Limitation of liability arguments are always a high-stakes endeavor by the aerospace & defense (A&D”) contractors, and this term is not enforceable in many times as to "cap" the damages exposed are generally relates to either type of contract or defect/warranty arguments. Furthermore, Turkish law only allows the limitation of liability for slight negligence except for the contracts which require expertise of a service, profession, or art and deems the previously made agreement having effect that the contractor is not liable for gross negligence as null and void.

In this context, the limitation of liability regulated in a contract requires the priority determination of the nature of the contract in Turkish law in many disputes.

In A&D contracts, where most of the disputes are related to the contractor's obligations under the defect and warranty conditions, discussions concentrate that whether the contractor is within the liability limit even in case of defect or defect shall only be covered under warranty conditions or relates to duly fulfilment of a contract.

Defects Within the Scope of Sales Contract

The contract of sale is one of the contract types specially regulated in the Turkish Code of Obligations numbered 6098 (“TCO”), and the liability of the seller arising from the defect is regulated under Articles 219-231 of the TCO. Therefore, whether the relationship between the buyer and the seller is a consumer relationship, a commercial relationship or an ordinary sales relationship, the provisions of the TCO will be applied as a general provision for liability arising from defects in a sales contract.

First, TCO, defines defect only within the scope of the sales contract, and it is possible to use this definition by analogy for other contracts. As per the TCO, ‘defect’ may occur due to the absence of the qualities agreed by the parties in any way in the sale in question, as well as material, legal or economic defects that are contrary to the quality or quantity that affect the quality, that eliminate or significantly reduce the value of the sold in terms of use or the benefits expected by the buyer from it.

Conditions of the Seller’s Defect Liability

The TCO imposes the obligation to fulfil certain conditions in order to the seller to be held liable for the defects of the sold item, this includes: (i) Existence of defect in the sold item at the time the benefit and damage have passed to the buyer. (ii) The buyer does not know about the defect and the defect is important (iii) The liability arising from the defect has not been removed by contract. (iv) The buyer has fulfilled the obligations imposed on her by the law and has not accepted the defect. (Here, the obligations imposed on the buyer by law are the obligation to review the product and notify the seller of the alleged defects.)

Rights of the Buyer

In accordance with Article 227 of the TCO, the optional rights available to the buyer in cases where the seller is liable for the defects of the sold item are as follows: (i) Withdrawal from contract by declaring readiness to return the sold item. (ii) Withholding the sold item and asking for a discount on the sales price at the rate of the defect. (iii) Requesting free repair of the sold item at the seller's expense unless it requires an excessive cost. (iv) If possible, requesting that the sold product be replaced with a non-defective one.

Also, pursuant to TCO Article 227, the buyer's right to claim compensation in accordance with general provisions is reserved. Furthermore, the seller may prevent the buyer from exercising her optional rights by immediately giving the buyer a free copy of the same product and by removing all the damage suffered. In addition, if the buyer uses her right to withdraw from the contract, if the situation does not justify this, the judge may decide to repair the sold item or to reduce the sales price. Lastly, if the deficiency in the value of the sold item is very close to the selling price, the buyer can only use one of the rights to withdraw from the contract or to request that the sold item be replaced with a non-defective one.

Defects Within the Scope of Work and Service Contracts

Article 470 of the TCO defines work and service contracts as a contract in which the contractor undertakes to create a work and the principal undertakes to pay a price for it. Construction contracts, contracts for the establishment of a facility, contracts in which the contractor undertakes to create a work are all contracts of work in terms of their legal nature. Furthermore, the contractor will have duly fulfilled his obligation to create the work only when he creates the work in accordance with the contract and without defects.

TCO regulates the contractor’s defect liability for contract of work briefly compared to sales agreement. In the light of Supreme Court decisions and doctrinal views, "defect" in the work can be defined as a defect in the qualities that are guaranteed, agreed in the contract or that must be present in the work.

Rights of the Principal

The principal has several optional rights arising from defects and is regulated in Article 475 of the TCO. According to this article; The principal will be able to use one of the following optional rights in case of defect: (i) If the work is defective to the extent that the principal cannot use it or cannot be compelled to accept it in accordance with fairness, or if it is equally contrary to the provisions of the contract, reneging from the contract (ii) The principal has the right to keep the work and demand a reduction in the price, in this case, the price determined in the contract is reduced in proportion to the depreciation. (iii) To demand free repair of the work, at the contractor's expense, unless it requires an excessive expense.

In addition to special arrangements, the principal is entitled to demand compensation within the scope of general provisions. In case the principal suffers damages due to a defect, the right to apply to the provisions of tortious action is reserved.

Conditions of the Contractor’s Defect Liability

As per the TCO, to the contractor to be held liable under a contract of work, the work must first be delivered. No liability shall arise for a product that has not yet been completed or delivered. Another condition which must be mentioned is that there must be a latent or clear defect in the work. Additionally, the principal must have fulfilled its inspection and the notification obligations, and thus the work must not have been expressly or implicitly accepted by the principal. Lastly, the defect must have arisen exclusively from the actions of the contractor (use of defective materials or workmanship, faulty design, etc.) and should not have occurred due to the actions of the principal.

Pursuant to Article 476 of the TCO; If the work is defective, despite the contractor's warning, if it arises from the instructions given by the principal or if it can be attributed to the principal for any reason, the principal cannot use his/her rights arising from the defectiveness of the work.

In addition, Article 115 of the TCO regulates non-liability agreements regarding the liability of the contractor arising from her/his own behavior and limits non-liability agreements under certain conditions. According to this Article, contracts of irresponsibility are the elimination of liability as of the conclusion of the contract in terms of the degree of negligence with the agreement of the parties before the damage occurs. According to Article 115/1 of the TCO, previous agreements that stipulate that the contractor cannot be held liable in case of gross negligence are null and void. Furthermore, within the scope of Article 115/2 of the TCO stipulates that all kinds of agreements made previously indicating that the contractor shall not be liable for any debts that extending from the employment contract signed between the contractor and principal shall be strictly null and void. Lastly, Article 115/3 of the TCO states that, a prior agreement on a service, profession or art requiring specialization can only be carried out with the permission given by law or authorized departments indicating that the contractor shall not be liable for slight negligence shall be strictly null and void.

One of the decisions of the Supreme Court on this issue is as follows (11HD., 30.10.2017, 3632/5846): “Article 854 of the TCC numbered 6102, which was in force on the date of the lawsuit and incident, It has been stated that all contractual provisions that result in the reduction or removal of the responsibilities imposed by the law on the carrier, the freight forwarder and the transportation operators whose activities are subject to State permission are invalid. Article 115/3 of TCO No. 6098 also states that if a service, profession or art requiring expertise can only be performed with the permission granted by law or competent authorities, the prior agreements that the debtor will not be liable for his slight negligence are definitively invalid.”

Obligation to Notify Clear and Latent Defects

Pursuant to Article 477 of the TCO; After the explicit or implicit acceptance of the work, the contractor is relieved of all liability and continues to be liable only for the latent defects that were deliberately hidden by him during the delivery and cannot be noticed during the duly review. Within the scope of a contract of work, the liability of the contractor for clear defects is removed with the delivery. The principal must notify the contractor of any defects he or she detects by inspecting the work at the time of delivery. If the principal neglects to inspect the work and notify in this way, it is deemed to have accepted the work and there is no right to claim for clear defects. Again, in Article 477 of the TCO; It is also regulated that the principal should notify the contractor of the situation without delay regarding the latent defects that appear later in the work. If the principal does not make the relevant notification, the principal is deemed to have accepted the work and there is no right to demand any latent defects.

As per the TCO, the principal, who fulfils his inspection and notification obligations in this way, can use one of the optional rights stipulated in the TCO regarding the latent and clear defects in the work.

Defect Liability Statute of Limitations

The examination of warranty contracts is problematic as there are no specific provisions dedicated to them in the law. In this sense, the doctrine tries to reveal certain principles through the general rules that intersect with the regulation area of these contracts.

Pursuant to Article 478 of the TCO if the contractor has created a defective work, the right to file a lawsuit for this reason shall expire within; 2 years as from the delivery date, for works other than immovable structures,5 years as from the delivery date, for immovable buildings and 20 years as from the delivery date, if the contractor has a gross negligence, regardless of the nature of the defective work.

Under most work contracts, contractors are not relieved of all liability for the work at the end of the contractual warranty period. The duration of liability of the contractor for latent defects is not limited with the warranty period, and in case of gross negligence, the duration of the liability continues for 20 years following the delivery.

The parties may extend or shorten the statute of limitations by agreement. However, this extension cannot exceed twenty years, and it is not possible to shorten the twenty-year statute of limitations in cases where the defect is deliberately concealed. In addition, pursuant to Article 115 of TCO, if the defective performance is due to the gross negligence of the contractor, the condition regarding the abbreviation will not be valid again and there will be no possibility of getting rid of the responsibility for shortening the limitation period. The contractor may give a warranty for a certain period regarding the work done, either together with the contract of work or with a contract separate from this contract. Pursuant to Article 148 of the TCO, with the warranty contract, although the periods regarding the guaranteed liability of the contractor specified in the law can be extended, they cannot be shortened If the parties grant a warranty period longer than the statutory limitation period, it is considered that the limitation period is extended by the warranty period, or the limitation period begins to run upon the expiration of the warranty period. In case of doubt, the interpretation made in favour of the contractor should be accepted.

A decision of the Supreme Court on this issue (15HD., 10.06.2019, 1628/2660):“In the 15th article titled “Warranty” of the contract signed between the parties; Unless a longer period is foreseen, starting from the date of signing of the contract of acceptance between the principal and the contractor by the principal, the materials supplied by the contractor or the material supplied by the principal, if any, faulty use and/or faulty manufacturing, and/or workmanship and/or 5 Years warranty is provided against defects in assembly or workmanship. The Code of Obligations No. 818, which was in force at the date of the dispute and the lawsuit and must be implemented, brought an obligation to notify immediately as soon as he/she learned about the latent defect. As a rule, there is an obligation to notify for clear and latent defects, but in case of warranty provision, the subcontractor or contractor that performs the work, by giving a guarantee, removes the obligation of the principal for inspection and timely notification in case of clear defects, and removes the obligation to notify immediately in terms of latent defects, and to return these defects found out within the warranty period free of charge means that contractor undertakes to remedy it. Regarding the clear and latent defects that occur during the warranty period, the principal may demand the elimination of the defect and its damages within the statute of limitations without having to make a defect notice or claim a reprieve for the defect against the cost of the work.”

Defect Liability Under the A&D Contracts

Standard contracts prepared by the Presidency for Defense Industries (“SSB”) are used in projects carried out within the scope of the A&D industry. Subcontractor agreements made within the scope of these projects are generally formed by transferring the provisions of the main contract concluded with SSB one-to-one.

Since the project contracts concluded with SSB and the subcontractor contracts concluded in this context are generally not related to the sale of a standard product, but to the sale and delivery of products manufactured in accordance with certain technical specifications, these contracts are characterized as “work and service contracts” in accordance with the TCO. Accordingly, the provisions of the TCO on the contract of work are applied in relation to disputes arising under these contracts.

The Supreme Court in its ruling on other work that must comply with technical specifications (15HD., 08.12.2015, 1553/6259): “The court defined the relationship between the parties as a commercial sale contract and the provisions regarding commercial sale were applied. However, since the subject of the contract between the parties is direct production and delivery in accordance with approved type projects and TEDAŞ technical specifications, it is necessary to accept that the relationship between the parties is a contract of work and Articles 355 and the following of the Turkish Code of Obligations numbered 818, which was in force on the date of the contract, should be applied to the dispute.”

To conclude, in many disputes liability of limitation clauses are not enforceable as to Turkish law does not allow even the slight negligence where the work and service requires expertise and contractors are recommended to seek legal advice before they enter into a contract in A&D in Turkey.

Şafak Herdem, Esra Temur