Private investors must consider all the potential consequences of entering into what is often a very long term relationship with the state before sitting down to draft PPP agreements.

A private investor, entering into a long-lasting relationship with a state entity, should assess diligently how the relationship will likely run and in what ways his or her private interests can be protected as time progresses because PPPs generally entail long term agreements. If the main instruments establishing the partnership are well-drafted, the private investor may benefit from it throughout the implementation/contract period. The wording of the permitting clauses in particular should be clear and structured in a manner that covers all potential risks arising from the administrative law that may hamper the private interests.

The 1982 Constitution, governed by the legality principle, stipulates that the rights and duties of the administration should be regulated with laws. When administrative authorities are to apply a sanction, they should be able to substantiate such act with a specific legal provision. Any party which believes that an administrative act executable upon him is unjust or illegal may bring a case before the courts with a cancellation request. In such lawsuits the provisions of the PPP agreements may play an important role for the resolution of the dispute.  

This was the situation for a client company that had been operating a seaside gas-fired power plant in Turkey for two decades. The PPP was in the form of 40-year BOT. The private investor had entered into the implementation agreement with the Ministry of Energy and Natural Resources (“MENR”) back in 1993 based on Article 4 of the Electricity BOT Law. Enacted in 1984, this was the first legal instrument in Turkey regulating BOT projects and transfer of operation rights.  

Upon completion of construction as per the implementation agreement, the Company had started using sea water for operation of its power plant and then discharging it back into the sea. The administrative authorities had not shown any particular interest in this method since the plant began operation. Then in 2006, after almost 20 years of operation and for seemingly no reason, the revenue board of the local district governor’s office noticed the use of sea water and asked the company to pay a very high usage charge for a period covering the previous five years. This was the period they could make a legitimate backward-looking claim due to the applicable 5 years of statute of limitations.  

Initially, the district governor’s office issued notifications to the Company requesting compensation for unlawful occupation (ecrimisil ihbarnamesi). However, upon the objection of counsel to the Company, the district governor’s office, relying on the opinion of its legal department, agreed to cancel them. Instead, the district filed an action for debt collection before the court for failure to pay the usage fee. The district’s legal department gave the opinion that the district could not issue a notification for the usage fee for previous periods as compensation for unlawful occupation, but their position was that the district should petition the civil courts requesting the same amount as revenue on the grounds of unjust enrichment under the Code of Obligations. The district governorship filed the case in 2008 and requested some TL 2,000,000 for the sea water used so far, in addition to accrued commercial interest. 

The Civil Court of First Instance (the “Trial Court”) reviewed an expert witness report and dismissed the lawsuit in favor of the Company. In the detailed decision of the Court it was determined, inter alia, that:

  • The power plant had been established based on an agreement with the MoE, and the MoE had undertaken to obtain all necessary permits and approvals for the use of sea water in order to operate the power plant. Therefore, the use of the sea water by the Company cannot be considered unlawful.
  • Being an official state institution, the district governor’s office cannot argue that the company’s agreement with the Ministry is not binding upon itself.
  • There are no legal grounds to claim a usage charge from individuals or legal persons for sea water. In this respect, the sea water cannot be considered an immovable property and cannot be rented. It is impossible to approve a usage charge by the state without any legal basis.      

The Court of Appeals unanimously upheld the decision of the Trial Court and the decision become final. Since the claimed amount was high, the administration had to pay the proportioned attorney fees for the Company’s counsel. At that point the Company believed that the issue was permanently settled.

However, the district governor’s office continued to pursue usage charges against the Company. Shortly after finalization of the civil court lawsuit in 2014, they issued another notification to the Company requesting compensation for unlawful occupation. The notification stated that the Company was being sanctioned for the unlawful usage of sea water, and it again demanded compensation for the previous five years back from 2014. The Company again objected to this notification which was asking for TL 563,833.17. Unlike the first time, the governor’s office rejected the objection of the Company to the notification. The rejection decision did not explain why the notification was found legitimate this time. However, avoiding the initiation of a civil lawsuit, the governor’s office also avoided the risk of paying proportioned attorney fees for the Company’s counsel at the end of litigation.       

This time around, the Company had to file a cancellation lawsuit for the notification before the Administrative Court. The district governor’s office argued that as per Article 75 of the State Procurement Law, the compensation request for unlawful occupation is lawful. However, the relevant article can only be applied for unlawful occupation of immovable property. The Administrative Court accepted that sea water cannot be treated as immovable and the administrative act subject to the cancellation lawsuit was contrary to the principle of legality of administration acts. Having an explicit court decision in favor of the Company and since nothing had changed in the applicable law, the Administrative Court accepted the stay of execution request. The objection of the administration against the stay of execution decision was also rejected by the District Administrative Court.

Finally, just seven months after filing the lawsuit, the administrative court ruled on the case in favor of the Company and cancelled the notification demanding compensation for the usage of seawater on an unlawful occupation theory. The reasoning for the dismissal was consistent with the reasoning of the Trial Court. Naturally the district governor’s office appealed the decision again.  The Danıştay rejected the stay of execution request as well, but the final decision on the appeal has not been rendered yet. 

In this example, the permitting clauses from the implementation agreement played the pivotal role in repulsing the claims of the local administrative body. Without solid clauses the cases could have come out differently. If the court would have decided against the Company, it would have had to pay usage fees for sea water for the rest of the operation period in addition to making payments for the previous periods. The fact that the agreement was clear about the obligations of the state for water usage clearly enabled the Company to emerge from these cases unharmed. Indeed, the relevant provisions were the main foundation of the judge’s reasoning in the dismissal decision of the civil court.