The most common problem faced by landowners who sign a flat-for-land construction contract (kat karşılığı inşaat sözleşmesi) is that the contractor fails to complete the work within the agreed period. So what can the landowner do in the event of the contractor’s default? The short answer: Article 125 of the Turkish Code of Obligations (TBK) grants the landowner three mutually exclusive elective rights — to demand performance together with damages for delay, to waive performance and claim compensation for positive damages (expectation loss), or to withdraw from the contract and claim negative damages (reliance loss). In this article we examine the scope of these three options, the distinction between positive and negative damages, and how loss of profit is calculated using the “deduction method” required by the Court of Cassation (Yargıtay).
When Does the Contractor Fall into Default?
In terms of its legal nature, a construction contract in exchange for land share is a contract for work (eser sözleşmesi). The contractor’s principal obligation is to complete the agreed independent units in accordance with the contract and deliver them to the landowner. If this obligation is not performed on time, the contractor falls into default.
The text of Article 125 TBK describes the moment at which the elective rights arise as follows: “If the defaulting obligor has not performed its obligation within the period granted, or if the situation is one that does not require a period to be granted, the obligee is always entitled to demand performance of the obligation and compensation for the delay.” In other words, as a rule the contractor must be given a reasonable period to perform, and if that period expires without result, the landowner may exercise the elective rights.
If the delay has not yet become serious enough to bring the contract to an end, the first remedy the landowner usually turns to is compensation. In this regard, you may also refer to our article examining in detail the right to compensation for late delivery and loss of rent arising from delayed handover.
The Landowner’s Three Elective Rights under Article 125 TBK
Where an obligation has not been performed as a result of the obligor’s default, the law grants the obligee three powers. These rights are elective: the landowner may exercise only one of them and cannot claim all of them at once.
1. Demanding performance and damages for delay
The landowner may prefer to keep the contract alive. Under this option, the landowner demands that the construction be completed and the independent units delivered, and also claims damages for delay for the loss caused by the delay. Since the contractual relationship continues, the contractor’s obligation to perform is not extinguished.
In practice, this is the most frequently chosen option where the construction has been substantially completed and the landowner wants the finished work.
2. Immediately waiving performance and claiming positive damages
By immediately notifying the contractor that it waives performance and the right to claim damages for delay, the landowner may demand compensation for the loss resulting from non-performance of the obligation. Under this option the contract is not terminated; only the obligee’s right to claim performance is replaced by a right to claim compensation for positive damages.
As also emphasised in the decision of the Assembly of Civil Chambers of the Court of Cassation (Yargıtay Hukuk Genel Kurulu) dated 05.07.2006, E. 2006/13-499, K. 2006/507, what is at issue here is not loss resulting from the contract not being terminated, but loss resulting from the non-performance of the obligation, and this point must not be overlooked.
3. Withdrawing from the contract and claiming negative damages
The third option is to waive performance and withdraw from the contract. Under Article 125 TBK, in the event of withdrawal the parties are mutually released from their obligations to perform and may reclaim what they have already performed. In this case, unless the obligor proves that it was not at fault in falling into default, the obligee may also claim compensation for the loss suffered because the contract has become ineffective — that is, its negative damages.
The conditions and consequences of ending flat-for-land construction contracts are subject to rules of their own; we have discussed this topic separately in our article examining whether the contract can be terminated unilaterally.
The Difference between Positive Damages and Negative Damages
The choice between the second and third elective rights is, in practice, the most critical decision, because it directly determines which heads of loss can be claimed.
Legal scholarship defines this distinction as follows: “Positive damage: the difference between the position the obligee’s assets would have been in had the obligor performed properly and on time, and the actual position, is the positive damage. In other words, positive damage is the loss arising from the contract not being performed at all or not being performed properly. It undoubtedly also includes loss of profit.” (Prof. Dr. H. Tandoğan, Türk Mesuliyet Hukuku [Turkish Law of Liability], 1961, p. 426 et seq.)
Accordingly:
- Positive damages are calculated not as if the contract had never been concluded, but by reference to the position that would have been reached had it been properly performed. They also cover loss of profit.
- Negative damages are the loss suffered because the contract has become ineffective; they refer to expenses incurred in reliance on the contract.
According to legal scholarship, compensation for positive damages applies where performance has become impossible through fault, where damages for delay are claimed from the defaulting obligor together with late performance, where performance is waived following the obligor’s default and compensation is claimed in lieu of performance, and in cases of positive breach of contract.
Article 112 TBK: The Burden of Proving Absence of Fault Lies with the Contractor
Under Article 112 of the Turkish Code of Obligations, if an obligation is not performed at all or not performed properly, the obligor must compensate the obligee for the resulting loss unless it proves that no fault whatsoever can be attributed to it. This is an important evidential advantage for the landowner: it is not the landowner who must prove fault, but the contractor who must prove the absence of fault.
On the other hand, the same provision also sets a limit. For compensation to be claimed, the obligee must have suffered a loss; an amount that does not correspond to a loss actually suffered cannot be awarded as compensation. Here the law defines the scope of the loss as net and actual loss; net and actual loss means the real reduction in the person’s assets.
For this reason, where positive damages are compensated, the value the assets reach must not exceed the value they would have reached had the contract been performed. The calculation is carried out with this principle in mind.
How Is Loss of Profit Calculated? The Deduction Method
The most contentious head of positive damages is loss of profit. According to the settled approach of the Court of Cassation, loss of profit must be determined on the basis of the actual reduction in assets caused by the inability to earn the profit.
In determining the actual reduction, the method set out in Articles 408 and 438 of the TBK, which govern service contracts, is applied:
- Article 408 TBK governs the calculation of the wage that may be claimed due to the employer’s default and provides for the deduction of expenses saved and benefits knowingly forgone as a result of the employer’s obstruction.
- Article 438 TBK governs the calculation of the loss that may be claimed where the principal unjustly terminates the contract and states that the amount saved as a result of the termination and the income earned from other work or knowingly forgone are to be deducted.
Both contain similar rules as regards the items to be deducted; in legal scholarship and practice this calculation is called the deduction method (kesinti yöntemi). Although the deduction method in the TBK relates to service contracts, it must also be applied by analogy where other contracts are unjustly terminated. Indeed, in its decision dated 12.05.2010, E. 2010/14-244, K. 2010/260, the Assembly of Civil Chambers of the Court of Cassation accepted that, where a bilateral contract is unjustly terminated by the other party, the deduction method must be applied by analogy in determining the loss that the party suffering loss of profit may claim.
How is the deduction method applied in concrete terms?
Under the deduction method, the following items are deducted from the contract price:
- The expenses the contractor saved because it could not complete the work (savings on materials and labour costs),
- The benefits it earned by doing other work or knowingly refrained from earning.
The amount remaining after these two items are deducted from the contract price gives the loss of profit falling within positive damages. The 15th Civil Chamber of the Court of Cassation also applied this principle in its decisions dated 11.04.2007, No. 4955-2372, and 09.05.2013, No. 7521-3029.
Precedent: The Deduction Method, Not a Percentage-Based Profit Calculation
The method by which loss of profit must be calculated was clearly set out in the decision of the 15th Civil Chamber of the Court of Cassation dated 08.04.2019, E. 2018/2267, K. 2019/1576.
Summary of the facts
It is important to understand the parties’ positions in this decision correctly: the claimant is the contractor and the defendant is the landowner. The parties signed a flat-for-land construction contract dated 25.07.2013; while the contractor was about to finish the preparatory stage of the work — such as cancelling usufruct rights, having parcels classified as farmland opened for development and having the project prepared — the landowner terminated the contract without giving reasons by a warning notice dated 06.03.2014. The contractor then claimed compensation for the positive and negative damages it suffered as a result of this unjust termination.
In the reversal judgment of the 23rd Civil Chamber of the Court of Cassation, it was accepted that the landowner’s termination of the contract without reasons constituted unjust termination and that the contractor was therefore entitled to claim compensation for all the loss it suffered; it was also stated that positive damages had to be awarded. At the rectification-of-judgment stage, the file was examined by the 15th Civil Chamber — the chamber competent for flat-for-land construction disputes after 01.07.2016 — pursuant to the division-of-work decision of the Grand General Assembly of the Court of Cassation dated 09.02.2018, No. 2018/1.
Why was the expert’s calculation found to be wrong?
In the expert report on which the court based its judgment, loss of profit had been calculated in line with the case law of the Council of State (Danıştay) holding that the profit obtainable in contracting services should be taken as 25% of cost where the cost is known, or 20% of revenue where the cost is not known. Using this method, 25% of the construction cost of TRY 4,290,000.00, determined on the basis of 2014 unit prices per m², i.e. TRY 1,072,500.00, had been determined as loss of profit.
The 15th Civil Chamber of the Court of Cassation found this calculation to be wrong. According to the Chamber, that calculation could not be regarded as having been made in a manner consistent with the deduction method in Article 408 TBK, in force on the date of the contract, and capable of review. Since the report did not contain an examination of loss of profit under the deduction method, the judgment had to be rendered after calculating loss of profit in accordance with the provisions cited above.
What the decision means for landowners
On its facts, this decision concerns a lawsuit brought by the contractor following the landowner’s unjust termination. Nevertheless, the principles applied in the decision — the elective rights under Article 125 TBK, the distinction between positive and negative damages and the mandatory use of the deduction method for loss of profit — apply in both directions (symmetrically), regardless of which party breached the contract.
Indeed, the above-mentioned decision of the Assembly of Civil Chambers, E. 2010/14-244, also sets out a general principle for cases where bilateral contracts are unjustly terminated by the other party. Accordingly, in a lawsuit in which the landowner claims compensation for positive damages due to the contractor’s default, the loss must likewise be determined not by abstract percentages but by a concrete calculation capable of review, based on the actual reduction in assets.
Frequently Asked Questions
What should I do first if the contractor does not finish the construction?
Under Article 125 TBK, as a rule the contractor must be given a reasonable period to perform. If that period expires without result, or if the situation does not require a period to be granted, the landowner’s elective rights arise. Since the choice of remedy depends on the stage of construction, the terms of the contract and the specific loss, it is important to obtain legal advice before the warning-notice stage.
Can I exercise all three elective rights together?
No. These rights are elective; once one is exercised, the others are waived. For example, a landowner who waives performance and claims compensation for positive damages can no longer claim completion of the construction and damages for delay in the same lawsuit.
Should I claim positive damages or negative damages?
Positive damages represent the difference between the position that would have been reached had the contract been properly performed and the current position, and they also cover loss of profit; under this option the contract is not terminated. Negative damages, on the other hand, are the loss suffered because the contract has become ineffective following withdrawal from it. Which is more favourable depends on the specific heads of loss.
What happens if the contractor claims it was not at fault?
Under Article 112 TBK, the burden of proof lies with the contractor. Where the obligation has not been performed at all or not performed properly, the contractor must compensate the landowner for the resulting loss unless it proves that no fault whatsoever can be attributed to it.
Can the court calculate loss of profit as a percentage?
In the decision of the 15th Civil Chamber of the Court of Cassation, E. 2018/2267, it was stated that a percentage-based profit calculation in the form of 25% of cost / 20% of revenue cannot be regarded as consistent with the deduction method or capable of review. Loss of profit must be calculated by deducting from the contract price the expenses saved and the benefits earned from other work or knowingly forgone.
Which court and chamber have jurisdiction over these disputes?
By the division-of-work decision of the Grand General Assembly of the Court of Cassation dated 09.02.2018, No. 2018/1, the task of examining files arising from construction contracts in exchange for land share that come before the Court of Cassation on appeal or with a request for rectification of judgment after 01.07.2016 was assigned to the 15th Civil Chamber of the Court of Cassation.
Points to Consider When Assessing the Elective Rights
In the event of the contractor’s default, which elective right is exercised, the content of the warning notice and the method by which the loss is calculated directly determine the outcome of the case. Choosing the wrong path can lead to losses of rights that are difficult to remedy later. To understand the basics of the subject, you may also read our article explaining what type of contract a flat-for-land construction contract is. Since every dispute is unique, it is advisable to seek professional legal advice from a lawyer before taking any action.
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.