ENERGY

EPC and Supply Contracts in Energy Projects: Delay, Acceptance and Guarantees

In wind and solar projects in Türkiye, European companies often participate as main contractor, equipment supplier or sub-supplier to a contractor. The turnkey and supply contracts used in these projects are usually based on international templates; where the contract is governed by Turkish law or performed in Türkiye, however, some provisions of these templates may not produce the intended result.

Most disputes in energy projects centre on delay, acceptance and guarantees. The following sections address the main points to consider when drafting and performing contracts for energy projects in Türkiye.

Contract price and foreign currency

Whether the price in contracts between persons resident in Türkiye can be set in foreign currency depends on the type of contract. In sale contracts for movable goods other than vehicles, a price in foreign currency may be agreed, while restrictions and exceptions continue to apply to contracts for work such as construction and installation contracts. In projects where equipment supply and installation obligations are governed by the same contract, the legal nature of the contract and the applicable currency rules must be determined from the outset.

In long-term projects, the allocation of cost increases is also important. Turkish law allows a contract to be adapted where an unforeseeable extraordinary event occurs after its conclusion; since this possibility is interpreted narrowly, however, expressly regulating the need for price adjustment in the contract produces a more predictable result.

Delay and contractual penalties

In turnkey contracts, the amount payable in the event of delay is usually set as a daily or weekly contractual penalty. Under Turkish law, merchants cannot, as a rule, request that an agreed contractual penalty be reduced on the grounds that it is excessive. In exceptional cases where the penalty is so high as to jeopardise the debtor's economic existence, however, a different assessment may be made. This rule requires the contractor to consider seriously the rates and the cap it accepts in the contract.

The cause of the delay also matters. Delays attributable to the employer, such as the grid connection line not being ready in time or delayed permits, entitle the contractor to request an extension of time. In practice, failure by the contractor to notify such events within the time limit and in the form required by the contract may result in even a justified extension request being rejected.

Acceptance procedures

In energy projects, acceptance is usually divided into stages such as mechanical completion, provisional acceptance and final acceptance, and each stage has different consequences for the return of guarantees, the payment of instalments and the start of the warranty period. The contract must therefore clearly define which tests and which document mark the completion of each stage.

The possibility that the employer fails to issue an acceptance certificate without good reason should also be addressed in the contract. Where the facility has in fact been put into operation but acceptance has not formally taken place, the date to which the warranty period and the return of guarantees are linked is frequently disputed.

Bank guarantees

In Turkish practice, advance payment, performance and warranty guarantees are usually provided as bank letters of guarantee. Where the guarantee contains an unconditional undertaking to pay on first demand, the beneficiary can call it without waiting for the outcome of the dispute in the underlying relationship. Although an interim injunction can be sought against an abusive call, this route succeeds only under narrow conditions.

For the contractor, the amount, term and conditions for calling the guarantees should therefore be among the most important points of contract negotiation. Reducing the guarantee amounts in stages linked to acceptance milestones also contributes to a balanced allocation of risk.

Defects and warranty

Liability for defects is subject to different rules under equipment sale contracts and turnkey contracts for work. Inspection and notification obligations must therefore be expressly regulated according to the nature of the contract and the agreed warranty regime; this is particularly important in energy projects with long warranty periods. For the supplier, it is also important that its warranty rights against its own sub-suppliers are aligned in duration and scope with the warranty it has given to the employer.

Conclusion

EPC and supply contracts in energy projects require international templates to be considered together with the Turkish rules on foreign currency, contractual penalties and guarantees. Regulating the currency and price adjustment at the outset, giving delay notices on time, clearly defining acceptance stages and carefully negotiating the conditions for calling guarantees significantly narrow the scope of disputes that may arise during the project. General questions of contract law are addressed on the page of the relevant practice area.