, all kinds of faults are sufficient to hold the debtor liable (TCO art.98). 

Generally, the fault of the debtor will be determined objectively whether the debtor has shown the care must be shown by taking into account the law and contract provisions, the principle of good faith and the consideration of the works. However, the law subjects the diligence that will be shown in some circumstances (TCC art. 368, TCO art.528) to a subjective basis that the debtor shows in his own works (diligentia quam is suis).

On the other hand, Turkish Commercial Code art.20/2 states that,

 “Every merchant should act as a prudent businessman in all the operations regarding his commerce.” 

In our legal system, in order to say that the debtor is faulty or not, the Judge should use objective criteria. That is to say, the Judge cannot take into account the subjective situation of the debtor. This necessity becomes more serious when the debtor is a merchant. As I said before, a merchant should be more attentive, prudent, and cautious than ordinary people. I think, the statement of the Chairman: “The question for "faute grave" is not "he or she should not have done this or that": the question is "how could he or she have done this?" is for the determination of the debtor’s fault subjectively.