Contracts and performance
Standard contract forms
What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?
The general contractual conditions for the performance of construction work are set out in the contracting rules for the procurement of public work (VOB/B) and form the basis of the most common German standard contract form for construction projects.
The contracting rules for the procurement of public works were developed by the German Procurement Committee for Construction Works (formerly the German Procurement Committee for Public Works Contracts) and have specific sections tailored and used by architects and engineers. These standards do not form a template, but rather a set of regulations for construction contracts in general.
Being general terms of contract, parties may deviate and alter individual provisions by specific agreement; however, this option is less common when relying on the VOB/B’s terms of contract.
Other than the VOB/B, international standard forms (eg, the International Federation of Consulting Engineers contract) are also used, although commonly with significant changes and adaptions to bring them into line with German law.
Definition of ‘construction work’
How is ‘construction work’ legally defined?
No legal definition of ‘construction work’ exists in German law. However, Section 631 of the Civil Code (“Typical contractual duties in a contract to produce a work”) covers construction work in more general terms and may include:
- alterations; and
Are there any rules or restrictions on the governing law of construction contracts?
As no mandatory restrictions regarding the governing law apply to construction contracts, parties are free to agree on the governing law. Certain aspects of a construction contract (eg, the agreement on a lien on the property of the construction site) may still be subject to German law on the basis of lex rei sitae irrespective of the generally agreed applicable law for the construction contract. When agreeing on the applicability of German law, parties typically exclude principles of the conflicts of laws as well as the United Nations Convention on Contracts for the International Sale of Goods.
Are construction contracts subject to any formal requirements?
Construction contracts are seldom subject to formal requirements. In general, architectural and engineering agreements, as well as construction contracts, are tacitly concluded.
An exception applies where a construction contract includes not only the performance of construction works, but also the sale or purchase of a property (eg, a construction site). Under these circumstances:
- the formal requirements that apply to the sale of property under German law apply to the entire contract; and
- authentication and signature by a notary public is required.
Are there any mandatory or prohibited provisions in relation to construction contracts?
In general, legal provisions governing construction contracts are not mandatory. Therefore, parties are free to amend, delete or change the respective provisions of a construction contract. Parties' freedom to negotiate their contract terms is limited to the extent that such changes may not violate mandatory laws or public policies.
If a contract is signed by a public body, special and mandatory procurement rules may apply (eg, competitive bidding).
Can any terms be implied in construction contracts?
German law does not recognise the common law concept of implied terms. Nonetheless, and given that there are no formal requirements for construction contracts in general, the parties' intentions may be used to interpret and fill certain gaps in a contract if said parties have failed to address certain issues in their written contract. If the parties have not regulated and addressed certain issues in their contract and these issues cannot be otherwise remedied by establishing the parties' intentions, the legal provisions under the Civil Code (particularly Section 631 in seq) will apply.
How are risks typically allocated between parties to construction contracts?
Each construction contract must determine the parties responsible for the planning and engineering stages of the project. In a traditional distribution of responsibilities, plans and drawings are provided by the employer, while the contractor bears the financial risk until the works are carried out. If the works are destroyed prior to acceptance, the contractor must start again at its own cost. Ground risk must also be must also be properly allocated in a construction contract. Unless otherwise contractually agreed, the employer bears this risk.
In general, parties to construction contracts can allocate specific risks to another party (particularly in case of force majeure). For example, contractors may be liable for unforeseeable ground conditions. However, this assumption of risk and liability may be overturned where an employer has withheld information and knowingly shifted risks to the contractor. Hence, risk allocation is limited by the parties’ obligation to negotiate in good faith.
Limitation of liability
How and to what extent can parties to construction projects contractually limit or exclude their liability?
Parties to construction projects can exclude or limit their liability. Limitation of liability is usually effective for both contractual and tort claims. However, any injuries or bodily harm caused to third parties, as well as any breach of contract or tort that causes wilful misconduct or fraud, are excluded from the limitation of liability. In such cases, the limitation of liability is voided, resulting in the full liability of the respective contracting party.
Under Section 276(3) of the Civil Code, the liability for intentional and wilful misconduct (including fraud) cannot be excluded in any case even if the contract is silent in that regard. In the same context, Section 639 of the Civil Code provides – as a sub-category of ‘wilful misconduct’ – that a limitation of warranty is voided if the contractor intentionally defrauds or fails to inform the employer about certain defects in the works.
How are liquidated damages typically calculated and to which liabilities are they usually applied?
Liquidation damages are usually agreed during the execution or on completion of a project and often apply to a project’s performance parameters (eg, production output).
In general, parties will provide for an amount per day, week or month of delay with respect to the work’s completion date (or intermediate stages of construction work). The total liquidated damages must be capped at a percentage of the total contract prize. Parties' considerations with respect to estimated actual losses need not be documented (as under common law).
In addition to liquidated damages, parties may also apply penalties. Both employ the same calculation method.
As such provisions effectively constitute a contractual limitation of liability, they are subject to court review. This review is more rigorous where the terms are considered general terms of contract, in which case the amount of permissible liquidated damages is lower. Penalties in general terms of contract are prohibited.
How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?
As a general rule, ‘force majeure events’ are only external events caused by elemental forces or actions of third parties that are:
- unpreventable using any reasonable means or utmost care; and
- unaccepted by either party because of their effect and unpredictability.
Despite this definition, there is no enumeration on what qualifies as a ‘force majeure event’. Therefore, contracts must contain an explicit list of such events. While force majeure clauses can contain so-called ‘umbrella clauses’ to extend the list of events to “events of similar effect", such broadening of force majeure clauses is typically not valid. In fact, a contract's risk allocation structure may limit the interpretation of what events qualify as force majeure.
Force majeure events need not be permanent, but must be long enough to affect the performance of the one party’s contract in whole or in part. As the concept of force majeure must be explicitly included in the contract, so must its legal consequences. Consequences due to a force majeure event may apply only automatically or where the event and its consequences could frustrate the contract, in which case the contract’s terms may be adapted according to Section 313 of the Civil Code.
General performance obligations
What are the general performance obligations of contractors and employers?
In general, contractors are responsible for carrying out and performing construction works according to the definition of the scope of works (ie, technical descriptions and plans of the work) in accordance with the work schedule and price agreed by the parties. On the other hand, employers are responsible for paying the agreed contract price in accordance with the payment schedule (eg, certain milestones as agreed by the parties).
These main obligations can be altered or amended significantly. For example, parties may agree that certain obligations of the required scope are carved out and provided by the employer or additional contractors of the employer; thus, the timely performance of these services and works rests with the employer. Another key area of amendment in regard to risk allocation is the project’s design or architectural services. Often, a design (at least a basic design) is provided by the employer at the beginning of the project. Parties may agree to implement the design into the overall construction contract with the contractor assuming liability for the correctness and completeness of the initial design obtained by the employer.
How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?
In principle, tender documents contain the deadlines whose observance is of major importance to the employer. The contractor is in most cases obliged to provide a detailed schedule for execution and control management in accordance with the deadlines set out in the contract.
In the event of a culpable delay by the contractor, the employer may be entitled to damages (usually liquidated damages). In the event of a culpable delay by the employer, the contractor may be entitled to a time extension. It is best practice to provide detailed provisions for such delays in the contract. Absent such provisions, and in case of major delays, the courts may consider ‘time at large’ with the effect that deadlines and penalties or liquidated damages no longer apply.
There is no general obligation for contractors to accelerate works unless so provided in the construction contract.
To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?
In principle, variations can be made to the scope of the contract at any time. Such agreements (Nachträge) are of great practical importance – they may trigger a contractor’s right to remuneration or a time extension.
While the contracting rules for the procurement of public work (VOB/B) and Section 650b of the Civil Code provide rules on the consequences of variations, construction contracts often provide detailed procedures and deadlines for submitting and agreeing variations. Pre-agreed unit prices for certain works may also be included in a construction contract.
What are acceptable grounds for the termination of a contract?
Typically, a contractor’s termination rights are excluded; however, both parties remain entitled to terminate the contract for cause (ie, in the event of a breach of a material contractual obligation by the other party that makes continued performance of the contract unacceptable or unreasonable). Therefore, construction contracts usually list the circumstances that entitle the employer (and/or the contractor) to termination for cause, such as the contractor’s insolvency. Extended force majeure events may also entitle parties to terminate the contract.
Further, as per Section 648 of the Civil Code, employers are usually entitled to terminate a construction contract for convenience; however, in in this scenario, the contractor is entitled to compensation for works rendered and lost profits.
Remedies for breach
What remedies are available for the breach of construction contracts?
In the event of a breach of contract (ie, delay or non-performance), the parties may be entitled to damages or even termination (or suspension) of the contract (Sections 280 et seq of the Civil Code). However, construction contracts usually provide for specific remedies, such as liquidated damages or time extensions in the event of a delay or termination for cause.
During the warranty period, the remedies available to employers include the entitlement to make good and repair (ie, work substitutions where contractors fail or refuse to make good).
Under German law, contractors owe specific performance. Employers can claim specific performance as an equitable remedy and enforce performance in the event of a breach of obligations.
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