Construction contracts and project development in the time of coronavirus
The proposed law to mitigate the consequences of the Covid-19 pandemic has alarmed many stakeholders in construction contracts and projects, who think that the legislator is granting new rights to refuse performance because of the pandemic, and that the need for individual contractual solutions and provisions no longer applies. But they could not be more wrong.
This law’s moratorium on payment only works for the benefit of consumers, micro-enterprises and small and medium-sized enterprises, and then only in the case of long-term contractual relationships. However, contracts for architects, engineers and construction and project development are generally not long-term contracts, at least not since the amending law governing construction contracts which entered into force on 1 January 2018. There is no indication that the law sees this differently.
Nevertheless, in the context of the Covid-19 pandemic, a number of legal questions arise which can be resolved with the principles of the existing German Civil Code, i.e. temporary impossibility of performance, force majeure, lack of fault, unreasonableness, frustration of contract, etc. These apply to issues of compliance with contract deadlines or any reasonable time limits set, enforcing contractual penalties, extending contractual deadlines, securing and documentation of construction sites in the event of cessation of construction due to Covid-19, as well as issues of interruption of supply or sub-contractor chains and their impact on the contractor’s obligations, as well as potential claims for additional remuneration and compensation.
The differences between construction contracts under the German Civil Code (BGB) and construction contracts governed by the German Construction Tendering and Contract Regulations – Part B (VOB/B) are ultimately not very large in most cases. The VOB/B regulations only specify more clearly that if construction is interrupted for more than three months, principals and contractors are entitled to a right of withdrawal and that the contractor may claim an extension of the execution deadlines if its execution is hindered by a force majeure or unavoidable circumstances.
However, this applies only to contracts entered into before the pandemic. Contracts entered into in the knowledge of the pandemic are often less favourable to the contractor because, in these circumstances, the contractor has made contractual commitments to which it may remain bound despite all the difficulties caused by the pandemic. It is therefore generally recommended that contracts should be entered into only with ‘coronavirus clauses’. There are no standard coronavirus clauses, and in the end you decide who should bear what risks. Accordingly, provisions are also required on the cessation of construction, standstill and restarting of projects after the Covid-19 crisis.
Any questions? Please contact: Stefan Weise.
Practice group: Real Estate Investments