01 May 2008
The german legal system is based on a ‘codified’, civil law system. However, the German Civil Code contains only a few provisions dealing with construction law, which were found to be too general some time ago. As a result, in 1926, the German Procurement and Contract Committee, the Deutscher Vergabeund Vertragsausschuss (DVA) developed standardised terms and conditions for the building industry. These are called Vergabe-und Vertragsordnung (VOB).
The DVA includes representatives of clients as well as contractors, and is designed to guarantee the fairness and balance of these standard terms. The VOB, in its current 2002 version, for example provides contractual terms providing expressly for: n general contractual obligations n terms of payment for extra work n contractual deadlines n penalty clauses n warranty clauses n payment conditions n securities n dispute resolution.
Rather like the JCT forms in the UK or the FIDIC standard forms used internationally, the VOB is not considered to be statutory law. So in order for them to have legal effect, the parties have to incorporate the terms and conditions expressly in their contractual framework.
Under German law, each provision of general terms and conditions is subject to strict control by the legal system if it is to be enforceable. Until 2004 the German courts accepted the VOB as a fair and balanced regulation, provided that the parties incorporated the VOB ‘as a whole’. According to the German Supreme Court, the VOB was still considered to be balanced (and thus enforceable) if the parties agreed in modifying ‘less important’ VOB-clauses, for example, those concerning general contractual obligations, prepayments, dispute resolution and so on.
However, in an important development in German construction law, the Supreme Court has now ruled that each modification of the VOB questions its balance and fairness.
Thus, the status of the VOB as a highly accepted allocation of risk and regulatory framework in the construction industry is now endangered.
The Supreme Court also reviewed penalty clauses for construction default. Contracts usually contain standardised penalty clauses that provide for a payment of 0,5% of the contract price per day in case of default, with a maximum of 10% of the contract price. Until 2004 these clauses were considered by the Supreme Court to be valid and binding.
However, the Supreme Court has now changed its position and reduced the 10% limitation down to 5%. Standardised clauses that do not meet these limitations are therefore now invalid and unenforceable. It should also be noted that under German law it is not legally permissible to reduce an invalid clause to the permitted 5% limitation. Once invalid, the clause remains invalid in its entirety.
Individually negotiated penalty clauses are also deemed to be fully enforceable under German law. In a dispute the client has to prove that the clause has been individually negotiated. German law means that a clause is only individually negotiated if the other party has a fair chance to modify the clause by way of discussion. If the client fails to prove this, he is not entitled to claim any default payment.
The German Supreme Court is concerned about the fairness and balance of the VOB if the parties start modifying any of its clauses. This is now the case regardless of whether the clauses are considered to be important or less important.
In order to establish legal certainty, the clear message of the German Supreme Court is that every single modification of the VOB leads to a full review of the general terms and conditions. As a result the parties can no longer rely on the validity and enforceability of these general terms and conditions which they used to impose on the other party.
What can the parties do? Either they accept the VOB ‘as a whole’ or they have to create their own - individually negotiated or standardised - contractual framework. But the parties have to bear in mind that, the party that provides the general terms and conditions takes the risk of the unenforceability of any of the clauses.
There is however a transition period in place, which will be important for long and complex projects. Construction law contracts which have a volume of up to € 7,5 million and which started before 30 June 2003 are not affected by the new jurisdiction on penalty limitations. The originally imposed penalty clauses remain valid and enforceable.
And what of the future? So far the Supreme Court has only modified the limitation of penalty clauses. However, it is also expected to examine the standardised percentage for a default. It is thought the Court will reduce the amount payable per day from the current 0,5 % down to 0,3 % of the contract price.