The Reform of the Construction Contract Law

On March 9, 2017, the German parliament (Bundestag) passed the "Act for the Reform of the Construction Contract Law, for the Change of Liability for Commercial Liability, and for the Reinforcement of Civil Procedural Legal Protection". After the Federal Council (Bundesrat) approved the law on March 31, 2017, the planned reform of the private construction law cleared the last hurdle to become law. The reform aims to simplify and clarify the complex legal practice by introducing a detailed set of regulations, with the objective of simplifying legal practice, as well as to strengthen consumer protection. As detailed below, the changes are significant and wide ranging.

 

I. Present State of Private Construction Law

Private construction law is partially regulated in the Civil Code, in particular in the provisions regarding contracts to produce a work (§§ 631 BGB). These regulations apply across all sectors to contracts for the creation of a work, regardless of whether it is a dental prosthesis or a road bridge. Accordingly, the provisions are very general. Only a few provisions are specific to construction law, specifically § 648 BGB regarding mortgages for building contractors, and § 648a BGB regarding builder’s security. Otherwise, the Civil Code does not specifically regulate the construction contract law. Detailed provisions come into play during the design of the agreements, by incorporating parts of the Construction Contract Procedures (VOB/B and VOB/C) and by agreeing to other, often very extensive general terms and conditions. Private construction law has developed into a highly complex area of law, with very comprehensive jurisprudence.

 

II. The Major Elements of the Law Reform

 

1.Contract to Produce a Work

The legal regulation of contracts to produce a work will be restructured. The special types of contracts of private construction law (construction contract, architect- and engineer contract, and developer contract) will be brought into line with the general provisions applicable to all contracts to produce a work, with a separate chapter devoted to construction contracts for consumers.

 

A) General Provisions of the Contract to Produce a Work

The amendments to the current regulations affect in particular the calculation of advance payments and the right of the client to refuse performance if the services rendered are not as had been agreed. The concept of notional acceptance is also regulated differently. Following present case-law, the right to terminate the contract for important reasons has been reintroduced, combined with a right of the parties to jointly assess the services performed.

 

B) Construction Contract

One of the most important changes is to establish in statute the client’s right to order changes and expand the work to be performed, and standardizing the resulting adjustments to payments. Under current practice, the client’s right to order amended or additional services is often included in the construction contract on the basis of general terms and condition clauses in § 1 para. 3 and 4 VOB / B. In practice, the adjustment to payments has often been made pursuant to § 2 para. 5 to 8 VOB / B. The reform process now regulates the order rights and procedures, as well as the financial consequences, whereby the planned regulations differ significantly from those contained in VOB / B.

Specifically for construction contracts, the reform provides for an inspection of the services in case of refusal of acceptance. During this inspection, under certain conditions, it will be presumed that the contractor will be relieved of remedying defects and damage that were probably not caused by them.

 

C) Consumer Construction Contract

In order to comply with EU consumer protection law, the reform differentiates between construction contracts for businesses and those for consumers. This includes the following new provisions:

- The contractor is obliged to provide the consumer with a construction specification that complies with the legal requirements, prior to execution of the contract.

- The construction specification, unless otherwise agreed, will become part of the agreement. Ambiguities will be interpreted to the detriment of the contractor.

- The contract must contain a binding completion date, or at least one for the duration of the construction work.

- The client has the right to revoke the construction contract within 14 days, unless it has been notarized.

- The amount of the advance payments, as well as the protection of the company’s entitlement to compensation, are limited.

- The contractor is obliged to provide (plan-) documents for the construction to the client, which they need to prove compliance with public law or to obtain financing.

 

D) Architects and Engineering Contracts

Contracts for architects and engineers are part of the German Civil Code under contract to produce a work. The specifics of these contracts are taken into account by the definition of the typical obligations of the architect or engineer. A "two-phase solution" is provided for in the event that the essential planning and monitoring objectives have not yet been defined at the time the contract is signed. In the first phase, the architect / engineer owes only those planning and consulting services that are necessary to concretize the planning and monitoring objectives, in particular a planning foundation and a cost estimation. After approval by the client, the contract will continue in the second phase, provided that the architect / engineer has to perform the services to achieve the previously defined planning and monitoring objectives. If the client does not wish to continue the contract in the second phase, they are entitled to a limited period of special termination. If the client refuses to consent or if he fails to do so within the deadline set for this purpose, the architect / engineer may terminate the contract.

In the planned new regulation, the architect / engineer is given a right to partial acceptance. In addition, it will become harder to hold the architect / engineer responsible for mistakes in the monitoring of construction. The architect / engineer, who is jointly and severally liable with the building contractor, may refuse performance if and so as long as the client has not set a reasonable deadline for subsequent performance by the contractor.

 

E) Developer Contract

Apart from the new provisions regarding construction obligations, the reform does not fundamentally alter the existing developer contract law. One change is that advance payments may only be required if they have been agreed upon on the basis of the Regulation on Developers and Real Estate Agents (MaBV). Further amendment of the law governing developers is expected in future legislation.

 

2. Purchase Contract Law

Under the new provision of Section 439 (3) of the Civil Code, a purchaser who has received defective goods in the course of a commercial business transaction, is entitled, regardless of fault, to dismantling and installation work, or to an appropriate reimbursement of expenses. The planned changes to the claims for remediation benefit contractors who have unwittingly purchased defective building material and installed it for a third party. Under current law, the contractor usually is responsible for the dismantling and installation costs. Following the reform, these costs can be liquidated completely within the supply chain through regress liability.

 

 

Future Outlook

The law reform becomes effective on January 1, 2018. The new regulations will apply to construction contracts concluded from this date onwards. The law reform should be observed with regard to future construction projects, as well as the structuring of existing agreements. We would be pleased to advise you in this regard.

 

 

DSC Legal is specialized in advising on all legal and notarial aspects of real estate transactions. We advise our international clients in all areas of real estate, corporate and financial law for domestic and cross-border matters.

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