A clause is often included in building and architect's contracts stating that set-off by the client against the fee entitlement of the planner or contractor is permissible only for claims which are undisputed or have been finally awarded. Such provisions have often been applied to disputes over the payment of remuneration. However, in a ruling of April 7 2011,(1) the Federal Court of Justice departed from the higher courts' previous practice and declared that the exclusion of set-off is invalid because it violates the law relating to general terms of business.
In this respect, the Federal Court of Justice referred to a ruling from 2005(2) and stated that it is unreasonable for a client to pay in full for defective or incomplete performance, although the client is entitled to counterclaim for the amount of the defect remediation, completion costs or compensation arising from the same contractual relationship. The court considers that this basic principle applies both to contracts for work agreed under Part B of the Standard Building Contract Terms and to the conclusion of architect's contracts.
If the exclusion of set-off were effective, this would mean that the client would be obliged to pay the remuneration, at least initially, as long as its counterclaim for the cost of remediation or completion or its claim for competition has not been finally awarded by a court. The court stated that this would place the client at an unreasonable disadvantage because the reciprocal relationship between the demand for payment for work carried out and the client's entitlement to the defect-free fulfilment of the contract is the basic principle underlying the law of contracts for work and services. It considered that an exclusion of set-off in the general terms of business would undermine this basic principle.
In this connection, the Federal Court of Justice rightly points out, for example, that the right to refuse performance under Section 320(1) of the Civil Code – which in any case has only temporary effect – must not be limited by general terms of business because of the reciprocal relationship between remuneration and successful performance. However, if this already applies to the enforceability of rights which limit the claim, it must apply all the more to set-off rights, which can cause a claim to lapse.
In terms of court proceedings, this also means that a provisional judgment must not be made if it awards a claim to payment for work and services rendered, but a set-off of claims for the remediation of defects under the same contractual relationship is deferred to subsequent proceedings. Here, too, the reciprocal balance would be seriously disrupted.
With this judgment, the Federal Court of Justice has again explicitly underlined the close connection between the successful performance of works and the resulting remuneration, and has clarified the consequences of this connection in relation to the law on general terms of business. In future, a clause excluding set-off will presumably be possible only in relation to rights arising from different contractual relationships. The court explicitly did not decide whether a set-off clause is permissible for rights arising from claims which are not reciprocally linked (ie, different contractual relationships) or whether this would also conflict with the law on general terms of business.
For further information on this topic please contact Julia Zerwell at SIBETH Partnerschaft by telephone (+69 71 58 99 60), fax (+69 71 58 99 699) or email ([email protected]).
(1) Case VII ZR 209/07.
(2) Case VII ZR 197/03.
October 17 2011