IMPROVEMENTS AND AMENDMENTS TO LAW ON CONTRACTS FOR WORK AND SERVICES
Contracts for work and services [“Werkverträge”] which have been concluded after 1st January 2018 are subject to amended regulations. In particular, the law applying especially to construction contracts was substantially reformed. In addition, “Bauträgerverträge” [building developer’s contracts] as well as “Architekten- und Ingenieursvertrag” [architect’s and engineering contracts] were regulated in the German Civil Code [Bürgerliches Gesetzbuch – BGB]. Revisions regarding the acceptance, advance payments and extraordinary termination, however, also affect companies which do not operate within the construction sector.
I. Amendments to the law on contracts for work and services
The amendments of the BGB within the scope of the law on contracts for work and services may result in a substantial impact on both parties to a contract for work and services – the contractor and the client placing an order.
Concerning the contractor’s opportunity to demand advance payments (§ 632a BGB), the previous requirement of achieving an increase in value on the client’s side was eliminated. Therefore, the contractor may demand advance payments in the amount of the value of the services rendered and owed under the contract. The client can no longer deny full payment of the instalment due to substantial defects, but may retain an appropriate portion of the payment. In this case, however, the contractor bears the burden of proof that the services are in accordance with the contract.
The change in the area of the acceptance of work is of practical importance as well. While the obligation of the client to accept a work which was duly effected in accordance with the contract continues to exist and the denial of acceptance due to non-substantial defects remains unchanged, the so-called fictitious acceptance was re-designed. According to the new provisions under § 640 para. 2 BGB, a work is deemed to be accepted if the contractor has set an appropriate deadline for the acceptance after the completion of the work towards the client and if the client did not deny acceptance within this period of time by stating at least one defect. The distinction between substantial and non-substantial defects does not matter anymore in case of a fictitious acceptance. If the client does not react to a request by the contractor at all or in a timely manner and there are substantial defects, it is an advantage for the contractor, as the acceptance becomes already fictitious because of the delay. This provision can, however, go the contractor’s detriment if the client denies acceptance under reference to non-substantial defects or if the client reports defects that do not even exist. It remains to be seen how the jurisdiction will deal with this regulation. The term “completion of work” will eventually provide some room for discussion as well. If the client is a consumer, a prior reference to the fictitious acceptance in text form is prerequisite for its occurrence.
Furthermore, the termination for good cause was expressly implemented in the law on contracts for work and services (§ 648a BGB). This possibility is not new, but its explicit stipulation means an improvement, since the former insecurities regarding the legal basis of the right of termination are eliminated. Each party is entitled to termination without notice, if it cannot be expected from the party to continue the contractual relationship until the completion of the work, taking into account all circumstances of the individual case and giving due consideration to the interests of both parties. If necessary, a warning regarding the conduct needs to be submitted or a deadline for remedial actions needs to be set. Partial terminations with regard to a delimitable part of the work owed are possible as well. § 648a para. 4 BGB contains a mechanism for determining the performance rendered up till now. The contractor may demand payment only for the part of the work rendered until the termination, the possibility to assert claims for damages, however, remains unaffected.
II. Standardization of “construction contracts”
The contract type “construction contract” has now received a separate chapter in the BGB. §§ 650a et seq. BGB deal with some special features of construction contracts as special type of contracts for work and services. To some extent the regulations therein are similar to those in the Construction Tendering and Contract Regulations – part B [VOB/B]. Construction contracts are defined as contracts on the construction, rebuilding, elimination or reconstruction of buildings, outdoor facilities or parts thereof. The most characterizing guideline for construction contracts are the regulations under §§ 650b – 650d BGB which provide framework conditions in case of amending the contract. If it is not possible to reach an agreement on a modification requested by the client, he will be granted under certain requirements – e.g. the expiry of 30 days – a unilateral right to order. The following compensation adjustment has also been regulated by law. If legal disputes arise in connection with the right to order or the compensation adjustment, there is now the possibility to seek an interim injunction without having to credibly show the urgency.
Further amendments include e.g. the introduction of a joint status assessment in case the client denies acceptance as well as the postponement of the due date to a later date: Only after the acceptance and only after the submission of a verifiable final invoice by the contractor, his remuneration entitlement becomes due. The termination of the construction contract must be made in writing.
Consumer protection also finds its way into private construction law through the regulation of the “consumer building contract” in §§ 650i – 650n BGB. The scope of application for this type of contract is rather small, because the term “consumer building contract” is more narrowly defined than construction contracts, as it merely includes the construction of a new building or substantial reconstruction measures of an existing building.
III. Further improvements in the area of private construction law
The introduction of the section “architect’s and engineering contract” into the BGB may also be relevant for private construction law. Some special features regarding participation of these two professionals, when it comes to the planning and construction of buildings and outdoor facilities, were laid down in §§ 650p – 650t BGB.
In addition, an own subheading was dedicated to “building developer’s contracts”, set out in §§ 650u and 650v BGB.
IV. The contractor’s recourse
Furthermore, the amendments in the law governing purchase contracts could prove to be interesting for contractors: According to the revised § 439 para. 3 BGB, a contractor may demand reimbursement of any installation and removal costs incurred to the contractor from the supplier if the material delivered was defective. Even though the contractor has already been obliged towards the client to remedy any defects according to the former legal situation, he could not obtain full compensation from his materials supplier.
V. Conclusion and outlook
The reform on the law on contracts for work and services has already a significant impact on the construction industry, when drafting a contract. However, the changes in the law on contracts for work and services will also be noticeable outside of the construction industry, when it comes to acceptances, advance payments and extraordinary terminations – either in connection with drafting a contract or if a conflict arises.
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