Pricing, payment and financing for shipbuilding in Turkey

Pricing, payment and financing

Does the law in your country have different provisions for ‘fixed-price’ contracts and ‘labour-and-cost-plus’ contracts?

The general principle in vessel and yacht construction agreements is the turnkey practice, thus fixed price. Needless to say, the parties may choose to include an adjustment clause to determine situations when the fixed price will be altered, such as a change in material and class requirements. According to article 480 of the TCO, if a contract includes a fixed-price provision, the builder will then be obliged to carry out the construction against the determined price and cannot request an increase in price even if the construction requires more cost and effort. However, in the event that certain conditions that could not be foreseen or were not considered in the beginning by the parties prevent or significantly hinder the performance of the builder, then the builder may ask the court to adapt the agreement to new conditions or, if this is not possible or cannot be expected from the buyer, the builder may rescind the contract. The builder may only be entitled to use its termination right in cases where this is required under the principle of good faith.

As per article 481 of the TCO, in the event that the price is not predetermined or determined roughly in the contract (which is unlikely in practice), then the price shall be determined in accordance with the value of the vessel at the place and date of construction, as well as the costs suffered by the builder.

Does the builder have any statutory remedies available to charge the buyer for price increases of labour and materials despite the contract having a fixed price?

In principle, if a fixed price is determined in the contract, there will be no statutory remedies for the builder to charge the buyer for price increases of labour and materials unless otherwise agreed in the contract. However, in unforeseeable or foreseeable but unconsidered circumstances, the builder may request the court to adjust the price to the new conditions. In such cases, general principles such as good faith and prudent merchant shall be considered.

Can a buyer retract consent to an increase in price by arguing that consent was induced by economic duress?

We do not consider this situation be likely to occur in practice. Article 480 of the TCO, which is explained in question 17, entitles the court to adjust the price of contract. In cases where the parties have already entered into a contract with free will, it will be difficult to challenge the price thereafter based on the claim that their consent was impaired due to economic duress. Having said that, this will require a case-by-case analysis, in the absence of a clear provision in statutory law.

May the builder and the buyer agree to exclude the buyer’s right to set off, suspend payment or deduct certain amounts?

The parties to a shipbuilding contract are free to agree on the buyer’s right to set off, suspend payment or deduct certain amounts, unless this falls against public policy.

If the contract price is payable by the buyer in pre-delivery instalments, are there any rules in regard to the form and wording of refund guarantees? Is permission from any authority required for the builder to have the refund guarantees issued?

In practice, refund guarantees are issued by banks in the form of bank letters of guarantee. In this respect, the response to this question is provided on the assumption that the refund guarantee is provided by a bank. There is no standard form or wording for refund guarantees under Turkish law, and the content is subject to negotiation of the parties and the bank. However, the guaranteed amount, the beneficiary, the party whose obligation is being guaranteed and the conditions under which the refund will be made shall be included in the relevant refund guarantee. Under Turkish law, guarantee agreements (including refund guarantees) do not have any statutory validity condition, and a simple written agreement is sufficient to prove its existence and validity (provided that such an agreement does not violate any mandatory provision of Turkish law). Refund guarantees are not subject to any permission from any governmental authority; however, there is an information obligation upon providing guarantees to third parties located outside of Turkey.

What formalities govern the issuance of advance payment guarantees and parent company guarantees?

Under Turkish law, guarantee agreements, including advance payment guarantees and parent company guarantees, do not have any statutory validity conditions, and a simple written agreement is sufficient to prove their existence and validity, provided that such an agreement does not violate any mandatory provision of Turkish law. As specified in question 21, in practice, advance payment guarantees are issued by banks in the form of letters of guarantee. This reply does not cover personal guarantees or surety.

Can the builder or buyer create and register a mortgage over the vessel under construction to secure construction financing?

As per article 1054/1 of the TCC, either the buyer or the builder may create and register a mortgage over a VUC provided that the VUC is registered in their name. As per the provisions of article 1054 of the TCC, a mortgage can be established on a VUC from the date of its keel-laying until the date of its launching, beginning from the time of the vessel becoming clearly and permanently distinguishable by placement of its name and number on a visible spot thereon. Article 1055 of the TCC stipulates that the mortgage on a VUC shall be established upon written agreement of the owner and the creditor, which should be certified by a notary public and by registration of the mortgage with the NBR. Alternatively, an agreement may also be made before the registrar.