On 23 March 2020, the Federal Ministry of the Interior, Building and Homeland Affairs (FMI) published a decree on construction contract issues in connection with the current pandemic. The decree has immediate effect and is directly applicable to contractual relationships of the federal authorities. The decree does not have any binding effect on the private sector, but it does provide important indications and recommendations for private-sector contractual relationships.
In terms of its federal application, federal construction sites should in principle continue operations. According to § 3 BaustellenV (Sect 3 Construction Site Ordinance), the Safety and Health Coordinator (SiGeKo) exercises a special responsibility to minimise the risk of infection. Each coordinator must draw up construction site-specific regulations and ensure compliance. The Employer's Liability Insurance Association of the Construction Industry makes recommendations in this regard, which the SiGeKo coordinator can use as a guide.
The FMI expressly orders that construction-site operations only be suspended when unavoidable, such as in the event of direct prohibitions to enter or due to quarantine measures in the contractor's company that make further work impossible.
Coronavirus could constitute force majeure
According to the Federal Ministry of the Interior, the coronavirus pandemic in principle fulfils the definition of force majeure, but each individual case must be considered. In short, there is no reason to assume that the pandemic will lead to a general limitation of the performance of building contracts.
The person who invokes force majeure circumstances must prove them by providing a comprehensive justification for the reasons why he is unable to continue to fulfil his performance obligations due to the pandemic.
The pandemic as force majeure on the part of the contractor
A contractor may invoke force majeure in a construction contract, for example, for the following reasons:
- the majority of the contractor's employees are quarantined and he cannot find labour replacements in the market or through subcontractors;
- employees or subcontractors based abroad cannot reach the site due to travel restrictions and cannot be replaced;
- building materials cannot be procured.
An appeal to force majeure can only be the last resort and can only be assumed if it is objectively impossible for the contractor to take substitute measures. It is even reasonable for the contractor to accept cost increases for the procurement of adequate substitutes. The contractor must do everything possible to fulfil his contractual obligations and present these measures to the client.
However, in view of the current pressures on public authorities and the decline in business activity in the private sector, the FMI's view is that it should not be too difficult for the contractor to prove the existence of force majeure. Proof of force majeure should be considered furnished if the contractor's justification for the existence of force majeure is considered predominantly probable with no reasonable doubt remaining for the client. The client should also show understanding if more time is required to provide evidence.
The pandemic as force majeure for the client
The client may also suffer performance restrictions due to the pandemic if, for example, project managers are quarantined and the client is no longer able to fulfil contractual cooperation and monitoring obligations.
Here the same requirements apply as for the contractor. The client can only successfully terminate his services due to force majeure if he can demonstrate and prove that replacement measures were not possible, such as remote working or procuring a representative.
Effects of classifying the coronavirus as force majeure
If the parties to the contract can successfully invoke the existence of force majeure, this can have the following effects on the contractual relationship:
- The contractor is released from his performance obligations for the duration of the obstruction;
- Deadlines for execution will be extended for the duration of the obstruction plus a reasonable surcharge for resuming work;
- The client may not assert any claims for damages or compensation against the contractor due to the delay;
- A possible contractual penalty is not forfeited by exceeding the original contractual deadlines; and
- If the client cannot provide the cooperation required for the contractual services, he is not in default of acceptance and the contractor cannot assert any claims for compensation in accordance with § 642 BGB (Sect. 642 German Civil Code). This also applies in cases where preliminary work cannot be completed due to force majeure and the contractor asserts claims for obstruction against the client.
Inform the contract partner immediately only if there is no alternative to stopping the service
If there are obstacles to performance on the part of the client or contractor due to the pandemic, replacement measures or procurement of replacements should be sought first. In this case, replacement measures can also be taken that increase costs. Under no circumstances, however, should contractual services simply be discontinued due to the pandemic.
Only when it is clear that a termination of performance is unavoidable should the contractual partner be informed of the obstruction and the reasons for it. If evidence is required, it must be obtained as soon as possible. Here, the contractual partner should show a willingness to cooperate in order to find a mutually satisfactory solution both during and after the obstruction. If the obstruction continues for several months due to the crisis and if the situation is financially unacceptable, one possibility could be to amicably discuss terminating the contract and submitting invoices only for services performed up to that point. Most construction contracts already provide for this extraordinary right of termination.
At this point, outstanding invoices should be checked and settled or demands issued for their settlement over the short term. In this way, a loss of receivables due to the insolvency of the contractual partner can be prevented.
For more information on this FMI decree and how it might apply to your business, contact your regular CMS advisor or local CMS advisors Martin Krause and Vanessa Renter.