Supplementary memorandum submitted by
Black & Veatch Ltd
A PRACTICAL CRITIQUE OF DISPUTE RESOLUTION
PROCEDURES SELECTED BY THE TURKISH CENTRAL FINANCE AND CONTRACTS
UNIT IN SERVICE CONTRACTS FUNDED BY EUROPEAN UNION EXTERNAL AID
THE ISSUE
The Turkish government has decided that any
disputes arising between it and consultants it engages in connection
with European Union (EU) funded infrastructure projects, shall
be adjudicated in the Turkish public courts. Credible evidence
indicates that the Turkish public courts suffer from corruption
and cannot be relied on to determine disputes expeditiously or
fairly. Consultancies from EU member states which have much to
contribute to these projects, may therefore be deterred from taking
part in these projects. The Turkish government's decision contrasts
with its approach to contractors whose disputes will be adjudicated
by international arbitration.
THE BACKGROUND
The EU has agreed with the Government of Turkey
that the EU will provide finance from its general budget for external
assistance, to projects aimed at improving environmental protection
and ensuring compliance with EU directives on control of water
pollution. These projects, and the EU's financial contributions
to them, are being administered by a Central Finance and Contracts
Unit (CFCU) established within the Government of the Republic
of Turkey.
CFCU will engage contractors and consultants
to deliver projects. In the terminology of the procurement procedures
under which the EU requires these projects to be tendered and
administered, contracts awarded to consultants are called "service
contracts" and contracts for construction works are known
as "works contracts". CFCU establishes the terms of
service contracts and works contracts using template forms of
contract prescribed by the EU but, unlike other development aid
agencies, the EU is not prescriptive in relation to the procedures
for resolution of disputes under service contracts.
CFCU has resolved that works contracts shall
provide for resolution of disputes by international arbitration,
but that disputes under service contracts shall be resolved by
the Turkish public courts. CFCU is aware of non-Turkish consultants'
concerns about the involvement of the Turkish courts in the resolution
of disputes arising under these contracts, and that service contracts
do not align with works contracts in this regard.
Objection is taken to the choice of Turkish
courts for service contracts because the Turkish courts are not
free from corruption and have not established a reputation for
the expeditious and impartial adjudication of the kinds of disputes
which arise from contracts for the type of professional services
required by CFCU. Objection is also taken to the differing treatment
afforded to services contracts when compared to works contracts
for which there seems to be no discernible rationale.
This paper considers the importance of providing
an expeditious and impartial mechanism for the resolution of disputes
which produces awards or judgments which are readily enforceable.
It also considers the performance of the Turkish courts by reference
to the EU's assessment of Turkey's progress in preparing for full
EU membership. Finally it contrasts CFCU's position on dispute
resolution mechanisms with positions taken by other Turkish public
sector clients administering projects financed by development
agencies.
Why is it important that contracts between the
Contracting Authority and Consultants should include dispute resolution
procedures which are fair and expeditious?
All projects, especially projects involving
the construction of complex treatment plants and infrastructure,
involve a significant degree of uncertainty. Contracting Authorities
change the objectives of a project or their strategy for procuring
it; initial concept designs prove impractical to execute; other
consultants or contractors fail to perform or become insolvent;
or force majeure events interfere. All these factors, and others,
delay projects and while reputable consultants will always try
to accommodate a degree of change without seeking extra fees,
the extent of change is sometimes so great that consultants cannot
accommodate it without applying extra resources.
Under the "General Conditions for service
contracts financed by the EC" modifications to the total
contract amount must be negotiated by the Contracting Authority
and the consultant. However, these General Conditions set out
no specific principles or criteria to assist in determining essential
issues such as whether any particular circumstances which may
have arisen justify a modification, or by what amount the total
contract amount or contract duration should be modified. There
is therefore a distinct possibility that the parties will reach
widely differing positions on these issues, and that negotiation
will not succeed in achieving a mutually acceptable compromise.
The resulting dispute will be determined by whatever dispute resolution
process is stipulated in the contract.
Significant disputes can also arise between
the parties over the adequacy of the consultant's performance,
with Contracting Authority and consultant unable to agree what
the Terms of Reference require of the consultant, and what compensation
the Contracting Authority is entitled to when these requirements
are not met.
It is critical to the efficient management of
the project that disputes which cannot be settled amicably, are
resolved fairly and expeditiously by a court or tribunal which
is neither open to nor under suspicion of corruption or undue
influence. If the selected dispute resolution mechanism does not
possess these features disputes will not be resolved, or they
will be resolved in an unsatisfactory way. This will adversely
affect working relationships between the parties, and the Contracting
Authority's objectives in commissioning the project may not be
fully achieved. The impact on the consultant's solvency of a failure
to resolve financial claims satisfactorily could be disastrous.
The performance of the Turkish courts in commercial
disputes
The "Practical Guide to contract procedures
for EC External Actions" published on 22 August 2006 places
great emphasis on the need for tendering processes to be transparent,
and for contractors to behave ethically both during the tendering
process and when executing contracts. It is equally important
that others who have a part to play in the effective administration
and execution of the contract, such as the Contracting Authority,
its Project Manager and the dispute resolution tribunal, adhere
to similar ethical requirements.
The Commission of the European Communities'
Staff Working Document entitled "Turkey 2006 Progress Report"
(COM (2006) 649 final) ("the Commission Report") has
looked at the civil justice system in Turkey. The Commission Report
acknowledges current efforts to improve the integrity, independence,
competence and efficiency of the judges and the civil justice
system, but notes some serious reservations about the situation
which prevails at present.
Foremost amongst these reservations is the concern
that corruption remains a widespread problem in the Turkish public
sector and judiciary, despite recent efforts to eliminate it.
Additionally perceptions remain that the independence of judges
is undermined by a number of factors. Judges are attached to the
Ministry of Justice which is controlled by the elected government,
the Ministry of Justice and the High Council of Judges (the governing
body of judges) are too closely interwoven, and judicial inspectors
who appraise judges' performance are attached to the Ministry
of Justice not the High Council of Judges.
Disputes which arise under service contracts
can fairly be categorised as commercial disputes. In relation
to the ability of the Turkish courts to deal with commercial disputes
the Commission Report notes that Turkish courts work relatively
slowly, that swift resolution of commercial disputes is hampered
by inadequacies in the training of judicial personnel, and that
difficulties persist in enforcing courts' decisions.
Concern among the international business community
about the ability of the Turkish courts to resolve commercial
disputes expeditiously and fairly has existed for many years.
Istanbul Water and Sewerage Authority implemented a major project
in the 1990's, but disputes between the Authority and its consultants
which have been before the Turkish courts since the late 1990's,
have yet to be resolved.
These concerns led to calls on Turkey by the
International Monetary Fund and the World Bank to improve arrangements
for determination of commercial disputes. Turkey responded by
implementing the International Arbitration Law (Law No. 4686)
which came into force in July 2001. This law allows the parties
to commercial contracts to keep their disputes out of the Turkish
courts and opt for dispute settlement by arbitration in accordance
with international rules. In addition it limits the grounds on
which Turkish courts may refuse to enforce international arbitration
awards.
What arrangements have been made for resolution
of disputes by other Turkish public sector clients administering
aid funded projects?
The table attached to this paper summarises
the dispute resolution arrangements included in five contracts
for professional services put out to international tender in connection
with aid funded infrastructure projects.
A number of comments arise from this table.
CFCU is the only contracting authority which requires both Turkish
and non-Turkish consultants to submit to the Turkish courts. This
contrasts with CFCU's position on works contracts where disputes
are to be resolved by international arbitration. The Turkish authorities
have produced a standard form contract for public procurements.
This requires Turkish consultants to submit to Turkish courts,
but non-Turkish consultants are offered international arbitration
under the Turkish International Arbitration Law. The contracts
terms prescribed by the European Investment Bank and the World
Bank provide for international arbitration of disputes whether
the consultant is Turkish or international. Moreover, the contract
for the Eskisehir project funded by the EIB and the World Bank's
form of contract, provide that arbitrations involving non-Turkish
consultants shall take place wholly outside Turkey.
CONCLUSION
There is credible evidence to doubt that the
Turkish public courts will determine disputes between CFCU and
consultants expeditiously or fairly. This appears to have been
accepted by CFCU in relation to works contracts, but overlooked
in relation to service contracts. CFCU's decision to place disputes
arising from service contracts in the hands of Turkish courts
is inconsistent with the practice of other development aid funders,
and creates a significant deterrent to participation by EU consultancies
which are entitled to share in the opportunities created by EU
external assistance.
TABLE
Analysis of dispute resolution procedures under
various forms of services contract being used for aid funded projects
recently awarded, or currently being tendered, in Turkey.
| Contracting Authority
| Funding Agency | Project
| Form of Contract | Dispute Resolution Procedure
|
| Eskisehir Water & Sewerage Administration
| European Investment Bank (EIB) | Consultancy Services for Non-Revenue Water Reduction + Operational Capacity Strengthening—tender document issued Feb 2006.
| EIB's standard form contract for Consultants' Services (a derivative of the World Bank form)
| International arbitration in Paris under UNCITRAL rules in the English language with neutral country arbitrators. Awards shall be final and binding and enforceable by any court with jurisdiction over the parties.
|
| Bursa Water & Sewerage Administration |
EIB | Consultancy Services for conceptual design for new SCADA system, preparation of tender documents and provision of assistance during tender process. Tender documents issued Jan 2005.
| World Bank Contract for Consultant's Services (Complex Time-Based Assignments)—July 1997
| For non-Turkish Consultants procedure is same as for Eskisehir except that arbitration proceedings are to be held in Turkey. Where the Consultant is Turkish, disputes are to be resolved in accordance with the Turkish International Arbitration Law 2001 (No. 4686), not by the Turkish courts.
|
| Procurements of Services conducted under Turkish public procurement laws.
| Not applicable. | Not applicable.
| Turkish Standard Contract for Procurements of Services conducted under Turkish public procurement laws.
| Where the consultant is not Turkish there shall be international arbitration in Turkey in accordance with the Turkish International Arbitration Law (No. 4686).
|
| Republic of Turkey, Istanbul Project Coordination Unit
| World Bank (IBRD) | Consultancy Services for Municipal Services Project—tender issue dates various commencing 2006.
| World Bank's Joint Lump Sum and Time Based
| For non-Turkish Consultants procedure is same as for Eskisehir except that arbitration proceedings are to be held in Geneva, Switzerland. Where the Consultant is Turkish, disputes are to be resolved in accordance with the Turkish International Arbitration Law 2001 (No. 4686), not by the Turkish courts.
|
| Turkish Central Finance & Contracts Unit
| EC General Budget + Turkish Govt. | Works contract for construction of Cannakale Regional Solid Waste Management Project—tender documents issued—Spring 2007
| FIDIC Red Book | International arbitration in Turkey under ICC rules
|
| Turkish Central Finance & Contracts Unit
| EC General Budget + Turkish Govt. | Consultancy Services ie: Technical Assistance + Supervision for Cannakale Regional Solid Waste Management Project—tender documents issued October 2006.
| EC General Conditions allow Contracting Authority to select the dispute resolution arrangements.
| Turkish Courts |
UNCITRAL = United Nations Convention on International Trade Law
FIDIC = Federation Internationale des Ingenieurs-Conseils
ICC = International Chamber of Commerce
| 
