No execution by substitution before approval - now also with contractual agreement on the VOB/B!
In almost every construction project there is the common problem that construction defects become apparent long before approval. But basically the contractor has the freedom to plan until the aprroval, when or how to accomplish his work and when he will eliminate the defects. For this reason it is difficult to force the construction company to eliminate defects at an early stage of the construction work before approval. This is pretty dramatic because most of the times construction defects cannot be reasonably eliminated at a later stage, and the owner thus often looses out.
Up until now it was possible under the regime of a VOB contract to set a deadline for the elimination of defects already identified before approval and, after expiry of the deadline, to set a second grace period with the threat of termination. After expiry of the second deadline, the contract could then be withdrawn and the defects remedied earlier by means of substitute performance.
The described possibility of withdrawing the contract and substitute performance before approval has now been considerably restricted by the BGH in its ruling of 19.01.2023 (Ref.: VII ZR 34/20). This restriction concerns cases in which the VOB/B is not agreed to as a whole and in which the client is the one who used the VOB/B in his terms and conditions. This termination option which enables the client to carry out substitute performance prior to approval unreasonably disadvantages the contractor within the meaning of Section 307 (1) Sentence 1, (2) No. 1 of the German Civil Code (BGB), because it enables termination even in the case of minor defects, which represents a contradiction in terms to the statutory termination provisions.
In the case underlying the decision, the client terminated a construction contract with a volume of several million euros due to defects worth approximately EUR 6,000. In its ruling, the Federal Court of Justice (BGH) ruled that the termination provision in § 4 no. 7 p. 3 in conjunction with. § Section 8 No. 3 Para. 1 Sentence 1 Var. 1 VOB/B (2002)¹ is no longer effective in cases where the VOB/B is not agreed as a whole and the client is the user. This termination option unreasonably disadvantages the contractor. As a result, the possibility of substitute performance prior to approval is significantly restricted in the scope of application of the VOB/B and not possible regarding a BGB work contract since the fundamental decision of the Federal Court of Justice (BGH) of 19.01.2017 (Ref.: VII ZR 301/13).
According to § 4 No. 7 S. 3 in conjunction with. § 8 No. 3 Para. 1 Sentence 1 Var. 1 VOB/B (2002), it is possible for the client to terminate the contract with the contractor after setting two reasonable deadlines (the second deadline combined with a threat of termination) and to have the defects existing at that time remedied by a third party company by way of substitute performance at the contractor’s expense. If the VOB/B has not been agreed as a whole (i.e. with deviations in content) and if the customer is the user, the privilege of Section 310 (1) sentence 3 of the German Civil Code (BGB) does not apply in which case the individual GTC clauses are subject to content review. According to the principle of Section 305c (2) of the German Civil Code (BGB), doubts in the interpretation shall be borne by the user, whereby the most customer-friendly interpretation shall be taken as a basis (see BGH, judgment of May 12, 2016 – VII ZR 171/15, para. 42). In the case of an interpretation that is most hostile to the customer, this possibility of termination enables the withdrawal from the contract even in the case of minor and insignificant breaches of contract and/or defects (= performance not in accordance with the contract), which is why even before the decision a large part of the literature assumed the invalidity of Section 4 No. 7 p. 3 VOB/B (2002)². There is a contradiction in value with the legally stipulated cases of extraordinary termination of a contract for work and services, since the termination option of § 4 No. 7 S. 3 VOB/B (2002) allows termination (and subsequently substitute performance) even in the case of minor defects.
In its decision (para. 44 ff.) the BGH clarified that this invalidity only relates to the termination option under Section 8 No. 3 Para. 1 Sentence 1 VOB/B (2002)³, as far as the provision refers back to Section 4 No. 7 VOB/B (2002)⁴. Furthermore it is clarified that a notice of termination based on this termination option may, if necessary, be based on another reason for termination. So in the end such a notice of termination may still be legally effective.
For notices of termination already issued on this basis, it will have to be examined in a timely manner whether the client is the user and whether there are any deviations from the VOB/B in terms of content. If this is the case, it will have to be examined in a second step whether the termination can still be based on another termination option. If this is not the case, the termination is invalid with the consequence of claims for damages by the contractual partner.
If a termination is currently being prepared on this basis, it is imperative to check whether there is another reason for termination on which the termination can be based. If this is not the case, it is essential to refrain from giving notice of termination.
For the future, this means for the contract design of the client as user and content-related deviations from the VOB/B that the clarification must be included according to § 4 para. 7 p. 3 in connection with § 8 para. 3 no. 1 var. 1 VOB/B (2016). § 8 Para. 3 No. 1 Var. 1 VOB/B (2016), that a withdrawal from the contract is not possible in case of minor and insignificant contract violations or defects. We will be happy to offer you our advise!
¹ Section 4 para. 7 p. 3 in conjunction with Section 8 (3) No. 1 Var. 1 VOB/B 2016
² Section 4 para. 7 p. 3 VOB/B 2016
³ Section 8 (3) No. 1 Var. 1 VOB/B 2016
⁴ Section 4 para. 7 p. 3 VOB/B 2016