Land-share-for-construction contracts (flat-for-land construction contracts, known in Turkish as “kat karşılığı inşaat sözleşmesi”), which are among the most common contract types in Turkish construction law and practice, are mixed contracts of a dual type that combine the elements of both a contract for work (the contractor’s obligation to produce a work) and a promise to sell immovable property (the landowner’s obligation to transfer land shares). By their very structure, these contracts create numerous complex obligations between the parties and frequently give rise to legal disputes during performance and after delivery. One of the most important of these disputes arises where the contractor fails to complete the work (the independent units and common areas) in accordance with the contract and with the rules of science and craft, that is, where the contractor carries out incomplete and defective construction.
Faced with such defective performance by the contractor, landowners apply to the civil courts to obtain compensation for their losses and to recover the cost of the incomplete/defective works. However, since determining the full cost of incomplete and defective works at the time the action is filed requires technical expertise, and landowners cannot be expected to determine this amount with millimetric precision before filing suit, the question of which type of action to bring is of great importance in terms of procedural law. The action for an unquantified receivable (HMK Art. 107), which entered the Turkish legal system with the entry into force of the Code of Civil Procedure No. 6100 (HMK), has at this point become one of the most critical procedural avenues available to landowners.
In this article, in the light of two key decisions of the Court of Cassation (Yargıtay) that are frequently debated in legal terminology and give rise to disputes in practice, we examine whether a landowner under a land-share-for-construction contract may bring an action for an unquantified receivable against the contractor for the cost of incomplete and defective works; we discuss the concepts of active and passive standing (capacity to be a party) within the framework of the principle of privity of contract; we explain the requirement to calculate incomplete and defective works in common areas in proportion to the land share; and finally we analyse in depth the general duty of notification and warning that the contractor bears in classic contracts for work as a “competent professional” (Former Code of Obligations No. 818 (BK) Art. 357/last; Turkish Code of Obligations No. 6098 (TBK) Art. 478).
Action for an Unquantified Receivable in Land-Share-for-Construction Contracts
In land-share-for-construction contracts, it is LEGALLY POSSIBLE for the landowner to bring an action for an unquantified receivable against the contractor for the cost of incomplete and defective works, and the landowner has a legal interest in bringing such an action.
According to paragraph 1 of Article 107 of the Code of Civil Procedure No. 6100 (HMK), entitled “Action for an unquantified receivable and action for declaratory judgment”, where the claimant cannot be expected to determine the amount or value of the receivable fully and precisely on the date the action is filed, or where this is impossible, the creditor may bring an action for an unquantified receivable by specifying the legal relationship and a minimum amount or value. Paragraph 2 of the same Article provides that, at the point when it becomes possible to determine the amount or value of the receivable fully and precisely on the basis of information provided by the other party or the outcome of the investigation (the proceedings and expert examination), the claimant may increase the claim stated at the outset without being subject to the prohibition on expanding the claim.
By their nature, the cost of incomplete (unperformed) and defective works arising from construction contracts cannot be determined fully and precisely by the claimant landowner before filing suit. The main reasons for this are as follows:
Need for Expertise: Identifying defects in construction (for example, inadequate concrete quality, insulation faults, work contrary to the approved project, deficiencies in finishing work) and calculating the cost of remedying them require detailed examinations by technical experts such as civil engineers, architects and quantity surveyors.
Variability of Market Values: The cost of incomplete and defective works is calculated on the basis of current market values. This calculation is a process that requires adjudication and the discretion of the court (“muhtacı muhakeme”).
Impossibility of Determination at the Outset: Even if the claimant landowner is able to obtain a technical report by their own means, discrepancies between the final cost determined as a result of the preservation of evidence before the court or the official expert examination conducted during the proceedings and the claimant’s estimated cost are inevitable.
As emphasised in the settled case law of the 23rd Civil Chamber of the Court of Cassation (and subsequently the 15th Civil Chamber of the Court of Cassation), in land-share-for-construction contracts it is not possible for claimants to determine the cost of incomplete and defective works at the outset of the action. Since these claims must be determined and established by technical experts on the basis of market values, claimants have a legal interest in bringing the action as an action for an unquantified receivable.
Indeed, in the Court of Cassation decision under review, the local court’s dismissal of the action on procedural grounds (under HMK Arts. 114/1-h and 115/2), reasoning that “the amount of the receivable was determinable as of the filing date and there was no legal interest in bringing an action for an unquantified receivable”, was found unlawful and the decision was reversed by the Court of Cassation [4]. The Court of Cassation expressly held that such actions should be conducted directly as actions for an unquantified receivable and that the claimant should be allowed to increase the claim after the expert report is received [4, 6].
PART 2: Principle of Privity of Contract, Standing (Capacity to Be a Party) and Change of Party (HMK Art. 124)
The rights and obligations arising from land-share-for-construction contracts produce effects only between the parties to that contract. Under the principle of privity (relativity) of contract, one of the most fundamental principles of the law of obligations, a contract as a rule binds only the persons who are party to it, and in disputes arising from the contract only the parties to that contract can be parties to the action. In Court of Cassation case law and legal doctrine, this is referred to as standing (capacity to sue or be sued).
- The Concepts of Active and Passive Standing and Their Ex Officio Consideration
Active Standing (Capacity as Claimant): Refers to the holder of the right in dispute, i.e. the person entitled to claim that right.
Passive Standing (Capacity as Defendant): Refers to the person liable under the right in dispute, i.e. the debtor from whom the right is claimed.
Standing (capacity to be a party) is one of the conditions of admissibility of an action and is determined according to substantive law. Its most important procedural feature is that it is not a defence that depends on being raised by the parties (such as the defence of limitation) but an objection in the nature of an itiraz. Therefore, even if it has not been raised by the parties at any stage of the proceedings, the court must take it into account ex officio (of its own motion) at every stage of the proceedings.
In the specific case underlying the Court of Cassation decision we examined, a land-share-for-construction contract drawn up by a notary was concluded between the claimant Rıdvan T. and the defendant contractor Ceylan Y. However, other persons who were not party to the contract (Gökhan B., Mustafa Ü. and Ergun A.) also appeared as claimants in the action; likewise, Döndü Y., who was not a party to the contract, was named as a defendant. In this situation, the Court of Cassation made the following legal findings:
With respect to the claimants Gökhan B., Mustafa Ü. and Ergun A., who were not parties to the contract, the action must be dismissed for lack of active standing.
With respect to the defendant Döndü Y., who was not a party to the contract, the action must be dismissed for lack of passive standing. The court’s rendering of judgment concerning persons outside the contract, disregarding this principle of privity, is a clear ground for reversal.
- Change of Party Under HMK Art. 124 and Erroneous Practices
Incorrectly naming the parties in the statement of claim, or changing a party during the proceedings, is subject to strict formal requirements. Under Article 124 of the HMK, a change of party in an action is, as a rule, possible only with the express consent of the other party. However, there are exceptions to this rule:
Requests for a change of party arising from a clerical error, or which are not contrary to the rule of good faith, are accepted by the judge without the consent of the other party being required.
If the incorrect or incomplete naming of a party in the statement of claim is based on an excusable mistake, the judge may accept the change of party without seeking the consent of the other party. In this case, the judge awards litigation costs in favour of the person removed as a party who did not give cause for the action to be brought against them.
In the specific dispute, although the action was brought by one of the claimants, Mustafa Ü., and this claimant’s name was written in the heading of the decision, the operative part of the judgment was rendered in favour of Yasemin Ülker, who had never acquired the capacity of a party at any stage of the action and in respect of whom no change of party had been made in accordance with procedure (HMK Art. 124). The Court of Cassation reversed the decision, finding it contrary to procedure and law to render judgment in favour of a person who was not a party to the action in the absence of a proper request or decision on a change of party.
PART 3: Method of Calculating Incomplete and Defective Works in Common Areas and the Land Share Ratio
In land-share-for-construction contracts, incomplete and defective works in the building generally fall into two main groups: defects in the independent units (flats/shops) allocated to the claimant landowner, and deficiencies/defects in the common areas serving the whole building (stairwell, roof, façade, shelter, garden, etc.).
According to the settled case law of the Court of Cassation, the cost of these two areas is calculated using completely different methods:
Independent Units: The cost of incomplete and defective works in the claimant landowner’s own independent units must be calculated and awarded in full, without any reduction.
Common Areas: Common areas are in the co-ownership of all unit owners in the building. Therefore, in an action brought by a single landowner, after the total cost of incomplete and defective works in the common areas has been determined, a calculation must be made taking into account the claimant’s share in those common areas, i.e. the land share ratio. The claimant landowner should be paid not the total cost of damage to the common area but only the portion corresponding to their own land share.
In the decision under review, when calculating the cost of incomplete and defective works in the common areas, the expert report made no reduction in proportion to the land share, and judgment was rendered directly on the basis of the total cost. The Court of Cassation reversed the local court’s decision, stating that the incomplete and defective works of each independent unit must be calculated separately, that claims relating to common areas must always be determined according to the claimant landowner’s land share, and that rendering a decision without a land share reduction was contrary to procedure and law.
The Contractor’s General Duty of Notification and Warning in Contracts for Work (BK Art. 357/Last – TBK Art. 478)
In contracts for work, which form the basis of construction contracts, one of the most important obligations imposed on the contractor is the duty of care and notification (warning). Under Article 357/last of the repealed Code of Obligations No. 818 (BK) (and, to similar effect, Article 478 of the Turkish Code of Obligations No. 6098 currently in force), the contractor is a competent professional and is obliged to complete and deliver the work in accordance with the rules of science and craft, the technique and the purpose the employer expects from it.
The limits of this obligation of the contractor do not disappear even where the employer (the administration or the landowner) gives the contractor faulty projects or instructions [1]. The legal rule is as follows:
Non-Conformity With the Project and the General Notification Duty: Where work is carried out contrary to the contract and its annexes or to the technical drawings or projects, the contractor remains liable for it even if this non-conforming work was requested by the employer or the project was provided by the employer (the administration) itself.
Condition for Release From Liability: When the contractor notices that the project or instruction given by the employer is faulty and will lead to results contrary to the rules of science and craft, the contractor must immediately notify the employer (General Duty of Notification). Only if the contractor fulfils this warning duty in writing or in a provable manner and the employer nevertheless insists on its own instruction or faulty project can the contractor not be held liable.
In the specific case underlying our second Court of Cassation decision (15th Civil Chamber, 05.02.2018, E. 2016/3571, K. 2018/354), the defendant contractor undertook, under a contract dated 06.09.2004 with the claimant administration, the construction of Block A of a primary school with 8 classrooms. After the 2011 Van earthquakes, serious damage occurred in the school building and strengthening works costing approximately TRY 400,000 were carried out on the building. The claimant administration sought recovery of this cost, alleging that the concrete strength was inadequate and the building had been constructed defectively. Relying on the expert report, the local court dismissed the action, reasoning that the building had been constructed in accordance with the architectural and structural project provided by the administration, that the concrete strength conformed to class C20 and that there was no work contrary to the earthquake regulations.
However, the Court of Cassation reversed this decision on a very important legal ground:
The expert report stated that the project provided by the administration was faulty.
Under Article 357/last of the BK, the court had not investigated whether the defendant contractor had checked the projects and fulfilled its warning duty by notifying the administration (employer) of the errors [1].
If the contractor identified that the project was faulty and did not warn the administration, it is personally liable for the resulting loss (the earthquake damage and the cost of strengthening), even if the project was provided by the administration.
The Court of Cassation gave the court the following instruction: it must be investigated whether the defendant contractor fulfilled its general duty of notification; if this duty was not fulfilled, the contractor must be held liable for the loss. In this context, an additional report should be obtained from the panel of experts, the cost of remedy should be calculated according to the earthquake regulation standards in force at the date the school was built, and a decision should be rendered accordingly.
CONCLUSION
This comprehensive legal review shows that, in land-share-for-construction contracts and general contracts for work, both procedural and substantive rules are subject to strict conditions designed to preserve the balance of rights.
The main legal conclusions are as follows:
Action for an Unquantified Receivable (HMK Art. 107): In land-share-for-construction contracts, the landowner may bring an action for an unquantified receivable against the contractor to recover the cost of incomplete and defective works. Since the identification of incomplete and defective works requires expert examination and adjudication (muhtacı muhakeme), the claimant cannot be expected to determine the full cost at the outset of the action. This fully satisfies the legal interest requirement for bringing an action for an unquantified receivable.
Capacity to Be a Party and Standing: Under the principle of privity of contract, only the parties to the contract may bring an action or be named as defendants. Third parties who have not signed the contract (for example, persons who later purchased an independent unit or relatives of the contractor) have no standing (active/passive) [3]. This is a matter of public order and must be considered ex officio by the court. Rendering judgment in favour of non-parties contrary to HMK Art. 124 is a ground for reversal.
Land Share Ratio: When the cost of incomplete and defective works in common areas is paid to the claimant landowner, a reduction must always be made in proportion to the claimant’s land share; the entire cost of damage to the common area must not be awarded to a single landowner.
The Contractor’s General Duty of Notification (BK Art. 357/Last): The contractor is an expert (competent) in the work and is obliged to check the faulty projects presented to it and to notify the employer of the errors. A contractor who implements a faulty project as it stands cannot escape liability for losses caused by earthquakes and similar events and for strengthening costs unless it proves that it fulfilled its general duty of notification.
These rules aim to ensure that the rule of good faith prevails in the construction sector, that technical errors are minimised and that the balance of rights between the parties is distributed fairly.
Legal Notice: This text has been prepared for general information purposes only and does not constitute legal advice. sophoshukuk.com makes no referral, guarantee or promise of outcome. Each case must be assessed on its own particular circumstances; for your specific dispute, please obtain professional advice from a lawyer.