COVID-19 & Construction Law: Challenges resulting from the ongoing pandemic
The ongoing spread of the COVID-19 pandemic is not only challenging and changing our everyday lives, it also cripples large parts of economic life worldwide.
The construction industry is particularly affected. Developers are forced to temporary postpone or even fully stop construction activities, either because of interrupted supply chains, due to a reduced workforce resulting from inner-European border closures or due to stricter safety measures to be observed by the developer resulting from labour law. These are all direct results from various ordinances and protective measures by authorities.
In this context, the question may arise what effects these obstacles have on existing developer contracts and what mutual rights and obligations the parties have?
Supply bottlenecks and a reduced workforce as well as restrictions imposed by authorities often lead to a shutdown or at least to a slowdown in construction activities. This can result in missed deadlines regarding the handover or even the completion of the whole construction work. Unless otherwise agreed upon in the developer contract, the developer bears the risk of non-performance of the contract regarding the construction.
If and insofar as the non-performance of the developer contract or default of the developer is due to a culpable breach of duty on his part, buyers may be entitled to withhold purchase price instalments, assert claims for damages (e.g. due to contractual penalties agreed upon in the developer contract) or even be to rescind from the whole developer contract.
Is the property developer in default with his performanceand can he exonerate himself?
The developer is in default if the non-performance or late-performance is a result of any circumstances for which he is responsible. If there is no culpable breach of duty on the part of the developer, e.g. the obstruction is corona-related and therefore not the responsibility of the developer, the developer is not in default; claims for damages due to delay are excluded.
If the reduced workforce or closure of the construction site is due to an administrative order, the developer could exculpate himself by referring to the administrative order. In addition, the developer, as an employer, has to observe duties of care and protection towards his employees and may therefore be obliged to close or limit his operations in accordance with labour law provisions.
If the construction delays are due to "force majeure", the developer is not responsible for breach of duty. Force majeure is defined as an unforeseeable, unavoidable and external event. With corona classified as a pandemic by the WHO and by declaring it an international health emergency, corona is likely to be regarded as force majeure.
However, so far simply invoking force majeure has not been recognised by the German courts. Each individual case has to be carefully reviewed as to whether clauses regarding force majeure are included in the existing developer contract and whether non-performance is in fact a result of force majeure. If this is the case, any rights or claims for damages of the buyer against the developer are excluded. However, the COVID-19 pandemic can probably no longer be classified as "unforeseeable" for contracts concluded after or shortly before its worldwide outbreak.
In the event of a delay in construction not caused by the developer, the developer can also demand an extension of the construction deadline. However, usually he cannot claim any additional remuneration or compensation.
Furthermore, in the event of force majeure, the developer is, in principle, temporarily released from its contractual obligations to effect performance, without the purchaser being able to derive any claims from this. This is particularly the case if the performance has become impossible and unreasonable for the developer (§ 275 German Civil Code – Bürgerliches Gesetzbuch, BGB).
Can the contract be adjusted as a result of the disruption to the basis of the transaction?
In addition, an adjustment in accordance with the principles of interference with the basis of the transaction pursuant to § 313 BGB will come into consideration. This requires that circumstances which have become the basis of the contract have changed significantly after the conclusion of the contract and that the parties would not have entered into the contract or would have entered into it with different content if they had foreseen this change and one of the parties cannot reasonably be expected to uphold the contract without alteration.
For example, a disruption of the basis of the transaction in the event of an official prohibition of the contract performance was accepted if the security risks involved concern both parties equally and one party could not reasonably be expected to bear the consequences alone. Furthermore, the threat of destroying the economic existence due to external circumstances not attributable to the own sphere of risk is acknowledged. If the principles of interference with the basis of the transaction are applied, the contractual distribution of risk must still be taken into account. Whether the contract can be adjusted due to the COVID-19 pandemic depends on the circumstances of the individual case. If adaptation of the contract is not possible or one party cannot reasonably be expected to accept it, the disadvantaged party may withdraw from the contract.
In any case, the developer should at least try to find an amicable solution with regard to the extension of the execution periods or the completion deadline in order to ensure the ultimate success of performance. This can be achieved by a separate agreement on a contractual penalty or lump-sum compensation.
In summary, it can be noted that contractual agreements on the exclusion of liability as well as the extension of execution deadlines due to force majeure or other unforeseeable extraordinary events are advisable for existing and future developer contracts. The inclusion of such clauses requires a careful assessment as to their legal effectiveness.
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