abril 01 2020

Legal implications of the COVID-19 pandemic on German construction contracts

Authors:
Share

The COVID-19 pandemic is currently omnipresent and has a significant impact on the construction industry. Official restrictions, governmental measures of social and physical distancing, border controls and border closures, but also quarantine measures and sick employees can lead to delays of construction projects. Supply shortages, lack of manpower and inaccessible construction sites are just a few examples. In this respect, for the parties involved the question arises how to deal with these disruptions legally.

In principle, the contractual provisions are the first decisive factor. Are there any overriding contractual provisions on force majeure or comparable unforeseeable events?

Impact on construction contracts based on VOB/B

In the following, we provide an overview of what needs to be considered from a legal point of view if the VOB/B (German rules on tendering and contracting construction works) is agreed as the basis of the contract and the contract does not otherwise contain any provisions for dealing with cases of force majeure.

Notice of impediment

If the Contractor sees itself exposed to impediments due to the COVID-19 pandemic, it must immediately provide the Employer with a written impediment notification (section 6 para. 1 sentence 1 VOB/B) and inform the Employer which exact works cannot be carried out for which circumstances. A notification can be omitted if the circumstances and their hindering effect are obviously known to the Employer. However, even if COVID-19 is omnipresent at the moment, a notice of impediment should be made in any case as the concrete effects in each individual case may not be obvious to the Employer.

Extension of execution deadlines in the event of force majeure

The execution deadlines shall be extended if the impediment is caused by force majeure or other circumstances that are unavoidable for the Contractor (section 6 para. 2 No. 1 lit. c VOB/B). The concept of "force majeure" is defined by the German Federal Court of Justice (NJW 1953, 184) as an "external event caused by elementary natural forces or by the actions of third parties, which is unforeseeable according to human insight and experience, cannot be prevented or rendered harmless by economically justifiable means, even by the utmost care which can reasonably be expected under the individual circumstances, and which is also not to be accepted by the Contractor due to its frequency". Although, as far as apparent, there has not yet been any jurisprudence on construction law disputes involving pandemics, pandemics are generally covered by the concept of force majeure, in particular a pandemic of historical proportions such as the COVID-19 pandemic.

However, it should be noted that the assessment of whether force majeure is present is a case-by-case examination. For example, in case of supply shortages, it may be possible to procure the construction materials elsewhere, possibly at higher purchase prices. This is because price increases for construction materials are generally within the Contractor's sphere of risk.

The decisive question is whether the Contractor is to be blamed for the disruption. In the case of employee absences, the specific cause must be considered in each individual case. In the case of official governmental orders, such as operating bans or quarantine measures, which also exclude the possibility of substitute procurement, the Contractor will generally not be at fault for the disruption.

In addition, the Contractor must do everything that can reasonably be expected of it to continue the works (section 6 para. 3 sentence 1 VOB/B). As soon as the hindering circumstances cease to exist, the Contractor must resume the works without further ado and without delay and inform the Employer thereof (section 6 para. 3 sentence 2 VOB/B).

Employer’s duties

The same considerations must be applied vice versa to the Employer’s duties of cooperation. The decisive factor here is which circumstances fall within the Employer’s sphere of cooperation and whether the Employer is at fault for the disruption of the construction process (section 6 para. 6 sentence 1 VOB/B).

Termination rights

If the interruption lasts longer than three months, each party can terminate the contract in writing after this period (section 6 para. 7 sentence 1 VOB/B). Furthermore, it must be examined whether in each individual case there are further relevant termination rights available, e.g. termination for good cause because adherence to the contract is unreasonable or termination due to deterioration of the other party’s solvency. Whether there is a possibility of termination should be examined carefully in each individual case to avoid the financial consequences of an ineffective termination. In particular, the question whether it is reasonable to adhere to the contract requires a thorough assessment due to the many possible cases.

Outlook

The longer the crisis lasts, the more difficult it becomes to speak of an unforeseeable event. At the same time, imponderabilia due to the COVID-19 pandemic are also to be expected in the future. In order to avoid disputes, corresponding force majeure clauses should therefore be included in new contracts and the handling of execution periods and price increases should be clearly set out in the contract.

Stay Up To Date With Our Insights

See how we use a multidisciplinary, integrated approach to meet our clients' needs.
Subscribe