Effects of COVID-19 upon ongoing construction projects from a principal‘s point of view
COVID-19 is already having a significant impact on ongoing construction projects in Germany. In the following, we will answer selected questions concerning the potential legal effects upon planner contracts in progress. Agreements must always be examined in each individual case as a matter of priority though. Both the effects on construction work and on the planner contracts concluded with the principal are of importance for architects and technical planners.
Key statements are as follows:
- Contractual obligations arising from construction contracts continue to exist.
- A case of force majeure will regularly be present.
- Planners and contractors must report such cases of force majeure as an obstruction.
- A default (contractual penalty for delay and compensation for damages due to delay) does not occur in the event of force majeure.
- Planners are entitled to securities for claims for remuneration against contractors.
- The planner is only entitled to additional remuneration for documented additional expenses, but not for mere delay. Contractual provisions take precedence.
- The planner may terminate the contract for good cause if the principal becomes illiquid. The principal however cannot, as a rule, terminate the planner contract for good cause.
I. Do contractual obligations expire as a result of the COVID-19 pandemic?
No, contractual obligations arising from contracts or planner contracts continue to have binding effect. Pursuant to section 275 (1) of the German Civil Code (BGB), the duty of performance only expires insofar as performance has objectively become (permanently) impossible after concluding the contract. Contractual obligations must be permanently unable to be performed by either the planner or any other third party. This is not the case as a consequence of the COVID-19 pandemic. Even if construction work was to be prohibited by the authorities, this would probably only lead to temporary – and not permanent – obstructions.
II. Does the COVID-19 pandemic qualify as a force majeure event in the case of planner contracts?
Generally, yes: Based on the rapidly-evolving situation at present, the COVID-19 pandemic will probably develop into a general case of force majeure. According to the case-law of the German Federal Court of Justice (BGH), a case of force majeure exists if an event occurs that cannot be attributed to a sphere of one of the parties to an agreement, but which instead externally impacts upon the living conditions of an indefinite number of people and which is objectively unavoidable and unforeseeable. The WHO’s classification of the coronavirus crisis as a pandemic on 11 March 2020 probably brings clarity in this respect. It should certainly also be noted in this context that the German courts themselves are in the meantime postponing court sessions on a large scale and are only hearing scheduled cases unable to be delayed. Furthermore, the German government is preparing statutory provisions for agreements concluded ahead of 8 March 2020.
Each individual case needs to be examined in order to establish whether, and to what extent, contractual obligations are unable to be fulfilled for any reason. A case of force majeure exists, in particular, in the event that an authority of the state prohibits any construction activity in the region in which the construction site is located. In this case, the planner will not be able to provide his property monitoring services. However, as long as planning services are possible, planning must be performed.
In the context of object monitoring, planners should now also consider securing the construction site against possible standstills.
The consequence of force majeure: The principal cannot demand any compensation for damages due to delay nor contractual penalties for delay from the planner if the planner is unable to perform his work (e.g. due to shortages of supply or quarantine measures), as the planner bears no culpability. However, the principal will in many cases also be able to defend himself by using the argument of force majeure against claims brought by the contractor due to a failure to cooperate.
III. Does an obstruction by the COVID-19 pandemic need to be noticed?
Contractors and planners must report a case of force majeure to their contractual partners by means of an obstruction notice as soon as they become aware of it. Such notifications of an obstruction must be made in writing and without undue delay. In doing so, the parts of the work which are being obstructed for whatever reason and the extent to which these are being obstructed should always be explained as precisely as possible. In addition to the potential initial information about affected construction projects and agreements, it is therefore also necessary to provide a specific statement on a case-by-case basis. In the event of orders being issued by the authorities, a reference to such orders and the consequences frequently suffices.
The obstruction notice is most important for planning appointments. These are postponed if the obstruction notice is justified. Where no such specific obstruction notice is given, the planner can nevertheless plead a lack of culpability in response to claims due to a delay in his performance.
IV. To what extent are contractual deadlines be extended as a result of the COVID-19 pandemic?
If a case of force majeure exists, the contractual deadlines will be extended by the same period of time as the obstruction lasts.
Where possible, the parties involved in a construction project should agree a new schedule of deadlines as soon as this is again possible after the situation stabilises. Ideally, the acquirers/tenants of the construction project should also be involved in this process.
V. Will the effects of COVID-19 force their way along the service chain, e.g. spread from the subplanner to the general planner?
Each contractual relationship must, in principle, be viewed in isolation. However, a case of force majeure on the subcontractor’s side as a consequence of the COVID-19 pandemic in the subcontractor’s contractual relationship vis-à-vis the general planner will frequently also spread to the relationship between the general planner and his principal, with the general planner bearing no culpability.
Having said that, a party obliged to perform construction work must take responsibility for the culpability of his vicarious agents (section 278 of the German Civil Code). Where a subplanner fails to render performance, e.g. as a consequence of the effects of COVID-19, yet does not endeavour to find potential alternatives, the impact will spread to the main contractor, with the effect that the general planner can be accused of culpability. In this case, the general planner may be entitled to terminate the subplanning contract for good cause if the subplanner does not perform, does not endeavour to find a replacement and a deadline has been set with the warning of termination.
VI. What consequences do (official) closures of construction sites have for ongoing construction projects?
Where construction sites are closed by the authorities, the parties performing the construction work and planning are probably released from any culpability and will probably be able to defend themselves against claims due to a delay in performance and against contractual penalties. The accusation that the necessary care as is usual in the ordinary course of business has not been shown could however be resurrected if, for instance, the closure of a construction site stems from a violation of official requirements.
VII. What consequences do (official) closures of business operations have for ongoing construction projects?
In the event of complete closures of business operations initiated by the authorities, delays can likewise be deemed a case of force majeure. If only individual parts of a business operation are closed by the authorities, the extent to which particular works can be ensured – where appropriate, by external companies – must be examined.
VIII. Do shortages of supply justify a refusal to render performance?
Although shortages of supply generally do not justify a refusal to render performance, the contractors cannot be held liable for delays arising from the COVID-19 pandemic due to force majeure. However, it must be reviewed if their stock of materials is in fact empty because of the COVID-19 pandemic and if they are able tp procure materials, even at higher costs or if their planning was insufficient. The contractor must undertake all reasonable efforts to ensure a procurement of replacement materials.
IX. Is the planner entitled to additional fees due to the effects of COVID-19?
Not in general, but only for specific additional expenses: The COVID-19 pandemic might lead to a longer shutdown of construction sites. However, a delay in construction alone does not yet entitle the planner to additional fees. The (contractually agreed) HOAI remuneration applies only to the chargeable costs and does not involve a time component. However, even if the construction project is delayed, the planner owes the necessary work input so that the building can be completed without defects. If the contract does not contain a contractual provision ("If the construction project is delayed for reasons for which the planner is not responsible, ..."), the planner is only entitled to remuneration despite above-average performance if either the principal violates a duty to cooperate or the business basis of the contract is affected. Whether the business basis of the contract is affected is to be assessed in each individual case. In any case, the planner cannot rely on the possibility to demand additional fees due to a disturbed business basis.
It is therefore even more important for the planner to notify the principal of any additional performances that may become necessary and also to have them confirmed by e-mail. If, for example, he has to issue a new invitation to tender for services, or if additional expenses arise in monitoring the property, he is entitled to an additional fee. Careful documentation will be essential here. Proof of the additional expenses will be considerably easier if the principal is directly involved.
X. How can fees be secured?
At first, planners should increasingly issue invoices on account for services rendered. According to § 15 Para. 2 HOAI, the planner is entitled to partial payments for services rendered at reasonable intervals.
In addition, according to § 650f BGB (German Civil Code), planners are (also) entitled to demand security for unpaid remuneration plus 10% for additional claims. The security fully covers the remaining remuneration. This is frequently done, at the discretion of the principal, by means of a guarantee, the costs of which the planner must generally bear up to an amount of 2%.
Since the economic effects of the COVID-19 pandemic cannot yet be seriously estimated, the planner currently has a particular interest in a security. If the planner demands security, he must set the principal a reasonable deadline and also take into account the fact that the principal may currently not obtain a guarantee from his bank as soon as usual.
If a requested security is not provided (in time) in accordance with § 650f BGB, the planner has a right to refuse performance and is entitled to terminate the contract. In this case, he is entitled to the agreed remuneration minus saved expenses. This legal obligation of the principal to provide a security cannot be excluded by contract.
As an alternative to a building craftsman's security in accordance with § 650f BGB, the planner - insofar as the client is the owner of the building site - can also register a building craftsman's security mortgage in accordance with § 650e BGB. However, such obligation can be contractually limited or excluded if equivalent securities are offered.
XI. Can planner contracts be terminated due to the COVID-19 pandemic?
First and foremost, building contractors may now be interested in terminating the contract if they wish to wait for further developments and postpone investments for the time being. The COVID-19 pandemic alone and the complications associated with it do not justify termination. Quarantine measures or illness on the side of the planner also do not entitle the principal to terminate the contract for good cause, since this usually requires a violation of the planner's duties. Only if the planner falls ill for a longer period of time and does not perform his services, the principal can terminate (regardless of fault). This requires a careful analysis of the individual interests and the reasonableness of the continuation of the contract in the individual case.
However, planners can also be interested in termination if the principal does not fulfil his obligations. The Client can regularly exonerate himself from the accusation that he is not fulfilling his duties to cooperate by referring to force majeure. This does not apply, however, if the principal becomes illiquid, e.g. due to a standstill in production. The principal cannot plead force majeure because he bears the risk of liquidity. Serious payment difficulties can therefore lead to an immediate right of termination by the planner.
XII. What are the consequences if construction site personnel leave the construction site without an official order to do so?
Generally speaking, this is the risk of the employer concerned. Without the intervention of official measures, each contractual partner who is part of a construction contract is obliged to maintain the availability of his personnel. If need be, new replacement subcontractors must be utilised – provided that this is possible. Here again, the additional costs belong to the risk of the contractor and price adjustments vis-à-vis the principal will only be possible in extreme cases. The contractor must also take all reasonable efforts in respect of the personnel to continue operations at the construction site.
XIII. Can the construction contract-related acceptance of work be refused due to COVID-19?
No, acceptance (inspections) cannot be refused in the current situation. As long as the construction project is not under quarantine, the parties to a planner, construction or purchase contract can at present be reasonably expected to conduct a joint acceptance inspection, potentially also by authorising representatives to do so. A different position would however apply in the event of a general lockdown being imposed.
The contractor may - depending on the provisions of the construction contract - set further deadlines for acceptance. The appropriateness of the deadline must be evaluated in each individual case. If there is no reaction within a reasonable period of time, the completed construction project is generally considered accepted. Since acceptance causes the transfer of risk and the risk of accidental deterioration is transferred to the principal, contractors will demand acceptance of completed works within a reasonable period of time. The construction supervisor must then take action and inform the Principal of (significant) defects and ensure that these are verifiably reported in good time. In VOB/B contracts, partial acceptance of self-contained services may also be considered - subject to deviating agreements.
XIV. Who is responsible for the protection of the construction site in case of an extended shutdown?
The contractor must protect the work he has rendered until this work is accepted. This also applies in the event of an extended shutdown. If the contractor vacates the construction site, he must take appropriate precautionary measures. For VOB/B contracts, a partial acceptance of self-contained services may be considered. The risk can then also be transferred to the client.
In the case of an agreement drawn up in accordance with the German Construction Contract Procedures [Vergabe- und Vertragsordnung für Bauleistungen – VOB/B], the principal must pay for work which is damaged, even before it has been accepted, if the damage has been caused by the crisis (section 7 of the German Construction Contract Procedures [Vergabe- und Vertragsordnung für Bauleistungen – VOB/B]). However, this requires that the contractor has taken all precautionary measures and bears no culpability whatsoever.
XV. What needs to be considered right now when executing ongoing construction contracts?
The contractual parties should take active steps. If, as a consequent of force majeure linked to the COVID-19 pandemic, contractual deadlines become extended, then a delay in performance can no longer be determined – at least with these deadlines – on the basis of a contractually agreed deadline which is determinable by the calendar. Instead, a warning notice after the due date is required in order to establish the delay in performance. Since it is, to some extent, difficult to estimate the temporal effects in connection with the COVID-19 pandemic, repeated warning notices (after the due date of the work in question) are recommended in order to establish the delay in performance as promptly as possible. Agreements by the parties in this respect seem more preferable however.
The following also needs to be kept in mind: Despite the COVID-19 pandemic, the principal must continue to pay remuneration for the work rendered. As long as construction sites are not closed by the authorities, it is also reasonable to expect the principal to undergo an audit, for example. The principal must also continue to undertake approvals of plans, including via authorised representatives if need be.
XVI. What needs to be considered right now when concluding new construction contracts and when concluding supplemental agreements to ongoing construction contracts?
All parties are well advised to only conclude contracts at present which incorporate clauses concerning the COVID-19 pandemic. Those who conclude contracts – particularly ones with binding contractual deadlines – with full knowledge of the current facts take on the risk of their ability to render performance under difficult conditions. The assumption of this risk rules out the existence of a case of force majeure.