Practical tips on concluding construction contracts under German law

The VOB/B (“German Construction Contract Procedures”)

In Germany, there are standard contract terms for construction work (drawn up by  joint committee made up of public sector clients, contractors and government bodies) that parties can include in their contracts. If these terms are included without any changes, they benefit from a ‘privileged’ status under German law (meaning they are considered a fair and negotiated standard position) and apply without restriction. However, almost every contract contains a deviation, so that the terms and conditions are reviewed by the courts in the same way as general terms and conditions (“AGB”) in Germany. Many clauses of the VOB/B have already been deemed invalid by courts in this context. It is therefore advisable to keep this in mind and, for example, not to rely on a reason for termination specified in the VOB/B without careful consideration or obtaining legal advice.

The BGB (‘German Civil Code’) and the general review of general terms and conditions

As in most cases with the VOB/B, other contractual provisions are also reviewed by the courts in accordance with the law on general terms and conditions if they are not considered to have been individually negotiated. In the event of invalidity, German statutory law, often the BGB, applies. The following topics are relevant in this context:

Termination

Termination is possible at any time (referred to as termination for convenience in English law), but this leads to the assumption that the contractor is entitled to 5% of the agreed remuneration for the part not performed.

Immediate termination for good cause is only possible if, after weighing up the interests of both parties in the individual case, the court concludes that the continuation of the contractual relationship is no longer reasonable. If the termination is deemed unjustified, this has the far-reaching consequences of termination at any time, as described above.

Contractual penalties

Contractual penalties are also frequently examined by the courts when reviewing the fairness and enforceability of termination provisions under general terms and conditions. Important points here include, for example, that the amount of the contractual penalty should not exceed a certain amount, both for the daily rate and for the total amount (0.1% or 0.2% per day, capped at an aggregate maximum of 5% of the net contract value). Overall, the contractual penalty should be formulated as transparently and clearly as possible in order to meet the requirements of case law.

Rights in respect of defects and limitation period

According to case law, rights in respect of defects generally only exist after acceptance of the service. The basic limitation period is 5 years.

Securities

It is customary in construction contracts to provide a contract performance bond and a warranty bond. The amount of these bonds should generally not exceed 10% or 5%, respectively, and no further securities should be required in order to meet the requirements of case law.

Differences from international contracts

The legal situation in Germany contains some deviations from internationally recognised contracts, especially the FIDIC standard form contracts. For example, the ‘engineer’ is not provided for as an integral part of contract execution in the VOB/B or BGB regulations. Institutions such as the ‘Defects Notification Period’ are also unknown in German law. 

In general, it is also unusual in German contracts to precede the contract with definitions. Contracts are generally shorter and more concise, as the statutory provisions, especially the BGB, or, if included, the VOB/B, applies in cases where a matter has not been regulated in the contract. It is therefore important for clients operating in Germany to understand the interplay between the contract and the (chosen) legal position, according to BGB or VOB/B.

Key takeaways

In summary, it is important in Germany to be familiar with the statutory framework underlying contracts and, for example, prior to exercising a termination right, to assess on a case‑by‑case basis whether the courts are likely to recognise the existence of grounds for extraordinary termination. As the courts often scrutinise contractual agreements strictly, particularly when qualifying them as general terms and conditions, it is important to be aware of these limitations.

If you have any projects in Germany or supply chain contracts under German law, please do not hesitate to contact us.