Out-Law / Your Daily Need-To-Know

Covid-19 in Germany: no 'carte blanche' for construction delays

Out-Law Analysis | 30 Mar 2020 | 3:00 pm | 6 min. read

Measures put in place by the German government, as well as some of Germany's neighbouring countries' governments, in response to the Covid-19 pandemic are causing considerable disruptions to the construction industry.

All German federal states have implemented regulations providing for 'social distancing' and even prohibiting the carrying out of certain business activities. Bavaria, Germany's second most populated federal state, implemented some of the most stringent restrictions and only allows the carrying out of 'essential' businesses; such 'essential' businesses, at present, including the construction sector.

Government measures do not at this stage altogether prevent the operation of construction sites. However, significant uncertainties remain. The next few months will be particularly challenging for employers and contractors alike, as they seek to adapt to the Covid-19 measures whilst having to comply with their contractual obligations.

In a first step key issues that are likely to arise in Germany would include the following:

  • absence of personnel (also on account of border closures);
  • unavailability of materials because of disruption to supply chains;
  • delays in complying with contractual obligations on the part of employers – for instance delayed construction permits due to the respective authorities requiring significantly more time, delayed milestone payments due to cash flow issues or lack of timely responses to claims under the contract;
  • delayed performance on the part of contractors, esp. failure to comply with contractual completion times;
  • the prospect of the federal government or state governments going one step further and ordering the suspension of works on site;
  • the possibility that any suspension of works may continue for a prolonged period and trigger termination rights;
  • the cancellation or significant postponement of future projects; and
  • the loss of project rights and/or revenues in particular in a subsidised environment due to non-compliance with progress milestones.

    Force majeur under German law

    The availability of claims under construction contracts will be dependent upon the individual contract. Where a contract contains a force majeure clause the respective content will, thus, be key; provided, however, the force majeure clause is not in the nature of 'general business terms' (Allgemeine Geschäfsbedingungen) or, where it is, survives the 'fairness test' (Inhaltskontrolle) in accordance with Sec. 305 et seq. of the German Civil Code (Bürgerliches Gesetzbuch – BGB), failing which it will be void. Contractors need to be aware that unless a force majeure provision in their contract explicitly refers to pandemics, Covid-19 will not automatically qualify as a force majeure event.

    The most widely used set of 'general business terms' relating to the execution of construction works in Germany is the VOB/B (Vergabe- und Vertragsordnung für Bauleistungen/ Teil B: Allgemeine Vertragsbedingungen für die Ausführung von Bauleistungen). The VOB/B refers to force majeure (höhere Gewalt) in Sec. 6 and Sec. 7 VOB/B, but does not set out a definition of force majeure or any particular force majeure events.

    The BGB also does not define force majeure or any particular force majeure events. However, Sec. 275 BGB provides for an exclusion of the obligation to perform where it is impossible for the obligor, and for anyone else, to perform (Unmöglichkeit). For any event to qualify for that purpose it is required that

  • the event is beyond the control of a party;
  • the event could not have been reasonably foreseen at the time of entering into the contract;
  • the effects of the event cannot be avoided through adequate measures; and
  • the event prevents a party from performing its obligations under the contract.

    Although Covid-19 has been declared as a pandemic and may be considered as an unforeseeable event beyond the control of the parties it does not necessarily, per se, prevent a party from performing its obligations under the contract. However, the consequences arising from Covid-19 – such as lockdowns, curfews, border closures or other restrictive measures – may indeed prevent a party from performing its obligations which needs to be assessed on a case by case basis.

    Thus, parties cannot merely rely on Covid-19 to excuse non-performance or delays, but must demonstrate a causal link between the Covid-19 measures and how they prevented performance of the contractual obligations. In relation to contractor delays this in particular means that the respective contractor will still have to comply with the requirements established by German courts to demonstrate an entitlement to extension of time, in particular by way of a concrete construction process analysis (konkrete bauablaufbezogene Darstellung).

    Further, parties must undertake reasonable efforts to mitigate any potential delay or loss. Thus, it is recommended that the parties keep records of all the steps taken by them in this regard.

    Other relevant German statutory law provisions

    A party may also seek to rely on the concept of 'hardship' under Sec. 313 (1) BGB, which would allow for an adjustment of contractual terms or even its termination, provided the following two conditions are fulfilled:

  • the claiming party must prove that there has been a change of circumstances – in this case, the Covid-19 outbreak – which was unforeseeable at the time of entering into the contract; and
  • the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change.

    In practice, meeting these two conditions is rather burdensome and the concept of hardship will only apply in exceptionally dire circumstances.

    Immediate things to do

  • Check that applicable health & safety rules are up to date and implemented on the construction site.
  • Issue certificates to employees or other personnel working on the construction site stating that their presence is required.
  • Consider where your project is in terms of life-cycle (for example is it at the start or close to completion?) What personnel and plans are in place to maintain continuity? Such matters will influence for both parties the approach that will be taken in contract negotiations.
  • Review and understand the contracts terms. Does the contract allocate the risk of force majeure and other events and circumstances that may arise from Covid-19? What relief is available in relation to specific issues and what areas are not clear and require discussions/negotiation between the parties to resolve?
  • Consider strategies to communicate with project parties to ensure contractual provisions are complied with and positions are preserved.
  • Identify and observe possible termination rights – for example based on Sec. 6 (7) VOB/B. Distinguish suspension from a mere ‘slow down’.
  • Prepare and send notices as soon as possible to ensure compliance with the underlying contract, as well as applicable statutory law requirements, and to ensure claims are not compromised by procedural barriers such as time-bars. The notice should provide information as to which obligation the party is or may be unable to perform. Further, the notice should set out the relevant particulars of the event and/or circumstances causing or likely to cause the respective non-performance and the beginning of the event and/or circumstances, the (potential) impact and (once possible of being assessed; usually by a separate notice) the duration/end. A party is only exempted from giving notice if it can demonstrate that the event and/or circumstances as well as the impact are evident to the other party (the latter rarely being the case).
  • Keep records – collate evidence, and ensure that records are being kept to evidence force majeure and specific issues encountered with. Do they reflect the costs incurred in maintaining the construction site, such as for idle equipment and staff, and what cannot be delivered as a result of disruption? Ensure that the records reflect which specific activities on the construction site were hindered on each day due to Covid-19 measures.
  • Consider whether the parties can find a joint way forward or need to amend the existing contract to ensure that the project can successfully achieve completion.