Construction Law

The unwillingness of the general contractor to pay

Subcontractors feel completely powerless if the general contractor does not pay the wages due to alleged defects. But there are ways in which craftsmen can still receive their money. The screed has been laid a long time ago, the screed layer has not yet received the money from his client. On request to the general contractor, it is only stated that there are defects and that the client is not satisfied with the services, even though the client has accepted the work or has already informed the subcontractor of his satisfaction during the work.

The problem:

The general contractor does not pay for alleged defects without naming them. The general contractor only delays the contractor. If the client has accepted or paid for the work, the subcontractor is entitled to his remuneration – no matter what the general contractor complains about.

The solution:

Subcontractors can demand information from the general contractor as to whether the client has already accepted or paid for the work. They can set a deadline for the information. If the general contractor does not meet the deadline, he is also entitled to payment.

Requirements:

The work wage must be due. Often general contractors have already received the money for a contract from the client. However, they do not pass it on to the subcontractor who actually executed the contract. But craftsmen have a chance: whether the work wage is due or not is not decided solely by the general contractor with his alleged allegations of defects. Instead, § 641 para. 2 BGB states three reasons as to when a craftsman is entitled to a work wage:

  • if the general contractor has already received the money for the work in question from the client, or
  • if the client has already accepted the work, or
  • if the craftsman has unsuccessfully set the general contractor a reasonable deadline for information on payment or acceptance.

Your right: Right to information

General contractors can therefore not easily delay payment with alleged defects. But how does the craftsman find out whether the client has already accepted or paid for the work?

According to § 641 para. 2 BGB craftsmen are entitled to information from the general contractor. The subcontractor should demand this in written form from the general contractor by handing it over to messengers, specifying a short deadline.

Concretely this means: The screed layer can require a binding information from the general contractor for example over it whether the owner transferred the work remuneration for the screed already or accepted.

General contractor does not pay despite claim – what now?

If the general contractor does not pay, even though the subcontractor is entitled to the work wage, only legal action remains.

Special rules for construction contracts since 1/1/18

Since the 1st January 2018, the Act on the Reform of Construction Contract Law and on the Amendment of Liability for Defects under Sales Law has been intended to ensure greater consumer protection and fairness of liability for building projects. The speed of construction processes, which often drag on for years, is to be accelerated by specialised construction chambers at the regional courts.

What will change in detail?

There was an urgent need for reform in construction law. In many respects, the current legal situation no longer corresponded to the changes that have occurred in construction technology in recent decades, which has developed into a complex speciality. This led to the fact that the law did not contain any really appropriate regulations for essential questions of construction contract law.

The reform that came into force at the beginning of the year adds special regulations to the law on contracts for work and services.

For construction contracts,
for consumer construction contracts,
for architects’ contracts and for the engineering contract.
In addition, the liability for defects under sales law is modified.

Three-part construction law reform

The reform essentially modifies 3 important sub-areas of construction law:

  • consumer protection,
  • the assumption of installation and dismantling costs in the event of material defects,
  • the regulations concerning the conclusion of contracts

What significant changes did the construction law reform bring?

Especially for consumers, who often spend a large part of their assets on building measures, the previous law contained considerable risks.

With the new construction contract law, the BGB introduces special regulations for the construction contract, the developer contract and the consumer construction contract. The key points of the new regulation are:

  • Introduction of a goal-finding phase,
  • binding information on the construction period,
  • rules on subsequent changes to the scope of the order,
  • a right of the customer to issue an order if the contracting parties have not reached agreement on changes within 30 days,
  • new rules for acceptance,
  • normalization of the dismissal for important reason,
  • stating a right of withdrawal in the consumer construction contract.

The new consumer construction contract

According to § 650i ff BGB, special protection regulations apply to consumers as building owners. According to the statutory definition, a consumer construction contract is “a contract between a business and a consumer which obliges a business to construct a new building or to carry out major alterations to existing buildings”.

Important: A contract for maintenance work on a building can also be qualified as a construction contract if the maintenance work is of essential importance for the construction, the existing structure or the intended use, § 650a para. 2 BGB.

New: Goal-finding phase of a construction project

The new goal-finding phase in accordance with § 650p BGB applies to the protection of the potential client, as the planning targets of the client are not always precisely defined at the start of a construction contract.

In this case, the planner must first submit a planning basis for determining the planning objectives after the new regulation.

  • The planning basis must be combined with sketches and descriptions of the planning project.
  • The planning must be supplemented by an estimate of the anticipated costs.

Important: The implementation of the goal-finding phase is not mandatory and presupposes that a basic contract has already been concluded between the planner and the client.

What happens if the client does not approve the planning documents?

If the client refuses the approval, the contract can be terminated within two weeks after submission of the documents, § 650r BGB.

If the client is a consumer, he must first be properly informed of the right of termination.

  • If a deadline is set accordingly, the planner is also entitled to terminate the contract after completion of the goal-finding phase.
  • He is then entitled to remuneration for services rendered up to the termination.

If a fee for the target determination phase has not been agreed, the remuneration claims shall be appropriately based on the HOAI for performance phase 1.

Stricter requirements for the conclusion of contracts

The formal conditions and modalities for the conclusion of a consumer construction contract have been strengthened.

  • sowie Angaben zum Zeitpunkt der Vollendung.

  • In future, the consumer construction contract must be concluded in text form. Contracts by handshake are generally not effective.

  • According to § 650j BGB, the building contractor must provide the consumer with a detailed description of the building prior to conclusion of the contract.

  • The mandatory content is the type and scope of the service offered, the building data, information on the energy status, fire protection and sound insulation status, if applicable the description of the interior fittings.

  • as well as the date of completion.

Important: The obligation to hand over the building description does not apply if the consumer has made the planning specifications himself, for example by his architect.

New consumer right of withdrawal for construction contracts

A key point of the new regulation is the consumer’s right of withdrawal.

  • In the future the consumer can revoke a construction contract within a period of 14 days from receipt of the revocation instruction, which is mandatory, § 650l BGB.

  • If the revocation instruction is missing, the right of revocation continues one year and 14 days after conclusion of the contract.

  • If the consumer for whom advance services have already been provided revokes the contract, only compensation for the value shall be paid if applicable.

Unilateral right of the client to order introduced, but defused

The originally planned unilateral right of the client to order subsequent modification of the agreed construction work during the construction phase was significantly defused in favour of the contractor in the course of the legislative procedure.

  • In accordance with § 650 b BGB, the customer shall be entitled to change the agreed success of the work by unilateral order.

  • In this case, the contracting parties shall agree on the concrete execution and the remuneration.

  • If no agreement is reached within 30 days of the contractor’s receipt of the change request, the customer may unilaterally order the change.

  • If the order changes the contractually owed success of the work, the contractor only has to comply with the order if the execution is reasonable for him.

Important: If the contractor has planned the construction work, he bears the risk of incomplete or incorrect planning, i.e. he can only claim compensation for increased expenditure for necessary modifications if the modification is not necessary to achieve the agreed work success.

Building regulations: Compulsory attempt to reach an agreement before legal steps are taken

In the event of an application for an injunction concerning a building order of the customer or a claim for remuneration of the contractor, the parties shall be obliged to carry out an agreement procedure in the form beforehand,

  • that the parties agree either initially by mutual agreement

  • or to appoint an expert to clarify the disputed issues.

  • In this case, the costs of the expert shall be borne equally by each party.

In many cases, this arrangement is likely, for financial reasons, to constitute a significant obstacle for the developer before the initiation of legal proceedings.

New features for advance payments

In future, advance payments may be demanded in the amount of the value of the services rendered and owed under the contract.

Advance payments may be demanded from consumers up to a maximum of 90 % of the agreed total remuneration, § 650m para. 1 BGB.

Consequences of refusal of advance payment

According to § 632a BGB, the customer may refuse payment of a reasonable part of the advance payment solely on the assertion that the performance rendered is not in accordance with the contract.

  • The burden of proof for the contractual conformity of the service lies with the contractor until acceptance.

  • In this case, the contractor must submit a list of the services provided, which allows a rapid and reliable assessment of the services provided.

Due date of the remuneration in the construction contract

The agreed remuneration for the construction contract shall become due when the customer has accepted the performance and the contractor has issued the customer with a verifiable final invoice, § 650g para. 4 no. 2 BGB.

  • The invoice is only verifiable if it contains a clear list of the services rendered,

  • this is presumed if the customer does not object within 30 days of receipt of the invoice.

Simple termination of the building contract and termination for good cause:

The termination of construction contracts must be declared in writing in future, § 650 h BGB. An e-mail is therefore not sufficient.

  • In addition, § 648a BGB provides for the right of the contracting parties to terminate the contract for good cause,

  • which should be given if the continuation of the contract is not reasonable for one of the contracting parties after consideration of all circumstances.

  • A partial termination of a definable part of the construction work is possible.

Obligation to determine condition

In order to avoid difficulties of proof in the event of refusal of acceptance, the customer shall in future cooperate in a joint determination of the condition of the work in the event of alleged defects.

  • The condition assessment shall be signed by both parties and shall state the date of the assessment.

  • The condition assessment may be carried out unilaterally by the contractor if the client does not attend an agreed date or a date determined by the contractor within a reasonable period of time.

Exception: The customer is not responsible for his absence and has informed the contractor immediately.

Fiction of acceptance of the construction work

According to § 640 para. 2 BGB, acceptance shall be fictitious if the customer does not comment on the request for acceptance within a reasonable time period set by the contractor after completion or if he refuses acceptance without naming defects.

Important: The fiction does not come into force even if the customer names at least one concrete defect within the period set by the contractor.

Right to documents required by the building authorities

Both before the start of execution and after completion, the contractor must hand over the planning documents required by the consumer to provide evidence to an authority (building authority) in time. This includes all documents required to prove to the authorities that the services have been performed in compliance with the relevant public law regulations.

Important: The contractual agreement cannot deviate from essential provisions of the consumer construction contract.

Building worker security

Important changes relate to the building worker security mortgage. According to §§ 650e, 650f BGB, the building contractor who has been commissioned with the construction of an outdoor facility or a part thereof can demand a building worker security mortgage. However, in the case of a consumer construction contract or a property developer contract, consumers do not in principle have to provide a building worker security, § 650f para. 6 No. 2 BGB.

New rules for architects and engineering contracts

With the reform, the legislator has followed the already valid case law of the BGH, which subjects architects and engineering contracts to the law on contracts for work and services. However, some special regulations are intended to take account of the specific features of these types of contract. An important point here is the relief of the architects and engineers within the scope of their joint and several liability with the executing contractor.

Special features for architectural and engineering contracts

The other significant changes for architects’ and engineers’ contracts relate to the following:

  • The obligation to prepare planning documents in the goal-finding phase,

  • the special right of termination of the customer after receipt of the planning documents, § 650r para. 1 BGB,

  • the obligation of the customer to accept part of the services rendered

In addition, essential rules of the construction contract are also applicable here, e.g. concerning the change in performance, the right to order, the adjustment of remuneration, the obligation to ascertain the condition in the event of refusal of acceptance and the obligatory written form of termination.

Developer contract

Similarly, the various provisions of the building contract also apply to the developer contract, such as

  • the validity of the data of the pre-contractual description of the building as the subject matter of the contract,

  • the consumer’s right of withdrawal,

  • the 90 % rule for payments on account,

  • the right of termination for important reasons,

  • the purchaser’s right to change and order the performance, including the adjustment of remuneration,

  • the building worker security mortgage.

Small enterprises and craft enterprises were in a better position

A modification to product liability places small and craft enterprises in particular in a better position than large, market-dominating firms.

To this end, the legal scope for large enterprises to design their own business structures, for example by means of general terms and conditions regulations to the detriment of small entrepreneurs as subcontractors (often craft enterprises), was significantly restricted in order to deviate from the legal rule.

-Even in the case of companies, any general terms and conditions deviating from the statutory provisions may contain inappropriate discrimination.

-The clause prohibition of § 310 para. 1 sentence 1 BGB is supplemented to the effect that this prohibition also applies to general terms and conditions which are used vis-à-vis an entrepreneur.

The regulatory complexes of purchase law on the one hand and construction contract law on the other were separated more clearly than originally planned.

Installation cases were newly regulated by construction law reform

With the reform of the construction law some changes of the BGB come into force for the adjustment of the liability for defects under sales law to the jurisdiction of the EuGH and the BGH. The object of the reform is in particular the new regulation of the so-called installation cases, which is to be seen in direct connection with the reform of the law on contracts for work and services. Anyone who installs a defective object of sale in another object, for example in a house property, often does not benefit much from the obligation of subsequent performance under the law on sales, because the seller only has to deliver a defect-free object of sale. However, the main costs for the buyer often arise from the installation or removal of the defective item (defective tiles in the bathroom).

Important for building owners and crafts enterprises: Amendment of the purchase law

In future, the removal and installation and the associated costs will be part of the statutory obligation to subsequent performance:

  • According to § 439 para. 3 sentence 1 BGB, the seller is obliged within the scope of subsequent performance to reimburse the buyer for the necessary expenses for the removal of the defective item and the installation and attachment of the repaired or delivered defect-free item,

     

  • if the buyer has incorporated the defective item into another item or attached it to another item in accordance with its type and intended use.

     

  • the provision applies to both consumers and businesses, including craft businesses.

Important: An atypical, unintended combination with another object is not covered by the new regulation.

Cost shifting in the supply chain

A direct connection with this is the new § 445a BGB.

  • According to this, the seller can demand compensation from the seller who sold the newly manufactured item to him (supplier) for the expenses he had to bear in relation to the buyer according to § 439 paras. 2 and 3 as well as § 475 paras. 4 and 6 BGB when selling a newly manufactured item.

     

  • The precondition is that the defect asserted by the buyer was already present when the risk passed to the seller.

     

  • The effect of the provision is that the seller’s obligation under the new law to pay compensation for the costs of installation and removal of a purchased item within the supply chain can be passed on to the last supplier.

     

  • In the supply chain, it is also not necessary to set a time limit if the seller has had to take back the purchased item from the seller due to its defectiveness or if the buyer has already legally reduced the purchase price.

Cases of recourse for craftsmen have been significantly mitigated

With the new regulation, existing cases of recourse for craftsmen will be significantly defused, if not eliminated, under the current legal situation. The dilemma for crafts enterprises often consisted in the fact that the tradesman had to provide considerable additional work for which he received no remuneration in the event of claims for defects asserted by the purchaser. In the future he will in many cases be able to pass the costs on to his supplier.

Improved recourse possibilities for craftsmen

The amendment to the law governing contracts of sale does not also significantly extend the rights of the tradesman to take recourse against suppliers. The seller’s or supplier’s right to refuse performance in cases of disproportionate supplementary performance pursuant to § 475 para. 4 BGB shall also extend to sales contracts between companies – including craft enterprises.

Jurisdiction

It should not be concealed that the reform of the sales law is partly lagging behind the requirements of the courts. This applies in particular to the case law of the European Court of Justice, which has already substantially strengthened the rights of the purchaser against the seller of a movable object within the framework of subsequent performance (European Court of Justice, judgments of 16.6.2011, C 65/09; C 87/09). Already due to these judgements a salesman is often obligated with notices of defects to remove an already inserted defective thing at his expense and to insert a replacement free of defects. The BGH has followed this case law (BGH, judgement v. 2.4.2014, VIIIZR46/13).

Compensation obligation can be limited with the consumer goods purchase

According to § 475 Para. 4 Sentence 2 BGB, sellers may limit the obligation to pay compensation to an appropriate amount in the case of a purchase of consumer goods if the repair or replacement is associated with disproportionately high costs. The assessment shall be made taking into account the value of the purchased item in a defect-free condition and the significance of the defect.