Source: https://iclg.com/practice-areas/construction-and-engineering-law-laws-and-regulations/germany
Timestamp: 2019-04-23 02:39:05+00:00

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The most important types of construction contracts continue to be the unit price (volume-based, compensation by unit price) and the flat rate (fixed compensation regardless of volume) formats. The execution of the unit price contract is typically preceded by the client’s execution planning, which in turn is created on the basis of a separate contract for work and labour with a planning firm. A flat rate contract is usually based on lower depths of planning, which is why the definition of performance interfaces between construction and planning contracts is an important issue, especially with major projects. In order to minimise interface risks, planning and construction services are combined in a uniform contractual document, especially in cases of what are known as total/general contractor awards.
As a rule, construction contracts may be entered into formlessly. In the interest of adequate documentation for the contractual obligations assumed, however, it is prudent to put the agreement, along with all pertinent annexes, in writing (e.g., in the form of specifications or plans) and authenticate it by having all parties sign it. Increasingly, contractual documents are exchanged electronically – using so-called project data rooms, for instance. In some instances, it may have to be clarified how selective statutory written-form requirements (as for the registration of added costs occasioned by changes) may be observed. Special requirements imposed on the transparency of tender and contractual documents may further flow from GWB’s (Act Against Restraints of Competition) formal rules for awards governing public clients and the award rules; since vague tender terms represent a common cause of disputes regarding deadlines and costs, the formal and correct assessment and representation of the parties’ regulatory intent at the closing constitutes a principal task of the lawyer providing advice.
The letter of intent is not frequently found in private building law. Instead, parties rely on contracts proceeding in separate stages by structuring the pertinent performance aspects in the form of distinct portions that may even be used in isolation. In the case of a planning contract, this may concern the assignment of the services making up the tender (performance stages 6 and 7 pursuant to the Fee Structure for Architects and Engineers (HOAI)) or object monitoring (performance stage 8 pursuant to HOAI); for construction contracts, occasionally the client may already work with the potential contractor during the planning stage, while simultaneously reserving the right to involve third parties in the project’s realisation, whether wholly or in part, under certain circumstances (the so-called construction team process).
The “classic” building insurance policies remain to this day Builder’s Risk and Construction All-Risk. For larger projects, by contrast, the trend points in the direction of adequately covering all risks for each party involved in the project under the umbrella of project insurance. This eliminates the need, in possible damaging events, for suing multiple contractual partners covered by different insurers.
Aside from the pertinent provisions of the new 2018 works and construction contract law under the Civil Code (BGB) (§§ 631 et seqq. BGB) and the general terms and conditions to be agreed separately under the Construction Tendering and Contract Regulations, Part B (VOB/B), the parties to a construction contract may incur legal obligations from various provisions of employment, tax and health protection law. In the area of employment and social insurance law, questions may arise as to the mandatory transfer of employees, the law on posted workers or the Minimum-Wage Act. For tax purposes, questions of sales tax play an outsized role – in addition to those of the so-called construction withholding tax. And subject to the pertinent building codes, employment law and the construction-site ordinance, safety and health protection measures must be taken; the safety and health protection coordinator (so-called SiGeKo), to be appointed under the construction-site ordinance, is to establish framework conditions for this.
Whether and to what extent the client may withhold a portion of the agreed fee until the construction project has been fully completed is to be established individually in consideration of the restrictions in place specifically for standard agreements. According to the pertinent case law, which increasingly favours contractors, the client must not hold an excessive amount of security despite the contractor’s obligation to render advance performance, especially if such security takes the form of cash withholdings combined with security by way of performance or defect bonds. However, up to 10% of verified payments on account may be acceptable even today, and particularly in the areas of consumers and developers. A distinction is to be made between routine security withholdings and those made on account of defects; while a so-called pressure premium may be assessed until defects have been removed, contractors may object to non-transparent or materially unjustified deductions.
A distinction must be made between agreed security and that permitted by law. To secure its claims for compensation for work performed, the contractor may demand that the client furnish security by law under the pertinent rules of the Civil Code, with the quality of such security being legislated in detail; so-called group guarantees or letters of comfort provided by corporate parents do not suffice as a rule. However, security of this nature gains in significance if and to the extent that the contractor is required to furnish security for the performance of its contractual obligations or the removal of defects. In light of the contractor’s existing obligation to render advance performance, the pertinent case law has tended to take a critical view of the security clauses used in part on the client’s side. The fees paid to banks or insurers for guarantees (which contractors naturally include in their contract rates), too, occasionally prompt a departure from excessive security arrangements.
As a rule, materials permanently bound to a structure or property automatically become the property of the purchaser. According to the Civil Code, even items that have not been installed are protected against so-called tortious interference if and to the extent that they passed into the developer’s property. For this reason, contractors and suppliers generally are not entitled to remove items they introduced on account of unpaid invoices. Subject to certain conditions, however, provisions under copyright law, for instance, may limit the availability to the client of a completed work product. The architect’s copyright should be mentioned first in this context, and such limitations of use may also concern the use of patents and trademarks in some cases.
Construction supervision represents a critical service provided by architects and engineers, which specifically encompasses the determination of how far performance has progressed ahead of billing, quality control with a view to possible defects, follow-up management regarding changed or added services as well as the preparation and transaction of complex completion, acceptance and commissioning processes. Insofar as such processes in general contractor projects are typically characterised by the fact that the general contractor bears responsibility first for coordinating and monitoring any subcontractors it uses, and the scope of performance of service providers engaged is defined according to interface aspects, the assignment of work to individual trades may well serve the purpose of controlling a high number of contractors (in the double digits). For this reason, architectural and engineering firms can be set up quite differently when it comes to planning and monitoring, and this is true not least of all because, in many instances, technically sophisticated aspects such as fire protection or building automation systems are to be checked as specialised fields in addition to construction-related work in a narrower sense. Since the object monitor may be liable, along with the contractor, for defects that it caused by itself or with others as joint and several debtors, the services in question entail significant potential liability for architects and engineers.
Within a contractual chain, the obligations assumed by the parties must first be considered independently from one another, which is why a subcontractor is entitled in legal relations with the general contractor to be compensated for services rendered even if the general contractor does not receive payment from the client. Provisions that deviate from this rule may be negotiated for individual contracts on a case-by-case basis. In standard agreements, however, clauses of this nature may very well be deemed violations of the provisions on the effectiveness of general terms and conditions. Therefore, general contractors in particular are well advised to consider availing themselves of legal rights to security with a view to minimising any risk related to advance performance.
Contractual penalties should be used to address instances in which binding deadlines are missed. Although the occurrence, amount or proof of specific damages do not matter to such extent, fixed penalties that accrue as a flat rate by the day may be applied on the basis of contractual penalty clauses. The pertinent case law provides that such clauses be subjected to a critical examination regarding specificity, the significance of culpability, daily rates and caps, especially on the basis of aspects of general terms and conditions (AGB). Irrespective of the effectiveness of contractual penalty clauses, the claimant may assert a claim for damages in an amount exceeding the contractual penalty. If, in the event of default, an elevated liability risk looms (e.g., because construction work is performed on economically significant industrial manufacturing facilities), the parties should illustrate conceivable scenarios in a transparent manner and provide for agreements limiting liability in consideration of the amount of available insurance coverage. Generally speaking, the question as to fault will almost invariably be a controversial one in cases of delays, which is why, in many of these cases, the contractor’s claims for added costs on account of the duration of construction (which in building-related cases are exorbitant) are opposed by the client’s claims related to contractual penalties and damages caused by delays.
When the new construction contract law came into effect on 1 January 2018, Germany joined other nations in granting clients a statutory right to give directions. Clients are now entitled to direct the performance of services that were not part of the original scope of performance. Services that are required for the realisation of the contractual object of performance may be demanded without restrictions of any kind, § 650 b (1) sentence 1 no. 2 in conjunction with sentence 2 of the Civil Code (BGB). Services that amount to changes to the original object of performance may be demanded only to the extent that they do not impose an unreasonable burden on the contractor, § 650 b (1) sentence 1 no. 1 in conjunction with sentence 2 BGB. In both cases, another limitation applies: both sides must first endeavour for 30 days to bring about an agreement about the execution of and the price for the service requested by the client. Only after this period has lapsed may the client direct the performance of the service in question, § 650 b (2) BGB. The template provided by the Construction Tendering and Contract Regulations, Part B (VOB/B), which was frequently agreed upon prior to 1 January 2018, continues to be an option, though its rights to give directions are not aware of the 30-day period. Over the coming years, the courts will have to settle the question whether this option of giving directions unbound by any period will continue to be regarded as effective for purposes of general terms and conditions.
Without the client’s consent, the contractor is not entitled to refuse performance of tasks assigned to it, whereas the client is entitled at any time to revoke the assignment of certain tasks given to the contractor. Under German law, this would be considered a partial termination of services already contracted out. In the event that such partial termination is effected in the absence of cause, the client must compensate the contractor at the agreed rate even for services that were not rendered, such payment to be adjusted only by any expenditures the contractor saved as well as any alternative gainful activity on its part, § 648 and § 8 (1) VOB/B. By contrast, the possibility of partial termination for cause, such as failure to perform or remedy defects despite prior notice, is subject to limitations in that it must refer to a definable (§ 648 a (2) BGB) or a self-contained (§ 8 (3) item 1 sentence 2 of the VOB/B) portion.
Until 31 December 2017, there were no specific legal regulations for construction contracts. For this reason, the VOB/B (standard contractual terms for the execution of construction services) were developed, which have served as standard terms and conditions for construction contracts for decades. They contain, and have contained for some time, construction-specific rules, such as the client’s right to give directions (§ 1 (3) and (4) VOB/B) or the contractor’s right to payments on account (§ 16 (1) VOB/B), which only gradually found their way into the Civil Code in recent years. Even today, they contain provisions on the consequences from disruptions to and interruptions of construction work (§§ 5 and 6 of the VOB/B), which the Civil Code does not address specifically for the construction arena to this day. Since the VOB/B were developed and are updated jointly by and with equal input from client and contractor groups, the legislature accords privileged status to the VOB/B, in § 310 (1) sentence 3 BGB, when it comes to a review of individual provisions for compliance with the law governing general terms and conditions.
Pursuant to § 6 (2) of the VOB/B, the contractor is entitled to an extension of the construction period if and to the extent that it faces obstacles to its capacity for rendering performance due to circumstances found within the client’s sphere of risk or resulting from strike or a lock-out ordered by the client’s trade association at the contractor’s own place of operations or a business working directly for it, or due to force majeure or other circumstances beyond the contractor’s control. Circumstances within the client’s sphere of risk include approvals and plans to be obtained – but not provided in time – by the client, along with delays in advance services owed by other contractors engaged by the client. Such right to an extension of the construction period exists even if the contractor’s inability to work during the period of obstruction stems additionally from factors attributable to the contractor. In such cases, however, the contractor may not demand financial compensation since that would require that the obstacle occurred through no fault of the contractor’s own and that the contractor is ready to render performance (§ 642 BGB and § 6 (6) VOB/B).
It is not unusual for contractors to build buffer periods into their construction schedules, and they need not identify and use such buffer periods for clients. Only once it has become clear at the end of the construction period that the contractor no longer needs the buffer periods are they to be used for the client’s benefit. So long as that is not clear, however, the client’s actions having an impact (e.g., directions altering performance) must be compensated for by extensions if and to the extent that services added in the process take additional time to order, prepare for and execute.
In Germany, claims lapse after three years as a rule (§ 195 BGB). Unless another starting date has been specified, the period of limitation commences upon the end of the year during which the claim came about and the client learns of the circumstances giving rise thereto as well as the identity of the obligor – or would learn thereof if not for gross negligence. Special rules apply to warranties under service and construction contracts. These claims typically do not expire until five years have lapsed for objects of performance, the realisation of which takes the form of rendering planning or monitoring services (§ 634 a (1) and (2) BGB). In § 13 (4), the VOB/B provides different warranty periods for different types of services. Nevertheless, the four-year period specified therein is typically extended to five years by way of contractual agreement.
As a rule, the parties to a construction contract regard the risk associated with unforeseen ground conditions as a quintessential client risk, which is why clients have frequently tried to transfer it to the contractor in construction contracts. The law, however, has favoured a differentiated approach in recent years and no longer recognises the risk’s assignment to the client as dogma. Instead, the contractual provisions are to be examined for details about soil conditions and any indication that, according to the contractual documents, even unanticipated deviations from such conditions have been moved into the contractor’s sphere of risk. For purposes of the terms governing general terms and conditions, however, any wholesale assignment of the risk of unforeseen ground conditions to the contractor continues to be subject to stringent limitations.
In construction contracts placed within the purview of the VOB/B, the building performance must adhere to the technical norms in place at the time of acceptance (§ 13 (1) sentence 2 VOB/B). The Civil Code does not contain these specifications. Nevertheless, consideration should be given to the option of applying the contractor’s obligation to register concerns about the performance with which it is tasked even in constellations in which the legal – and technical – requirements undergo changes after the closing. If the contractor is required to meet the new, current requirements either under the VOB/B, or at the client’s direction, it is entitled to a claim for additional compensation with respect to the altered performance so long as the changes to the legal or technical norms could not be foreseen at the time of the closing.
The copyright typically rests with whoever renders the performance in question. However, protection under copyright law is not available to each aspect of performance. Instead, a certain depth of creation is needed to justify such protection for the work in the first place. If protection under copyright law is available, one must differentiate as follows: the “moral right” (Urheberpersönlichkeitsrecht) encompasses the right of publication, the right to be credited as the creator and protection against the defacement of the work product, all of which cannot be transferred as a rule. By contrast, “rights of use and exploitation” (Nutzungs- und Verwertungsrechte) with respect to the copyright may be transferred to the recipient (here: the client). Contracts typically contain specific clauses to that effect, lest it should be determined based on the object of performance in question whether and to what extent rights of use and exploitation under copyright law were transferred to the client.
The contractor must complete its performance on or before the agreed completion date. Even if either the contractor or the client allowed for ample time, the contractor need not work faster than necessary in order to meet the completion date. In other words, it may take breaks or adjust the number of staff assigned to the project. By contrast, setting specific contractual milestones facilitates more narrow requirements, though it is true irrespective of the number and nature of agreed deadlines that the contractor is released from its obligation to render performance if and when the client fails to assist with the contractor’s performance as required – e.g., by obtaining building permits or conducting planning.
The client may terminate the contract at any time and, thus, without cause (§ 648 BGB and § 8 (1) VOB/B). The contractor is not entitled to terminate without cause. However, by way of compensation for the right to terminate freely and without cause, the client must make payment to the contractor in the full amount, such payment to be adjusted only by any expenditures the contractor saved as well as any alternative gainful activity on its part. By contrast, both parties have a right to terminate for cause if the other party provides such cause, in which case only the services rendered to date are subject to compensation. Furthermore, the blameless party is entitled to damages. On the client’s side, important causes for termination include defective or delayed performance by the contractor despite repeated notices as well as the contractor’s insolvency or anti-competitive conduct. On the contractor’s side, such causes are the client’s default in payment or failure to assist despite repeated notices. Since 1 January 2018, § 648 a BGB sets forth these principles for client and contractor, whereas the VOB/B differentiates between the client’s right of termination under § 8 (2), (3) and (4), and that of the contractor in § 9.
German law recognises “force majeure” and “frustration of performance”. In terms of provisions specific to a construction contract, such events initially give rise to a claim for an extension of the construction period. In cases in which the contract cannot be consummated because performance is impossible for all parties involved objectively, or for the obligor subjectively, § 275 BGB applies to the effect that the obligor is released from its obligation to render performance. The client’s associated claims for damages or the reimbursement of expenditures are subject to a differentiated regime, with the mere inefficiency of a contract not being equated with force majeure or frustration of performance. Instead, this case is governed by the construct of the “lapse of the basis of the contract” (Wegfall der Geschäftsgrundlage), § 313 BGB, which applies to cases in which certain assumptions that both parties regard as essential to the contract are proved incorrect. If this condition is present, the contract is to be amended to approximate how the parties would have written it if they had foreseen such development.
German law recognises agreements for the benefit of third parties, which a party purposely enters into with the goal of allowing third parties to assert rights on the basis thereon. German law additionally recognises agreements that provide protection for the benefit of third parties, under which third parties are to be shielded by way of contractual arrangements. However, the question posed here likely is concerned with the notion of subsequent owners of buildings asserting claims, including but not limited to those under warranties, against the contractor. For this purpose, one must differentiate as follows: with respect to contractual claims, such rights are available only if the original client has assigned them to the purchaser or user, whereas there are extra-contractual claims that may be asserted against the building contractor in cases of violations of absolute legal interests (e.g., life, body, health as well as property or possession).
Set-off is possible (§§ 387 et seqq. BGB). It requires that the claim which is to be adjusted is both due and undisputed. The right of set-off may be qualified by mutual agreement. However, the law governing general terms and conditions permits such restrictions only so long as the right of set-off is not qualified when it comes to undisputed or effectively established claims.
As a rule, the parties’ duties flow from the contract and applicable legal provisions. German law recognises duties of protection and care already in the context of the run-up to the closing (§ 311 BGB). The construction contract, moreover, imposes a “duty of cooperation” on the parties, which means that the parties to a contract, subject to the VOB/B, are bound by a duty to cooperate with one another throughout contractual performance. For this reason, there are obligations and duties of cooperation and mutual information, with Germany’s Federal Court of Justice stressing that the duty of cooperation is intended to procure, among other things, that differences of opinion in cases in which one or both parties deem a contractual amendment necessary are settled amicably (BGH, ruling dated 28 October 1999 – VII ZR 393/98).
German law, too, is vulnerable to the possibility of contractual arrangements requiring interpretation. The parties may specify how they want provisions in need of interpretation to be constructed. In the event that the contract is subject to the VOB/B, § 1 (2) thereof stipulates a certain order for the contractual bases in cases of conflict. As a rule, however, both the BGB and the VOB/B hold that detailed and specific contractual stipulations are to prevail over general ones, and more recent provisions are to be given preference over older ones. In addition, contractual provisions and specifications for performance are to be constructed as a cohesive whole.
All obligations the parties addressed in the construction contract are enforceable, although there is an exception to the rule: the pertinent case law treats the client’s acts of cooperation as “duties” (Obliegenheiten) that are not enforceable, rather than obligations (Pflichten) that are. For instance, in the event that the client fails to obtain building permits or conduct planning as required, the contractor may demand that it be compensated financially for the resulting period of obstruction, and it may even terminate the contract for cause following the lapse of the applicable legal deadline. However, it cannot compel the client to obtain such building permits or conduct such planning by means of legal action.
Construction and planning contracts are considered contracts for work and labour, and the same is true for building contractors responsible for planning. The contractor owes successful performance and bears liability for defects or delays. Until the object of performance has been realised, it is required to expend the requisite resources, which is why the obligation to remedy defects exists irrespective of culpability. By contrast, the contractor is liable for damages only if it is culpable and the defect could have been avoided by applying the customary care. Such liability is unlimited as a rule unless the contract provides for limitations thereof. However, the contractor’s liability for intentional misconduct and gross negligence cannot be qualified by way of its general terms and conditions.
It is preferable that conflicts be processed and resolved by way of negotiation. If this approach fails, the dispute’s resolution requires third-party support. In the event that the parties did not already agree to means of extra-judicial arbitration when entering into the contract or at a later point in time, either of them may appeal to a civil court. Legal action continues to be by far the most prevalent method of processing conflicts, and yet parties to construction contracts have become conscious of the weaknesses of legal proceedings when it comes to dispute resolution, which is why they – and those helping them to draft their contracts – frequently endeavour to include clauses designed to prevent conflict, address them and resolve them extra-judicially. Consequently, mediation and adjudication are used with increasing frequency.
While the law does not provide for adjudication proceedings, the parties are free to do so, and any adjudication proceedings so agreed are subject to the applicable rules of procedure. When the construction contract law came into effect on 1 January 2018, so did the construction directive that specifies the temporary injunction proceedings for the construction contract. Pursuant to § 650 d BGB, a temporary injunction in disputes regarding the right to give directions under § 650b or the adjustment of compensation under § 650c does not require that special urgency be established as the reason otherwise mandated for seeking injunctive relief once construction work has ensued. Thus, in cases such as these, temporary and very fast injunctive relief is available to bring about a preliminary resolution of the question in dispute; a final resolution may then be obtained in regular legal proceedings. Since the construction directive is still very much new, there is little practical experience. At this time, however, it is assumed that claims based on defects as well as rights of retention may be addressed as part of the proceedings as well.
The VOB/B, as the template for construction contracts, did and does not provide for an arbitration clause. Only § 18 (2) entitles the contractor of agreements with government agencies to appeal to the competent office for resolution in cases of differences of opinion. § 18 (3) VOB/B allows for the stipulation of extra-judicial dispute resolution mechanisms. As a result, clauses of this nature to date are found in construction contracts only if either party or its legal counsel took care to include them. No clear favourite has emerged in Germany when it comes to the type of process agreed for conflict resolution. In many cases, mediation clauses from the association of construction and real estate mediators (Verband der Bau- und Immobilienmediatoren) are incorporated (www.vdbauimm.de). Otherwise, adjudication, conciliation and arbitration clauses are used.
Germany is a signatory of the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Hague Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters, which is why arbitral awards are recognised in accordance with these conventions. The recognition of an arbitral award’s substantive force of law depends on whether it is consistent with the fundamental principles of the German code of law; for now, such arbitral awards are assumed to stand. As part of the enforcement of foreign arbitral awards, therefore, the party opposing enforcement must plead the reasons and prove why recognition and enforcement are to be denied.
The option to enforce foreign judgments in Germany is governed by § 328 of the Code of Civil Procedure (ZPO) and in cases of judgments from signatories of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters by the Brussels Convention. This means that the judgments of foreign courts may be enforced in Germany subject to certain procedural requirements. This is not the case if the foreign courts would not have jurisdiction under German law, the defendant was unable to properly defend itself, the judgment is inconsistent with certain other rulings, recognising the judgment yields an outcome that is patently incompatible with the principles of German law or reciprocity is not guaranteed.
The parties to a construction contract must file their claims in regional courts as a rule; only disputes worth less than EUR 5,000.00, which do not touch on the client’s right to give directions pursuant to § 650b BGB or the amount of the claim for compensation resulting from a direction given by the client (§ 650c BGB), may be brought to district courts, § 23 no. 1 of the Court Constitution Act (GVG) (§ 71 (1) and (2) no. 5 GVG). Where regional courts have jurisdiction over disputes arising from construction or architectural contracts, or from engineering contracts, construction divisions – specialised in the interest of higher-quality judgments – have been set up to deal with building services (§ 72 a no. 2 GVG). Here, Germany recognises two appellate instances, with the higher regional court adjudicating appeals before Germany’s Federal Court of Law examines appeals on point of law. The Federal Court of Law exclusively looks into the proper application of the law, to the exclusion of a review of the facts of the case. Given the need for frequent discovery as well as the complexity of relevant technical issues in many of these cases, legal proceedings dealing with construction matters often take longer than other civil cases, with lower-instance proceedings typically lasting between one and four years, appellate proceedings approx. two years and cases adjudicated by the Federal Court of Justice (where an appeal on points of law has been admitted or an objection against denial of leave to file appeal has prevailed) up to three years.

References: § 650
 § 650
 § 650
 § 648
 § 8
 § 310
 § 6
 § 6
 § 13
 § 8
 § 648
 § 8
 § 9
 § 275
 § 313
 § 1
 § 650
 § 650
 § 650
 § 18
 § 18
 § 328
 § 650
 § 23