The Impact of Contractor's Bankruptcy on Construction Contracts under Turkish Law

Introduction

In the dynamic landscape of construction law, the bankruptcy of a contractor can send ripples through construction contracts, prompting critical legal inquiries and considerations. This article navigates through the intricate terrain of how a contractor's bankruptcy influences construction contracts, elucidating pertinent legal provisions and their implications within the construction sector.

Automatic Termination: Death or Incapacity of the Contractor

Under Article 486 of the Turkish Code of Obligations numbered 6098 (“TCO”), construction contracts tailored to the personal characteristics of the contractor terminate automatically upon the contractor's demise or incapacity to fulfill their obligations without fault. This provision obligates the employer to accept and compensate for the completed portion of the work if feasible.

In practice, this means that if a contractor passes away or becomes incapacitated, rendering them unable to continue the construction work without any fault on their part, the contract will automatically come to an end. However, if any portion of the work has been completed and can be utilized by the employer, they are obligated to accept it and compensate the contractor accordingly.

Bankruptcy: Economic Implications and Decision Making

The specter of bankruptcy renders the economic viability of fulfilling a construction contract unattainable for the contractor. Until a decision by the bankruptcy estate regarding contract continuation, termination due to impossibility is deferred. Notably, bankruptcy refers to the establishment of the bankruptcy estate, with "inability to pay debts" defense contingent on estate sufficiency.

Bankruptcy represents a significant economic challenge for contractors, as it may render them unable to fulfill their contractual obligations. However, the termination of a contract due to the contractor's bankruptcy is not automatic. Instead, it depends on the decision made by the bankruptcy estate regarding the continuation of the contract. Until such a decision is made, the contract remains in limbo, with termination only occurring if the bankruptcy estate decides against continuation.

Decision Making at Creditors' Meeting

The decision on whether to continue the construction contract after the contractor's bankruptcy is typically made at a creditors' meeting. Creditors, along with other stakeholders, gather to determine the best course of action for the debtor's assets and operations. If it is decided at the meeting that continuing the construction contract is not feasible or beneficial, the contract will terminate in accordance with Article 486 of the TCO. In such cases, the employer may still be obligated to compensate the contractor for any completed work, regardless of the circumstances leading to the bankruptcy.

Bankruptcy Administration and Security Obligations

If construction operations persist under bankruptcy administration oversight, the latter may enter contracts on the bankrupt contractor's behalf. However, employer recourse to security provision, especially for defect liabilities, is paramount. Failure prompts termination under Article 98 of the TCO, empowering the employer to demand adequate security.

In cases where the bankruptcy estate decides to continue construction operations under the supervision of a bankruptcy administration, the administration may enter into contracts on behalf of the bankrupt contractor. However, to protect their interests, the employer may request that the administration provide adequate security, particularly for any potential defects or liabilities. Failure to provide such security within a reasonable timeframe may result in termination of the contract under Article 98 of the TCO, granting the employer the right to demand security to safeguard their interests.

Article 98 of the TCO: Safeguarding Reciprocal Obligations

Article 98 of the Turkish Civil Code provides crucial safeguards for reciprocal obligations in construction contracts, especially in the context of a contractor's bankruptcy. The article states:

"Impotence

ARTICLE 98 – In a contract that imposes a mutual debt, if the right of the other party is endangered due to the inability of one of the parties to perform his debt and especially his bankruptcy or the ineffectiveness of the foreclosure, that party may refrain from performing his own performance until the performance of the counter act is secured.

The party whose right is compromised may also return from the contract if the desired guarantee is not provided in a suitable time."

This provision empowers parties whose rights are compromised by the other party's inability to fulfill their obligations, such as in cases of bankruptcy. It allows the affected party to suspend their own performance until the counterparty provides adequate security. Furthermore, if the desired guarantee is not provided within a suitable timeframe, the compromised party has the option to terminate the contract.

By incorporating Article 98 into construction contracts, stakeholders can effectively safeguard their interests and ensure equitable treatment in the face of unforeseen circumstances such as bankruptcy.

Conclusion

In conclusion, the intricacies of construction law, particularly concerning the impact of a contractor's bankruptcy on construction contracts, demand a thorough understanding of legal frameworks and practical implications. As highlighted in this article, navigating these complexities requires diligence and expertise to safeguard the interests of all parties involved.

As a testament to the depth of analysis and expertise in this domain, we had the privilege of presenting these insights (in Turkish) at a prestigious construction law seminar attended by esteemed colleagues and professionals from highly reputable institutions. To further enhance your understanding and glean additional insights, we invite you to watch the video excerpt of our presentation below.

By leveraging collective knowledge and expertise, we can adeptly navigate the legal landscape of construction contracts, mitigating risks and fostering mutually beneficial outcomes.

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.

For further clarification or to address specific inquiries, you can contact us.