An engineering, procurement and construction ("EPC") contract is a complex form of construction contract, commonly used in large-scale construction works of complex infrastructure projects. EPC contracts are used in many sectors including energy (especially power plant projects), transportation and telecommunications. Under an EPC contract, the EPC contractor is required to deliver a completely functioning facility to the employer by carrying out the design, engineering, procurement and construction until a set date, in return for a pre-determined price. An EPC contractor must conduct the detailed engineering and design of the project (obtain the employer's approval if stipulated), procure all the materials and equipment, construct the facility and deliver it to the employer. Generally, the employer simply turns the key to operate the facility and, because of this, EPC contracts are sometimes called turnkey contracts.1 For EPC contracts in the energy sector, in addition to delivering a fully functioning energy facility on a set date, the EPC contractor must ensure that the energy facility performs to pre-determined levels.
Unlike traditional construction agreements, EPC contracts impose broad obligations for the EPC contractor, in order to facilitate the entire process for the employer. Hence, EPC contracts became a preferred type of agreement in public private partnership ("PPP") projects that (i) are project financed and (ii) involve multiple parties, such as lenders, investors, guarantors and public authorities.
An EPC contract governs many issues (e.g. liquidated damages, limitation of liability, compensation, force majeure). In addition, there are additional energy related issues (e.g. access to the transmission grid, commissioning and testing regimes, interface issues) that must be considered while drafting EPC contracts in the energy sector.
I. EPC CONTRACTS UNDER TURKISH LAW
There is no Turkish law that specifically governs EPC contracts. EPC contracts can be classified as "mixed contracts", as they contain the features of different contract types. Due to lack of court precedent and doctrine in relation to issues arising from EPC contracts, the provisions dealing with construction contracts, as set forth between Articles 470 and 486 of the Turkish Code of Obligations2 (the "TCO"), apply to EPC contracts by way of analogy.3 Some of the important provisions regarding construction contracts set forth under the TCO are as follows:
- If it becomes clear that the contractor will not be able to finish the construction on time, the employer can rescind the contract prior to the specified completion date.
- In the event of the contractor's gross negligence, the limitation period for the contractor's liability for defective works is 20 years for immovables.
- The employer can terminate the contract before completion of the work, by paying the completed part's price and the contractor's damages.
II. BASIC FEATURES OF EPC CONTRACTS FOR ENERGY PROJECTS
1. Single Point Responsibility
Under an EPC contract, the EPC contractor is responsible for conducting all design, engineering, procurement, construction, commissioning and testing activities. The EPC contractor undertakes the entire responsibility and risk, as the single responsible party. Even if an EPC contractor uses sub-contractors to carry out some parts of the work, it will remain responsible to the employer for the subcontractor's work. This single point responsibility is seen as one of the major advantages of EPC contracts in energy projects.
2. Fixed Contract Price and Fixed Payment Terms
The EPC contractor undertakes the entire risk, in return for a fixed contract price. Generally, the employer is not required to provide additional money unless it delays the EPC contractor or orders changes to the work. Furthermore, unless otherwise stipulated, EPC contract prices are free from market price variation. Payment terms are generally specified and fixed in an EPC contract and payments are generally linked to milestones set out in the EPC contract.
3. Fixed Completion Date and Milestone Basis Progress
EPC contracts provide for a fixed completion date for the overall contract,4 and may also contain fixed time limits for each activity. Under EPC contracts, contract work is divided into a certain set of activities and each set of activity is linked to a milestone. In EPC contracts with milestones, billing and payments are made when each milestone is reached. EPC contracts should include clauses that grant time extensions when the works are delayed for reasons arising from the employer.
In almost all cases, if the EPC contractor fails to meet the fixed dates, it will be liable for delay liquidated damages ("DLDs"). EPC contracts generally stipulate DLDs in order to compensate the employer for losses and damages arising from late completion of the energy facility. Although liquidated damages are not specifically governed under Turkish law,5 based on the freedom of contract principle and subject to certain restrictions,6 parties are free to agree upon liquidated damages clauses. In order to claim DLDs, the employer is not required to prove any damage. Under Turkish law, a party can claim damages exceeding the amount stipulated in the contract, if that party can prove both the additional amount and the other party's fault.
4. Performance Regime and Performance Guarantees
Stipulating a performance regime is a significant issue for EPC contracts in the energy sector. The employer's profits will be from operating the energy facility. Hence, it is important that the energy facility performs as required in terms of output, efficiency and reliability. It is for this reason that EPC contracts generally contain performance guarantees supported by performance liquidated damages ("PLDs"). The EPC contractor is required to pay PLDs if the energy facility fails to meet the pre-determined performance. Under Turkish law, similarly with DLDs, there is no provision prohibiting the stipulation of PLDs. Again, the employer is not required to prove any damage in order to claim PLDs.
5 .Limitation of Liability
The general rule in Turkish law is that the parties to a contract can contractually limit their liabilities, by way of determining a cap or excluding liabilities, to the extent this does not exclude liability for gross negligence and (of course) willful misconduct.7 Furthermore, there is no explicit provision under Turkish law that governs "consequential" or "indirect" damages and there is no legal restriction preventing the exclusion of liability for consequential and indirect losses. Parties can contractually agree on and enforce the exclusion of liability for consequential or indirect damages.
EPC contracts generally stipulate for an EPC contractor to provide securities in different forms in order to protect the employer if the EPC contractor does not fulfill its obligations. The purpose of this system is to protect the employer where the EPC contractor is in breach of the EPC contract and cannot or does not pay the employer's claim for damages. Examples of forms of securities are (i) performance bonds; (ii) bank guarantees; (iii) retention bonds; (iv) advance payment bonds; (v) warranty bonds; and (vi) parent company guarantees.
7. Supplier's Warranty / Defect Liability
Under Turkish law, defect liability is referred to as the supplier's warranty.8 In an energy project, a defect occurs if the energy facility's equipment and services do not comply with the agreed quality in accordance with the specifications under the EPC contract. According to the concept of the supplier's warranty, the EPC contractor must deliver the energy facility free from any defects and the EPC contractor's fault is not a condition for the employer to invoke the supplier's warranty liability. However, the supplier's warranty liability can be contractually excluded or limited, except for gross negligence or fault.
1 Although EPC contracts are sometimes called turnkey contracts, there are differences depending on the specifications of the project: For instance, in EPC contracts, the employer generally provides the basic engineering and the contractor conducts the detailed design. In turnkey contracts, the employer only provides certain technical specifications. In turnkey contracts, the contractor is required to perform construction, commissioning, start-up and turn-over of the facility to the employer; whereas in EPC contracts, it may be a third party's responsibility to perform commissioning and start-up.
2 Published in the Official Gazette dated 4 February 2011 and numbered 27836.
3. Under the TCO, in a construction contract, one party undertakes to realize a project and the other party is required to pay the contract price.
4. A fixed completion date can be either a fixed date or a fixed period following the commencement date.
5. According to some scholars, liquidated damages are considered as a penalty fee under Turkish law. However, the two are different concepts, as liquidated damages are a genuine pre-estimate of the damage, whereas a penalty is a sum that is not necessarily proportionate to the actual damage.
6. Under the TCO, "agreements against statutory provisions, morals, public order, personal rights and agreements, the subject of which are impossible, are null and void."
7 Article 115/3 of the TCO provides an exception to this general rule, whereby in agreements concerning services, professions or arts requiring a certain specialization, clauses excluding or limiting negligence are strictly null and void.
8 The concept of supplier's warranty is similar to the "implied warranty" principle in English law.
© Kolcuoğlu Demirkan Koçaklı Attorneys at Law, 2015
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