Contractual considerations for shipbuilding in Turkey

Key contractual considerations

Are there any statutory formalities in your jurisdiction that must be complied with in entering into a shipbuilding contract?

Entering into a shipbuilding contract is not subject to any statutory formalities. General provisions of the Turkish Code of Obligations No. 6098 (TCO) and the TCC are applicable to the signing and execution of shipbuilding contracts, whereas the permissions stipulated under the Regulation on the Construction, Refit and Maintenance-Repair of Ships and Watercraft should be obtained to commence such works under the relevant contract.

May the parties to a shipbuilding contract select the law to apply to the contract, and is this choice of law upheld by the courts?

The parties to a shipbuilding contract are free to agree on the law to be applied to the shipbuilding contract as per article 24/1 of the Turkish International Private Law No. 5718 (TIPL). According to article 2/1 of the TIPL, the courts shall apply the law agreed by the parties on an ex officio basis. Pursuant to the aforementioned article 24/1 of the TIPL, the choice of law that is clearly understood under the provisions of the contract or the present conditions of the case shall also be deemed valid and binding. If the parties to the contract have not expressly chosen a governing law, then the contract shall be governed by the law of the country with which it is most closely connected pursuant to the conflict of laws rule as set out in article 24 of the TIPL, which shall be the law of the place where the vessel is constructed.

Is a shipbuilding contract regarded as a contract for the sale of goods, as a contract for the supply of workmanship and materials, or as a contract sui generis?

The nature of shipbuilding contracts is not statutorily defined in Turkish law. However, according to the precedents of the Court of Appeal and opinion in the doctrine, in principle, shipbuilding contracts are regarded as contracts for works and services, and regulated under the TCO. Having said that, there may be different interpretations according to the provisions of the relevant shipbuilding contract; for example, sale of goods or sui generis contracts bearing obligations on the sale of both goods and services.

Is the hull number stated in the contract essential to the vessel’s description or is it a mere label?

The hull number is one of the key elements to distinguish a vessel from others. Therefore, the reference made to the hull number in a shipbuilding contract shall serve the ease of identification and proof. The hull number is one of the alternatives (including its name and any other identification mark) required for the registration of a hull with the NBR as set out in article 988/1(a) of the TCC. Thus, the hull number can be considered as an essential element of the contract from registration and identification points of view.

Do ‘approximate’ dimensions and description of the vessel allow the builder to deviate from the figure stated? If so, what latitude does the builder have?

Unless otherwise agreed by the parties in the shipbuilding contract, the builder, in principle, does not have the right to deviate from the figures specified in the contract. Any deviation from the figures and descriptions stipulated in the contract shall be deemed as the builder’s default. Having said that, approximate dimensions and descriptions stipulated in a contract might provide certain flexibility to the builder, as long as the result is reasonably close to the contracted figure and does not fall against the principle of good faith (article 2 of the Turkish Civil Code). However, if a specific figure is stipulated in the specifications or plans and drawings, this will supersede the approximate figure stipulated in the contract.

May parties incorporate guaranteed standards of performance whose breach entitles the buyer to liquidated damages or rescission? Are there any trade standards in your jurisdiction for coating, noise, vibration, etc?

As per the principle of freedom of contract, the parties can freely incorporate guaranteed standards of performance in a shipbuilding contract. In case of a breach of the guaranteed standards of performance, as per article 475 of the TCO, the buyer may:

• request a reduction in the contract price;
• request the elimination of the defect, if possible; or
• use its rescission rights, provided that the acceptance of the vessel cannot be expected from the buyer under the breach of such standards of performance.

The parties may also agree on a clause in the contract regarding liquidated damages or penalties in case of a breach of certain performance or remedies, as they deem appropriate. Currently, there are no trade standards applicable for coating, noise and vibration in Turkey.

Do statutory provisions or previous cases in your jurisdiction give greater definition to contractual quality standards?

Under Turkish law, there are no statutory provisions or court precedents that give greater definition to contractual quality standards. Article 471(1), (2) of the TCO states that the duty of care of the contractor (ie, the builder) shall be determined on the basis of acts of a prudent businessperson in the relevant area.

Where the builder contracts with the classification society to ensure that construction of the vessel leads to the buyer’s desired class notation, does the society owe a duty of care to the buyer, or can the buyer successfully sue the classification society, if certain defects in the vessel escape the attention of the class surveyors?

The classification society’s liability against the parties with whom they do not have a contractual relationship is unclear under Turkish law. There are no statutory provisions or court precedents clearly establishing the liability of the classification society against third parties.

Have the flag-state authorities of your jurisdiction outsourced compliance with flag-state legislation to the classification societies? If so, to what extent?

Yes, the flag-state authorities may delegate their powers to classification societies in accordance with the provisions of the Regulation on Institutions Authorised for Vessels. The powers may be wholly or partially delegated, and include the performance of surveys and inspections and the issuance of certifications.

Does your jurisdiction allow for registration of the vessel under construction in the local ships register in the name of the builder or the buyer? If this possibility exists, what are the legal consequences of this registration?

As per article 986/1 of the TCC, the vessel under construction (VUC) can be registered in the NBR upon request of the buyer, the builder, the creditor having a precautionary injunction over the vessel, or the mortgagee (if any). The registration can be made in the name of the builder or the buyer, which can be agreed upon in the contract. Upon the mentioned registration, the registered title and encumbrances (if any) become public.

May the parties contract that title will pass from the builder to the buyer during construction? Will title pass gradually, upon the progress of the vessel’s construction, or at a certain stage? What is the earliest stage a buyer can obtain title to the vessel?

The parties are free to agree on to whom the title will belong during construction. In the event that the parties have not clearly agreed on this issue in the contract, it is highly disputed under Turkish legal doctrine whether the buyer or the builder shall be entitled to the title of the VUC until delivery. The matter was in fact discussed during the drafting of the new TCC, where some legal scholars opined that the title should belong to the buyer until delivery, whereas the builder should have a statutory mortgage right over the VUC. However, this issue is still not clear. The parties are also free to agree on the gradual passing of the title, upon the progress of the vessel’s construction, or at a certain stage. The buyer can obtain title to the vessel by means of registering the vessel in the NBR when the construction level of the vessel is sufficient to distinguish the vessel from the other vessels.

Will risk pass to the buyer with title, or will the risk remain with the builder until delivery and acceptance?

It is important to state that the risk shall remain with the builder until delivery in cases where the vessel is registered in the buyer’s name. As per article 477/1 of the TCO, the risk shall pass to the buyer upon the delivery and acceptance of the vessel, save for hidden defects and defects concealed on purpose by the builder.

May a shipbuilder subcontract part or all of the contract and, if so, will this have a bearing on the builder’s liability towards the buyer? Is there a custom to include a maker’s list of major suppliers and subcontractors in the contract?

As per article 471/3 of the TCO, the builder is obliged to construct the vessel either itself or have it constructed by others under its own supervision, unless the builder’s own qualifications are important in the building of the relevant vessel. It is important to stipulate in the contract whether the buyer allows the builder to subcontract the whole or a part of the works or not. The builder will be responsible for the works carried out by its subcontractors as if these were carried out by the builder itself, unless otherwise agreed upon in the contract. Even though including a maker’s list in the contract completely depends on the negotiation between the parties, it is very frequently used.

Must the builder inform the buyer of any intention to have certain main items constructed in another country than that where the builder is located, or is it immaterial where and by whom certain performance of the contract is made?

In general practice, the parties are free to decide on the place where the vessel will be wholly or partially constructed, as well as on the qualifications and origin of the materials that will be used. In the event that there is no such provision in the contract, then it is important to check whether the builder is allowed under the contract to construct the vessel in a different country than the country of the shipyard. If there are no such provisions in the contract, then article 471/3 of the TCO shall apply. In this context, the builder will be obliged to construct the vessel itself, or have it constructed by others under its supervision.