AS COVID-19 continues to affect daily life hugely, one area in which it is leaving many questions to be answered is in the construction sector. Many construction projects are unsure how to proceed in this current situation. Contracts between partners have been signed, deadlines exist, and some projects have multiple parties involved. The current uncertainty means that it is truly a difficult time for all concerned.
In this article, we will outline some important points regarding the construction industry in Germany. This will provide our clients with an outline of how to approach construction projects during the COVID-19 coronavirus crisis.
As many offices and workplaces have closed down and their employees have commenced mass home office operations, building sites have remained open. Construction projects have continued around Germany. However, like all industries, construction sites in Germany have experienced major challenges due to the COVID-19 coronavirus outbreak. Just some of the issues that the construction industry has faced are:
- Supply bottlenecks: with borders closed, connections with China heavily disrupted and many industries closing down or adopting alternative measures when it comes to working, there has been a slowdown in acquiring supplies for many projects,
- Health issues: as the virus spreads rapidly, construction workers and contractors have had to self-isolate and stop work due to the contracting of COVID-19 coronavirus.
- Labour shortages: many construction workers in Germany come from neighbouring countries such as Poland and the Czech Republic. With borders closing, many of these labourers have returned to their home country for the time being.
- Site closures: in some areas, crisis centres have proved difficult and impossible for work on construction projects to continue due to restrictions in place.
As well as these more obvious difficulties facing construction projects, there have also been economic issues. Many investors now face an unexpected crunch, and finances may not be as available as they were once the project was started. How can parties continue in the uncertainty? Can investors leave these construction projects? What are the consequences when it comes to delaying construction projects?
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The delay of construction project deadlines is legislated for under § 6(2) VOB/B (German Construction Contract Procedure). Among the reasons provided are labour disputes and adverse weather conditions, but the one of interest that has arisen due to the current crisis is “force majeure or other circumstances beyond the contractor’s control”.
We have previously written in-depth about the topic of “force majeure” in German commercial law, but it also applies in the case of construction projects. Force majeure in straightforward language means events that could not be predicted and outside the control of the companies involved and prevent the contract from being fulfilled. With force majeure events, even if the company took reasonable actions, they could not protect the company from the external forces. Disease outbreaks have been taken to constitute force majeure events in German law.
It would be reasonable to expect that construction projects affected by the crisis will experience delays in this light. However, the companies need to outline to the business partners and investors how the crisis is affecting the construction project. Under § 6(3) VOB/B (German Construction Contract Procedure), it is expected that the contractor should carry out all that can be reasonably expected of them to continue the project.
For those directly involved in the project, for force majeure to apply, it must be shown that:
- COVID-19 coronavirus and its effects have caused the construction project to be delayed,
- They have acted reasonably to try and mitigate the disruption but to no avail,
- They have informed their business partners in writing that this is the case,
- once the crisis is over and work can continue on the project that they will do so.
Once force majeure is in place, the company will not be legally liable for the delay in the construction project. The work can be suspended and carried out later, and the contracting partners cannot compensate for the delay. However, if the delay lasts for over three months, there is a mechanism under § 6(7) VOB/B (German Construction Contract Procedure) whereby either party can exit the contractual arrangement.
When should Construction Companies seek an Extension to Deadlines?
Most construction projects are continuing around Germany at present. However, many projects will likely face delays due to some of the factors mentioned above (borders closing, supply chain bottlenecks etc.). When it comes to pursuing an extension on a construction project deadline, companies should also consider factors such as:
- The need for infected staff to quarantine is a legal requirement for people to quarantine themselves and not be at crowded places (such as a construction site) if they catch the virus. This need comes from § 30 Infection Protection Act (IfSG). The company cannot prevent this from happening and would risk more of their workforce if this did occur.
- Breakout at the construction site: If several staff members have the virus and the outbreak can be attributed to the construction site, it may face closure for a period of time. Such an action is likely to cause delays and thus require an extension of the deadline.
Construction companies should ensure that their sites are hygienic and that all reasonable action is taken to ensure that staff is provided with suitable hygienic conditions. This is vital to ensure that the company can avoid claims of negligence regarding their staff’s health.
When it comes to cases of claimed force majeure, it has to be proven that the external force disrupted your ability to act. Simply claiming it without demonstrating its impact on the construction project will not hold up.
Who is Liable for the Extra Costs Incurred due to Delay?
Suppose the delay is caused by a force majeure event (and thus not the fault of either side), neither party can claim the additional costs from the other party. A compensation claim will not work here. The fault has to be found when seeking compensation for the delay arising.
In cases where a delay is caused by the actions of the investor/client, then the construction company can claim compensation using § 642 BGB. In contrast, if the action is caused by the construction firm (and they are deemed liable for it), the client/investor can seek compensation under § 280 BGB in conjunction with § 286 BGB.
Can the Construction Project be Cancelled using Force Majeure?
The main aim for the parties involved should be to see the project delayed. One mechanism that can permit the cancellation of a construction project citing force majeure as the reason is if there is a specific contractual clause within the contract between the parties.
Many construction contracts will have a specific force majeure clause within them. Under this clause, it may provide cancellation of the project as an option as opposed to suspension. However, in most cases, it may be preferable for all sides to continue with the project.
If necessary, the construction company can consider whether measures such as Kurzarbeit / short-time work allowance for some of its employees is appropriate. Obviously, the company in question would have to fill the requirements to avail of governmental support in this regard.
How can the Parties Terminate the Construction Contract?
As stated above under § 6(7) VOB/B, both parties (the construction company and the investor) can pull out of the construction project if the interruption to work lasts for three months or longer. This is permitted even in cases where the interruption is unavoidable. The interruption here refers to the work coming to a halt instead of a minor delay where the construction staff can continue the project.
When it comes to compensation for termination due to work interruption, the party who has decided to pursue termination of the agreement would only be entitled to it if they can show that the interruption has occurred due to the other party’s actions. The legal basis for this can be found under § 6(6) VOB/B. In this instance, it can be due to either intent or gross negligence on the other party’s part.
Another option available is to cancel the contract invoking § 323 BGB, which permits termination for non-performance of the contract. However, even if the work has been halted and is partially complete, it means that the whole contract is terminated. This even refers to attempting to pass the contract and thus project on to another construction company. Construction project contracts tend to be with the finished construction in mind. Therefore this option is not advisable should the work be partially complete.
What should Parties in Construction Project Contracts consider for the Future?
In the future, there are going to be delays in the completion of construction projects due to this outbreak and the disruption it has caused. If, as a construction company, these delays occur or are foreseeable in the current climate, make sure to contact your business partners in writing as soon as possible. Outline the reasons why the virus outbreak will cause the delay and how it is affecting your project. Document the reasons and keep the paperwork safe.
The main piece of advice we would give is to work with your partners amicably. Every company and industry is being heavily affected by this crisis, and it is to be expected that the construction industry is as well. If amicable resolutions are not possible, then contact our construction law lawyers, and they will provide you with the representation and support needed.
Looking further ahead, parties should ensure that future construction project contracts have clear force majeure elements within them. Placing them in the contract from the start will help all sides know exactly how to proceed with such events occurring in the future.
At Schlun & Elseven Rechtsanwälte, we are a multidisciplinary and multilingual law firm. Our offices are located in Cologne, Aachen and Düsseldorf, and we have conference rooms in Berlin, Munich, Hamburg, Stuttgart and Frankfurt. However, at the moment, we would urge our clients to contact us remotely as we can provide our services by phone, through email and by video conferencing. Our construction law team led by our managing partner Dr Tim Schlun provides our clients with the necessary information and services they require in this most difficult time.
Please visit the Robert Koch-Institut website for updates on the COVID-19 coronavirus crisis in Germany as they occur. Updates here can be found in English as well as German. For updates about the developing legal fallout due to the crisis, make sure to keep an eye on our COVID-19 Coronavirus Crisis Center page.
