Default, liability and remedies

Liability for defective design (after delivery)

Do courts consider defective design to fall within the scope of poor workmanship for which the shipbuilder is liable under the warranty clause of the contract?

It is important to determine which party is liable for the design under the contract. If the design liability is on the buyer, then the builder cannot be held liable in this respect, unless it has acted in fault or in non-compliance with the design requirements set out in the contract. However, if the design liability rests on the builder, then the provision of article 474 et seq of the TCO concerning the buyer’s alternative rights in case of defect becomes applicable.

Remedies for defectiveness (after delivery)

Are there any remedies available to third parties against the shipbuilder for defectiveness?

If it is determined in the contract that the builder’s warranty liability shall continue within the warranty period against third parties (eg, buyers), then the builder can be held liable against the new buyers (thus third parties) under the determined conditions. There are no other statutory remedies for this purpose. In the event that a mortgage is established over the VUC, then the mortgagee may file a lawsuit requesting the court to prevent the builder’s act or failure to act that causes the deterioration of its physical condition or decrease in its value. Otherwise, the only option for a third party would be to raise a tort claim against the builder under the relevant provisions of the TCO, provided that the required conditions are met.

Liquidated damages clauses

If the contract contains a liquidated damages clause or a penalty provision for late delivery or not meeting guaranteed performance criteria, must the agreed level of compensation represent a genuine link with the damage suffered? Can courts mitigate liquidated damages or penalties agreed in the contract, and for what reasons?

If the contract bears any provisions regarding liquidated damages or penalties for late delivery or not meeting the guaranteed performance criteria, these will be applicable and binding on the parties. The liquidated damages claim is not related to damages suffered. The parties are free to determine the amount of liquidated damages or penalties and can determine a cap for liquidated damages or penalties payable.

However, the buyer will only be entitled to request liquidated damages (or penalties) and compensation for damages if it is explicitly stated in the contract that the buyer’s rights in this respect are reserved. As the liquidated damages or penalties are independent of the damages incurred by the buyer, these amounts will become payable even in cases where there is no damage. The buyer, however, may be entitled to request a certain amount of compensation if its damages exceed the determined liquidated damages or penalties, by proving that the builder has acted in fault.

Turkish law does not accept the intervention of the court to the amount of penalties set out in the contracts between merchants, save for exceptions (article 22 of the TCC). Considering that the builders of vessel construction agreements are mostly merchants (ie, companies), they will not be entitled to request a decrease in a penalty from the court by alleging that it is excessive.

Preclusion from claiming higher actual damages

If the building contract contains a liquidated damages provision, for example, for late delivery, is the buyer then precluded from claiming proven higher damages?

See question 26. In short, the buyer shall be entitled to claim higher damages upon proving that the builder has acted in fault.

Force majeure

Are the parties free to design the force majeure clause of the contract?

The parties to the contract are free to design the force majeure clause, as long as this is in line with public policy.

Umbrella insurance

Is certain ‘umbrella’ insurance available in the market covering the builder and all subcontractors of a particular project for the builder’s risks?

Yes, construction all risks insurance, covering the builder and all the subcontractors of all tiers or each of the named subcontractors of a particular project, is available.

Disagreement on modifications

Will courts or arbitration tribunals in your jurisdiction be prepared to set terms if the parties are unable to reach agreement on alteration to key terms of the contract or a modification to the specification?

Theoretically, one of the parties may request the alteration of the key terms of the contract from the court or an arbitral tribunal, although this is very unlikely in practice. In such cases, in practice, courts tend to refer the case to expert panels upon hearing the statements of the other party, while arbitral tribunals or the technical experts appointed under the contract (if this is the case) may render a decision directly at the party’s request.

Acceptance of the vessel

Does the buyer’s signature of a protocol of delivery and acceptance, stating that the buyer’s acceptance of the vessel shall be final and binding so far as conformity of the vessel to the contract and specifications is concerned, preclude a subsequent claim for breach of performance warranties or for defects latent at the time of delivery?

The buyer’s signature of a protocol of delivery and acceptance constitutes a statement that the buyer has accepted the apparent defects at the time of signing. However, latent defects are not deemed to fall within this scope, thus will not be deemed as accepted by the buyer. Therefore, in such cases, the remedies stipulated in the mandatory provisions of the law and the builder’s warranty liability shall remain valid. If the buyer notices any defect after the delivery of the vessel, then it shall notify the builder within a reasonable period, unless otherwise agreed in the contract. Furthermore, if a latent defect or any defect within the scope of the warranty clause appears after delivery, the buyer shall also notify the builder of this defect as soon as possible; otherwise, the buyer will be deemed to have accepted the vessel with such defect. Needless to say, specific provisions of the contract regarding the warranty liability shall also be taken into account, such as whether a notice requirement is determined to call the builder’s warranty liability.

Liens and encumbrances

Can suppliers or subcontractors of the shipbuilder exercise a lien over the vessel or work or equipment ready to be incorporated in the vessel for any unpaid invoices? Is there an implied term or statutory provision that at the time of delivery the vessel shall be free from all liens, charges and encumbrances?

The TCC explicitly grants the statutory lien right to the builder (shipyard) over the VUC for its receivables arising from the building and repair of the vessel, which shall be registered in the relevant NBR (article 1013 of the TCC). Subcontractors and suppliers are left outside the scope of this statutory lien right. However, the supplier or subcontractor may apply the right of retention if they have possession of the relevant equipment, while the title thereof belongs to the buyer.

Reservation of title in materials and equipment

Does a reservation of title by a subcontractor or supplier of materials and equipment survive affixing to or incorporation in the vessel under construction?

The validity of the reservation of title in materials and equipment is subject to its compliance with the official form stipulated in article 764(1) of the Turkish Civil Code, which is required to be entered into and registered with a special registry before a notary public. If the materials and equipment are delivered without such registration and are installed on the VUC, then they fall within the scope of the buyer’s ownership over the VUC, as these materials and equipment become an integral part or a supplement of the VUC upon their installation.

Third-party creditors’ security

Assuming title to the vessel under construction vests with the builder, can third-party creditors of the builder obtain a security attachment or enforcement lien over the vessel or equipment to be incorporated in the vessel to secure their claim against the builder?

As long as the title of the VUC is with the builder, the third-party creditors of the builder can obtain a precautionary attachment or an enforcement lien over the vessel or equipment to be incorporated in the vessel or start an enforcement process. However, if the vessel is under construction within a free zone, the fact that all materials, machinery and equipment enter into free zones in the name of the shipyard, in practice, there are cases where third-party creditors have applied arrest over the machinery and equipment even though the VUC was registered in the name of the buyer.

Subcontractor’s and manufacturer’s warranties

Can a subcontractor’s or manufacturer’s warranty be assigned to the buyer? Does legislation entitle the buyer to make a direct claim under the subcontractor’s or manufacturer’s warranty?

The subcontractor’s or manufacturer’s warranty can be assigned to the buyer under the shipbuilding contract or otherwise. In the event that no assignment is made, the buyer may only be entitled to claim tort liability of the subcontractor or the manufacturer in cases where the criteria sought under articles 49 et seq of the TCO are present.

Default of the builder

Where a builder defaults in the performance of the contract, is there a legal requirement to put the builder in default by sending an official notice before the buyer’s remedies begin to accrue? What remedies will be open to the buyer?

The parties are free to determine a specific date for performance and a cure period for default, as well as the buyer’s rights and remedies in cases of delay in performance. If the parties have already agreed on a specific date for the performance, there is no legal requirement to serve an official notice to put the builder in default; if not, then an official notice requesting the performance will be necessary to determine the date when the buyer’s remedies begin to accrue. In the event that both parties are merchants, such notice should be served:

  • through a notary;
  • by registered return-receipt mail;
  • by telegraph; or
  • by a registered electronic mail system using a secured e-signature, as per article 18/3 of the TCC.

As per article 124 of the TCO, there is no need to grant a period for remedy of defects if:

  • the current status or behaviour of the debtor proves that granting a period will be ineffective;
  • owing to the default of the builder, the performance of the obligation has become useless; or
  • it is understood from the contract that due to non-performance of the obligation at a certain time or within a certain period, its performance will no longer be acceptable.

If the builder defaults in the performance of the shipbuilding contract, then the buyer may:

  • request the performance of the contract and a compensation for delay; or
  • request the compensation of damages arising from non-performance of the contractual obligation, or rescind the contract, by notifying that it waives its right to request the performance and the compensation for delay (TCO, article 125), unless otherwise agreed under the contract.

In the event of rescission of the contract, the parties are discharged from their contractual obligations, and the buyer may request compensation for damages caused due to the invalidation of the contract, unless the defaulting builder proves that it had no fault.

Furthermore, article 473 of the TCO stipulates that, if it is clearly determined that there is no longer any prospect of completing the work on time owing to the builder’s failure to commence the works on time, or delay in the works in contradiction with the contractual terms, or delays not attributable to the buyer, then the buyer may rescind the contract without waiting for the delivery date. This provision grants the buyer the right to rescind the contract. During the course of the work, if it becomes apparent that the work is going to be defective or not in compliance with the contractual specifications due to the builder’s fault, to recover such, the buyer may serve a warning to the builder by which it grants an adequate period for remedying the defect or non-compliance, and warns the builder that such remedy works shall otherwise be contracted to a third person while all the damage and expenses will be borne by the builder.

The buyer’s alternative rights under article 475 of the TCO, which are explained in detail in question 8, may also apply.

Remedies for protracted non-performance

Are there any remedies available to the shipowner in the event of protracted failure to construct or continue construction by the shipbuilder apart from the contractual provisions?

Our explanations in question 36 on article 473 of the TCO also apply here in the specific cases of protracted non-performance of the builder. The shipowner can request a precautionary injunction order for the delivery or relocation of the vessel when the builder fails to construct it. The court, while granting such an order, may request the claimant to lodge sufficient security in consideration of the losses or damages of the opponent if such request of the claimant is found unjust. In very rare cases, the court may grant a precautionary injunction for the delivery or relocation of the vessel for further construction by a different builder, the cost of which will be borne by the previous builder.

Builder’s insolvency

Would a buyer’s contractual right to terminate for the builder’s insolvency be enforceable in your jurisdiction?

If the builder becomes insolvent, or if it loses its right of disposition over its property, or its right to freely dispose is restricted, then the buyer is granted the enforceable right to terminate. The inclusion of such a clause is always recommended. Furthermore, provisions stating that the contract may be terminated not only due to bankruptcy, but in case of a concordat or other such arrangements for the composition of bankruptcy or insolvency situations, may be included within the construction contract.

Judicial proceedings or arbitration

What institution will most commonly be agreed on by the parties to decide disputes?

Foreign arbitration, such as the London Maritime Arbitrators Association, is the most common agreement reached by the parties in this regard, whereas the choice of arbitration in Turkey or the jurisdiction of Turkish courts are also preferred occasionally. If the jurisdiction of Turkish courts is chosen, then the admiralty courts of the relevant province shall be competent to resolve these disputes as set out in the recent decisions of the Appeal Court.

Buyer’s right to complete construction

Would a buyer’s contractual right to take possession of the vessel under construction and continue construction survive the bankruptcy or moratorium of creditors of the builder?

As per article 473(2) of the TCO, the buyer may exercise its contractual right to take possession of the vessel against the bankrupt’s estate, provided that the VUC is registered in the name of the buyer. In such a case, the VUC can be recovered from the bankrupt’s estate by claiming the recovery of property. However, if ownership of the VUC is with the builder, then the buyer will not be able to claim the return of the possession of the VUC.

ADR/mediation

In your jurisdiction, do parties tend to incorporate an ADR clause in shipbuilding contracts?

The parties to a shipbuilding contract usually prefer to insert an arbitration clause rather than a mediation clause. If there is no arbitration clause in the contract and the parties have agreed on the jurisdiction of Turkish courts and the application of Turkish law, and the conditions stipulated in the legislation are fulfilled, then the parties shall apply to mediation before filing a lawsuit at the courts as a precondition (mandatory mediation).

Default of the buyer

Where the buyer defaults in the performance of the contract, what remedies will be available to the builder? What are the consequences of the builder’s cancellation of the contract?

If the buyer defaults in the performance of the shipbuilding contract (ie, in the payment terms), then the builder may:

  • request the performance of the contract and an interest and compensation for delay;
  • request the compensation of damages arising from non-performance of the contractual obligation; or
  • rescind the contract, by notifying that it waives its right to request the performance and the compensation for delay.

In the event of rescission of the contract, the parties are discharged from their contractual obligations, and the builder may request compensation for damages caused due to the invalidation of the contract, unless the defaulting buyer proves that it has no fault. The builder may claim interest for monetary debts and request damages exceeding the interest amount.

It is important to note whether the title of the VUC will be on the buyer or on the builder in order to determine the consequences of the builder’s cancellation of the contract. It is also important to agree in the contract the remedies of the builder in cases of the buyer’s default, whether the default of the buyer will grant the builder the right to sell the VUC to a new buyer or to enforce its statutory lien right under the law.

In cases of the buyer’s default in the performance of the contract, the outstanding receivables under the contract constitute a maritime claim under article 1352/1(m) of the TCC, and the shipbuilder has the right to request precautionary attachment (arrest) over the VUC.