By Christine Lingenfelser LL.M.and Mario Centola LL.M.*
On March 9, 2017, the German Bundestag adopted a law to reform construction contract law and to amend the liability for defects under purchasing law, which is to enter into force on January 1st, 2018 and will apply to all contracts concluded after that date.
In Germany, there have been almost no statutory provisions on construction contracts to date. Rather, issues relating to construction law were governed by the general law on work contracts. In addition, the application of the VOB/B (Regulations on Contract Awards for Public Works, Part B) has frequently been agreed. These are not statutory provisions, however, but general terms and conditions that must be expressly incorporated into the contract to be effective.
The new building contract law has a significant impact not only on German construction companies, but also on foreign companies performing construction projects in Germany or supplying construction companies with building materials. The key changes to be considered in the future include the following:
1. Progress payments
Under the current statutory provisions, the builder was only entitled to request progress payments from the client in the amount in which the client had gained value through the services. Progress payments could be refused because of major defects.
According to the new provision of Section 632a BGB (German Civil Code new version) progress payments are no longer governed by the increased value to the client. Instead, they are calculated on the basis of the agreed remuneration, since the builder may request progress payments in the amount of the value of the owed services rendered.
Also, the client may no longer refuse to make progress payments entirely, but may only retain a reasonable portion. In Germany, double the anticipated cost of remedying the defect is considered appropriate.
2. Deemed acceptance
In the future, builders may set clients a reasonable deadline for acceptance upon completion of the building. Unless the client refuses to accept the building by designating at least one defect within the set period (Section 640(2) Civil Code new version), the work shall be deemed accepted even if it is not actually free of defects.
Acceptance is of particular importance under German law insofar as the entire work remuneration (with the exception of a possibly agreed collateral retention) becomes due and payable upon acceptance. Consequently, the builder no longer has to prove that the building is free of defects, but the client needs to designate and prove their existence.
3. Right to issue orders
To date, only the VOB/B (Section 1(3)) have provided for a one-sided right of the client to issue an order under which the other party was bound to comply and which may have the effect of a change in the design or construction program; the Civil Code lacked corresponding provisions.
The new construction contract right now introduces a right to issue orders also to the Civil Code. Under the conditions set out in Section 650b Civil Code (new version), clients may now order changes to services. In case the order has the effect of a change in the design or construction program the builder may refuse if the change is unacceptable for him. In order to ensure that the right to issue orders is practicable and disputes about it do not impair the construction process, clients will be granted the instrument of the preliminary injunction if the parties don’t reach an agreement within 30 days after the builder has received the order (Section 650d Civil Code new version).
In analogy to the new right to issue orders, the builder will now be entitled to additional or adjusted remuneration (Section 650c Civil Code new version), which he may consequently also request by means of temporary injunction in urgent cases.
4. Compensation claims for changed services
The "unilateral" right to issue orders will be an exception, however, since the consensus principle will continue to remain in place in the new construction contract law. It is intended for the parties to reach an agreement on the amended remuneration within the meaning of Section 650c Civil Code (new version). A key amendment of the law comes into play when the parties fail to agree on the amount of compensation. In the future, the builder will be entitled to request 80% of the remuneration from the supplementary work quote as an advance (Section 650c(3) Civil Code new version). Additional disputes, if any, between the parties about the difference are then to be transferred to the final invoice.
The parties would certainly be well advised to reach an agreement directly and not to burden the ongoing collaboration with open issues or preliminary injunctions. Successful negotiation requires the awareness of the new options, however.
5. Consumer construction contract
The consumer construction contract under Sections 650i to 650n Civil Code (new version) is also new and intended to provide consumers with special protection or a special information volume in cases of new buildings or substantial reconstruction. Accordingly, such contracts always have to be in text form (email is sufficient if sender is recognizable) and have to contain a detailed description of the building and a correct instruction on the right of revocation.
The provisions supplementing the consumer construction contract (Sections 650i to 650n Civil Code new version) are mandatory in accordance with Section 650o Civil Code (new version) and may not be waived to the detriment of consumers.
6. Purchasing law: Reimbursement of installation and removal cost
The construction law amendment now also provides for relevant changes to purchasing law. To date, builders/craftsmen have been able to request from their suppliers the delivery of defect-free material only where the originally delivered product was not according to contract. In the future, suppliers will be obligated to reimburse craftsmen with the necessary cost to remedy the defective product and the integration or installation of the reworked or delivered defect-free item where builders/craftsmen had installed the defective items prior to the defect showing (Section 439(3) Civil Code new version).
The German legislature did not make provisions as to whether these options for recourse in transactions between business persons may be excluded in general terms and conditions. It will be permissible on an individual contractual basis.
As outlined in the introduction, construction law has so far only been governed by work contract law, which was unable to cover the complexity of a construction contract, however. The current amendment is intended to make construction law simpler and more effective, while at the same time avoiding not only costly and drawn out disputes, but also workflow disruptions at the construction site. It remains to be seen whether the reform will be able to meet these high demands in application in practice. Although the new law is expressly welcome and offers considerable progress compared to work contract law, it will be unable to solve all problems of construction contract law.
It will therefore be of key importance that companies affected by the new rules will prepare well for 2018, so as to benefit from the new statutory provisions and not to succumb to its pitfalls.
*Christine Lingenfelser and Mario Centola are partners in the Real Estate Practice Group in the Hamburg office of SKW Schwarz Rechtsanwälte. Christine Lingenfelser can be contacted at firstname.lastname@example.org. Mario Centola can be contacted at email@example.com