Türkçe
It is common for contractors which have contractual relationship with both public administrations and private sector employers to submit performance bonds to guarantee the proper fulfillment of their contractual obligations. Such performance bonds are kept by the employer until the completion of all the works under the contract or the expiry of the guarantee period and is returned to the contractor following the proper delivery of the works.
However, during the continuation of the projects, there may be some disputes between employers and contractors and accordingly, the performance bonds may be liquidated. At this point, it should be noted that; there is a difference between the liquidation of the performance bond and the forfeit of the performance bond amount.
What is the Difference between Liquidation of the Performance Bond and Forfeit of the Performance Bond Amount?
For example, if a performance bond is issued for a specific period and such period of the bond expires before the completion of the project, and the contractor does not extend the period of the performance bond or submit a new letter of guarantee despite of the fact that there is such an obligation under the contract, the employer will have the right to liquidate the performance bond before its expiry date and keep the amount of the performance bond as cash guarantee. However, in this case; the amount of the performance bond liquidated will not be recorded as revenue, in other words, it will not be deducted for a penalty and only the deposit amount will continue to be kept in cash.
However; in some cases, it may be possible to forfeit the performance bond partially. In the event that the contractor fails to perform a contractual obligation, is delayed or causes damage to the employer by his own action, the employer may liquidate the performance bond to compensate such amounts to be paid by the contractor. Although it is legally appropriate in this case to request for the partial liquidation of the performance bond from the bank, in practice, it is frequently encountered that the total amount of the letter is converted into cash and the remaining part is kept as cash security after deduction of the penalty amounts.
In this case, does the employer have to pay any interest to the contractor for the return of the cash guarantee amounts? Although this is not a particularly important risk for the contractors which submit their performance bonds in foreign currency, as a result of the latest amendments made on the Decree No. 32 on the Protection of the Value of Turkish Currency and the related Communiqué No. 2008-32 / 34, the cash guarantees are generally submitted in Turkish Lira and accordingly, such amounts are subjected to monetary depreciation against the inflation especially within the projects extending to years. This of course poses a problem for contractors.
What is the Procedure for Return of the Performance Bonds and Cash Guarantees?
Although the return of the performance bonds submitted within the scope of a project may be subjected to certain conditions under the related contract, generally; the performance bonds are returned to contractors upon the delivery of the works or upon the expiry of the guarantee period or delivery of the guarantee period bond for the projects under which the contractor undertakes certain guarantee obligations.
In this case; the amount of the liquidated performance bond and other cash guarantees will remain under the custody of the employer as long as the work is performed and the guarantee period continues. If the project is extending to years, these amounts will remain with the employer for many years and accordingly, will be subjected to depreciation against the inflation. In that respect; will the contractors have the right to demand interest from employers for the period until the return of the guarantee amounts?
Are contractors entitled to request interest from employers for the period until the return of the guarantee amounts?
Contractors’ entitlement to request for the payment of interest may differ depending on whether the employer is a public institution or a private entity. The incurred interest request for the cash security amounts will differ. Pursuant to Article 13 of the Public Tender Contracts Law No. 4735 and Article 45 of the General Specifications of Construction Works (“GSCW”),
“Half of received performance bond is returned after the fulfillment of the commitment in accordance with the provisions of the contract or tender document and the approval of provisional acceptance minutes by eliminating defects and deficiencies belonging to the work if available, and the determination of the fact that the Contractor is not indebted to the Administration and the remaining part after the approval of definitive acceptation minutes are returned to the contractor upon the submission of no lien affidavit from the Social Security Institution.”
Although the said regulations set the rules for the return of the performance bond amounts, the same do not include any regulation for the interest to be paid to the contractors for vesting of the said amounts in the administration accounts during such periods. In addition; there isn’t also any determination made on the above-mentioned issue under the decisions of Supreme Court, Council of State and Court of Account.
If the counterparty is a public institution in the contract concluded by the contractor, it will not be possible for the contractor to request for the payment of interest upon the return of the cash guarantee amounts. Since public institutions are bound by the current legal and administrative regulations and it would not be possible to make extra payments to contractors based on a practice not included in these regulations, it will not be possible to demand interest in the return of the cash guarantee amounts.
Although this is the case; if this issue is regulated separately under the contracts to be concluded with private entity employers under the private law regime, the interest claim will find a justified basis. In this case, it may be regulated that the amounts of liquidated performance bonds or other cash guarantees will be retained by applying a certain interest rate and these rates will be taken into account while the return of these amounts or that these amounts will be retained in foreign currency and accordingly, will be prevented from depreciation against inflation. However, in this case; it will be important to make the aforementioned regulations in a way not to contradict with the existing legal regulations, especially within the scope of the above-mentioned Decree No. 32 on the Protection of the Value of Turkish Currency and the related Communiqué No. 2008-32 / 34, and thus the rights of the contractor will be protected with correct regulations.
ERKUT LAW OFFICE
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