Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
There is no commonly accepted standard form of construction contract in Germany. Many construction contracts include a set of terms and conditions called “General Terms and Conditions for the Execution of Construction Work” (Vergabe- und Vertragsordnung für Bauleistungen – Teil B - Allgemeine Vertragsbedingungen für die Ausführung von Bauleistungen) (“VOB/B”). 2016 is the latest version.
The information collected in this section is applicable to “b2b” contracts.
VOB/B originates from the public sector. It is often negotiated and amended depending on the parties’ bargaining position. VOB/B is in parts inconsistent and not in line with the German Civil Code (the Civil Code). German law limits the power of a contract party to impose terms and conditions on the other party. This opens the possibility for courts to override the contract under certain circumstances. As a result the situation may sometimes be unclear.
VOB/B Clause 6.2 states that the deadlines for execution of work shall be extended where a hindrance is caused by:
a) “circumstances within the employer’s sphere of risk”,
b) certain labor disputes,
c) “force majeure or other circumstances beyond the control of the contractor”.
Neither VOB/B nor the Civil Code provides a definition of force majeure. From case law it can be distilled that in the context of fulfilment of a construction contract an event shall be classified as force majeure under the following conditions:
The event must be (i) external to the company, that is to say the event affects the company from the outside and has no connection with the execution of the construction work and the conditions directly resulting from it. Also the event must be (ii) unforeseeable in the sense that the event or the effect are beyond that, which, according to human insight and experience, cannot be prevented or its effects rendered harmless to a tolerable degree despite the use of economically accepted means and despite the use of the utmost care expected in the circumstance.
It should be noted that criterion (ii) has an element of reasonableness in it regarding precautions and reaction to the event. This element works in both directions, a party cannot claim relief based on force majeure if it has not met the reasonable precautions or even acted with negligence but on the other hand it is not expected to take economically unreasonable precautions. Obviously this leaves scope for assessment of the individual cases and the individual parties, considering also the frequency of such events.
An “other circumstance beyond the control of the contractor” shall be an event which fulfils the same criteria except that it does not need to be external, i.e. it can be from inside the contractor’s organization.
VOB/B Clause 6.6 states that if one party to the contract is responsible (i.e. negligent) for the cause of the hindrance, then the other party may claim indemnification; indemnification for loss of profit, however, can only being claimable in cases of intent or gross negligence. The contractor may also claim compensation if an interruption is caused by lack of an act of collaboration due from the employer (Sec. 642 of the Civil Code).
VOB/B Clause 6.6 provides that - as a general rule - each party shall bear its own cost except in a case where the other party is responsible. As to Sec. 642 of the Civil Code, see below.
VOB/B Clause 6.3 states that the contractor shall do everything that can reasonably be expected of it to enable work to continue. As soon as the cause of the hindrance has been resolved, it shall resume work without further prompting and notify the employer accordingly.
It is debated whether the contractor must incur extra expenses to make up a delay. Many lawyers take the view that this will depend on who is responsible for the delay. In the context of force majeure the contractor will be expected to restart work as soon as reasonably possible, but not to make up the delay.
VOB/B Clause 6.1 states that the contractor must notify the employer about the hindrance.
VOB/B Clause 6.7 states that either party may terminate the contract if an interruption of the work lasts longer than three months.
VOB/B Clause 7 is about destruction of work by force majeure before practical completion.
This is not relevant in the context of COVID-19.
The VOB/B does not include provisions for alternative relief.
The individual contract may have such provisions.
The Civil Code has provisions, which will normally apply to the extent the contract does not modify them.
Section 275 of the German Civil Code (BGB) provides that an obligation is cancelled if it is impossible to perform.
Additionally it can be concluded from case law that an obligation is suspended if it is impossible to perform it temporarily.
The contract as such is not cancelled automatically. The corresponding obligation for compensation is cancelled/suspended, but damage claims in either direction may exist depending on circumstances.
Section 286.4 of the German Civil Code provides that a debtor is not in default (Verzug) if it can establish that it is not responsible (kein Vertretenmüssen) for the late performance.
In the context of COVID-19 a contractor can escape a penalty or a damage claim for default regarding timely completion if it can establish that force majeure prevented it from performing in time. It should be noted that such proof would have to demonstrate causation. It can be expected that this will be a major point in upcoming disputes. It is an open question whether the courts may lower the threshold for such proof.
Section 313 of the German Civil Code states
“(1) If circumstances which became the basis of a contract have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account of all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to uphold the contract without alteration. […]
(3) If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may” terminate the contract”.
This section of the Civil Code gives the court a possibility to adjust the contract. However it should be noted that the threshold is high and use of this provision is rather exceptional. The provision should not be used to correct the level of risk attribution which the parties knew and intended.
There is a general thought that the sourcing of labour and materials to perform the work is the contractor’s sphere of risk. But Sec. 313 of the Civil Code might put a contractor in a position to request the employer to “wait or pay”.
Section 642 of the German Civil Code provides that a contractor may claim for an adequate compensation if the employer does not provide an act of contribution to the performance of the work which it owes to the contractor.
The compensation shall be adequate in the sense that it covers the cost of the standstill. In the context of COVID-19 this could be relevant in a case where the access to the site is blocked or if the employer cannot furnish permits or documents it owes as a contribution to the performance of the work. The claim does not depend on the employer being responsible. It is unclear whether the employer has a defense claiming it was unable to contribute due to force majeure.
Section 323 of the German Civil Code provides that a party to a contract may terminate the contract if the other party is in default regarding performance.
Section 644 of the German Civil Code is about destruction of work by force majeure before practical completion.
This is not relevant in the context of COVID-19.
Section 206 of the German Civil Code provides that limitation is suspended for as long as, within the last six months of the limitation period, the obligee is prevented by force majeure from prosecuting its rights.
This is of very low relevance in the context of COVID-19.
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