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Reform of the German Law of Obligations in Manufacture
Contracts
by Dr. Götz-Sebastian Hök
Berlin and Francis
Wallace Uckfield
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Traditionally manufacture contracts in German law include all contracts
for the provision of goods or the making of a product. This is a wide definition.
It can include certain types of work by a professional person where the
object of the contract is to provide the customer with a specific result.
Such as a building designed by an architect or a piece of music which a
composer is commissioned to write. It can also include the production of
standard or mass produced goods (such as shoes) and the provision of bespoke
or tailor made products such as houses or machinery which are constructed
to a design agreed by the customer.
The legislation has now brought about a major reform of the general
and special provisions of the German law of obligations1)
. The so-called “modernisation” consists of a fundamental revision
of the general provisions and some changes in provisions for different
types of contracts. Traditionally the German civil code (Bürgerliches
Gesetzbuch=BGB (abbre.)) draws a clear cut distinction between sale (Kauf),
service (Dienst) and manufacture (Werk) contracts. A manufacture
contract is one in which the manufacturer is obliged to produce a
particular result, e.g. the architect is obliged to design a house.
The price which the customer has to pay correlates with this result, that
is, with the plans the architect has made. Only the legislative changes
made to manufacture contracts in this sense are the subject of this overview.
Service contracts in which the manufacturer is obliged to work only
but not to produce a particular result of this work, e.g. the employment
contract between the architect and his secretary, and in which the price
correlates with the time spent working, are not the subject of this essay.
However, it is noteworthy that this differentiation between manufacture
and service contracts remains unchanged. So do the well-known problems
arising from it when one has to draw the distinction between them when
solving a particular case.
The manufacture contract is still regulated in §§ 631f (abbreviation
for Bürgerliches Gesetzbuch, German civil code)2).
Though many changes have been made to these provisions, there are many
calls for an even more rigid reform, e.g. to establish a construction contract
as a special type of contract of its very own, basically in order to solve
the problems arising from the difference between construction plans and
reality (see Kraus, Baurechtlicher Ergänzungsentwurf zum Schuldrechtsmodernisierungsgesetz
ZfBR 2001, 513). Certainly it would be desirable if the legislator would
differentiate between contracts about complex construction processes and
contracts about a haircut which the legislator still refuses to do.
Manufacture delivery contracts have also been fundamentally revised.
To a contract which obliges the manufacturer to produce and deliver mass-produced
movables (vertretbare bewegliche Sachen) the provisions about an ordinary
contract of sale (§§ 433f ) are applicable, with slight modifications
only. The warranty-system for manufacture-and-delivery-contracts is adjusted
to the system for sale contracts. First of all the customer has the right
to make a claim for post-performance by remedial works (Nacherfüllung
durch Nachbesserung). If this fails, he has the right to rescind
the contract (Rücktritt), to reduce the price (Minderung) or to claim
damages (Schadensersatz). If non-massed-produced movables are delivered,
the moment at which the risk of damage to the goods passes to the customer
is not the time at which the customer accepts them as good (Abnahme), but
is the decisive moment according to §§ 446/447, e.g. when the
producer hands over the product to a carrier (Gefahrtragungswechsel).
Little change has been made to the price provisions for manufacture
contracts. This means, when drafting a manufacture contract, the fee can
still be more or less undetermined. Nevertheless, priority is given to
the contractually fixed fee. If no such fee exists but a fee can be expected
to be paid because of the circumstances of the case, it can also be fixed
in an implied way. Otherwise, § 632 II is applicable: the price is
fixed by law in accordance with officially enacted regulations for particular
areas of business (taxgemäße Vergütung) such as the HOAI,
a price table for architects and construction engineers (Honorarordnung
für Architekten und Ingenieure). Finally, a reasonable price (übliche
Vergütung) is to be paid.
A new provision constitutes § 632 III according to which a fee
for the estimation of costs is excluded by law. However, the parties can
still fix a price for this by contract. Speaking from the perspective of
the manufacturer, the parties should do so explicitly and in advance, because
according to the new provision (“im Zweifel”) the burden of proof lies
with him.
The reform establishes a new law for the failure of performance. The
key-doctrine of the new regulations is the breach of contractual
duties (Pflichtverletzung). From now on substantial legal doctrines like
the doctrine of pre- and post-contractual liability (culpa in contrahendo)
no longer find their justification in a long standing tradition of judgement
but in the civil code itself. The term “impossibility of performance” has
lost its fundamental role.
Necessarily, this has also led to new provisions about the production
of defective goods. From the perspective of the legislator the reform strengthens
the position of the customer from the time when he accepts the product
as good (Abnahme). Still, the product must be free of all defects (§
633 I), free of defects in itself and free of legal defects which e.g.
arise if a third person has a lien in the product. The subtle differentiation
between defect (Fehler) and the lack of a guaranteed feature (Fehlen einer
zugesicherten Eigenschaft) no longer exists. The prerequisites according
to which a product is free of defects are regulated in § 633 II for
defects in the product itself and in §633 III for legal defects. The
new understanding of defects in manufacture contracts is adjusted to fit
the new understanding of defects in sale contracts. The quality agreed
upon by the parties to the contract is fundamental. It is up to them to
define the quality standard applicable to their contract. If no such agreement
exists, what is decisive is whether the product is suitable either for
its contractually defined use or its customary use. In the latter case
it is additionally decisive whether the product is of the usual quality
of products of its type and of the quality which the customer can expect
from a product of its type. A liability for statements made in public commercials
has not been established (but see § 434 I No. 2 for contracts of sale).
A new feature is the liability for legal defects. The manufacturer has
the duty to deliver the product free of all rights which a third person
has in respect of the product (§ 633 III).
Thus, priority is given to the contractually defined quality. Only if
no such quality exists are general criteria decisive. The problem, when
drafting a quality definition clause, will be to decide what it is supposed
to exclude. Or, to approach the problem from the contrary perspective:
In the future it will be much more important to design quality clauses
much more carefully. No longer is the contractual or customary purpose
of the product decisive in the first place, but rather the contractual
description of quality.
The remedies of the customer in cases of delivery of a defective product
have been completely reformed. Up to now a distinction has been drawn between
the right to make a claim for performance, which existed until the customer
accepted the product as good (Annahme), and the right to claim for repair
of the defect (§ 633 II). Moreover, according to § 634, the customer
had the right to reduce the price(Minderung) or to nullify the contract
(Wandelung). Now the legal remedies of the customer are sorted as follows
(§ 634):
1.) post – performance(Nacherfüllung) according to §
635 3)
2.) self repair (Selbstvornahme 4))
according to § 637
3.) rescission (Rücktritt) according to §§ 636,323,326
V
4.) price reduction (Minderung) according to § 638
5.) damages (Schadensersatz 5))
according to §§ 636,280,281,283,311
6.) compensation for wasted expenditures (Ersatz vergeblicher Aufwendungen)
according to § 284
If the customer claims for post-performance, then the manufacturer has
the choice between repairing the old product and producing a new one. The
costs resulting from this must be paid by the manufacturer (§ 635II).
If these costs are unreasonable, the manufacturer has the right to refuse
post-performance (§ 635III). However, in this case he risks the customer
rescinding the contract without any notice (§ 636) and claiming damages
(see §325), or the customer reducing the price (§ 638).
Instead of making a claim for post-performance the customer can repair
the defective product by himself (self repair), if the manufacturer has
let a reasonable deadline pass which the customer has set. The customer
can also claim for compensation for necessary expenditure, if not, the
manufacturer has the right to refuse post-performance. Within this claim
the customer can even postulate performance in advance.(§637 III)
Still, the customer can claim for damages if the manufacturer has caused
damage either negligently or intentionally (§§ 636,280,281,283,311a).
Negligence is the failure to such care as a reasonably prudent and careful
person would use under similar circumstances (§ 276 II: ”Außerachtlassen
der im Verkehr erforderlichen Sorgfalt” ). § 276 also states other
reasons for liability, namely guaranties, e.g. to promise the presence
of certain features (Zusicherung bestimmter Eigenschaften). The risk of
being confronted with claims for damages is extremely high if contractual
duties have been broken, for example in cases in which the performance
has not been carried out in an ordinary manner (Schlechtleistung) insofar
it is to be differentiated between two cases. On the one hand there is
the breach of contractual duties which are based upon the performance itself
(leistungsbezogene Pflichtverletzungen); and on the other hand such breaches
of contract which are based upon other circumstances (leistungsfremde Pflichtverletzungen).
The first case is not substantially influenced by the reform. Still
damages can be calculated in two different ways. The customer can either
keep the product and claim as damage the difference in value between a
defective and a non-defective product (kleiner Schadensersatz) or he can
give the product back to the producer, thereby quasi nullifying the contract,
and then calculate his damages based upon any disadvantage caused by the
failure of the contract (großer Schadensersatz).
With reference to the second case, first of all it is to be mentioned
that from now on in § 241 II it is explicitly stated in the law itself
that every party to a contract is obliged to take care of the other parties
´ legally protected rights (Rechte, Rechtsgüter und Interessen).
If one party breaches a contractual duty in the sense of §241 II,
i.e., a duty that is not based upon the performance itself (leistungsfremde
Pflichtverletzung), the other party can claim for damages. Doing so this
party again has the right to calculate their damage in either of the two
aforementioned ways (großer und kleiner Schadensersatz) However,
there is a prerequisite to this claim that performance itself has become
unreasonable for the injured party (§ 282). An example for this would
be a painter who damages his customer’s furniture. In the case of
the breach of a contractual duty which is not based upon the performance
itself (leistungsfremde Pflichtverletzung) unreasonableness is a special
prerequisite to claim for damages. That is why it is so important to draw
the distinction between the breach of contractual duties which are based
upon the performance itself and the breach of duties which are based upon
other circumstances.
In cases of part performance the burden of proof lies with the customer
(§ 281 I S.2). He has to prove that despite the part performance the
rest of the performance is of no value to him, if he wants to calculate
his damage in the second of the two aforementioned ways (großer Schadensersatz).
Especially for construction contracts, this fact makes it hard to realise
this claim and, compared to the former legal position, constitutes a disadvantage
to the customer.
Instead of claiming for damages the customer can also claim compensation
for expenditure which he has spent in good faith on the performance, unless
the purpose of this expenditure would also have been defeated if the manufacturer
had not broken his duties (§ 284). The foundation of this claim is
the fact that loss of profit is often hard to prove. In this case the customer
may at least claim for his expenditure.
Further legal remedies for the customer can be found in §§
634,638,636,323,326 V. He has the choice between rescinding the contract
(§§ 636,323,326 V) or reducing the price (§ 638). It is
advantageous that the right to rescind the contract no longer excludes
the right to claim for damages (§ 325). The right to reduce the price
depends on an individual decision and declaration of the customer.
It does not depend on the seriousness (Erheblichkeit) of the defect (§§
638 I S.2, 323 V S.2). But if the customer wants to rescind the contract,
the defect has to be serious, i.e., of some relevance. Nevertheless, this
remedy depends on a declaration of the customer. It does not depend on
the question whether the defect of the product is caused by any intention
or negligence of the manufacturer (§ 323 I). § 636 adds that
it is not necessary to set a deadline for post-performance if the manufacturer
refuses to perform again because of unreasonable costs (§ 635III)
or if post performance has failed or is unacceptable for the customer.
How much the price can be reduced depends on the relation between the “real”
value of the non-defective product at the time when the contract has been
concluded -(“real” in this context meaning the market price) and the value
of the actually fixed price. If necessary, these values can be approximated
(§ 638 III). If the manufacturer has received payments in advance
and then the customer reduces the price, the manufacturer has to return
the difference between the reduced price and the paid price (§ 638
IV).
Up to now it has not been wise to rescind a contract, because this has
led to the loss of all other remedies. As this has changed, now the new
meaning of rescission should be pointed out. According to § 346 received
performances are to be returned if one party rescinds the contract. Instead
of this it is also possible to pay an amount of money which equals the
value of the performance if its return is not possible because of its character
(§ 346 II No. 1). This will often be the case in construction law.
The amount of money which equals the value of the performance whose return
is impossible shall also correspond with the contractually fixed fee (§
346 II S.2). If the obligation to pay such an amount of money is excluded
because of the reasons mentioned in § 346 III 1, then at least unjustified
enrichments are to be returned (§ 346 II S.2). The main difference
between rescission and termination (Kündigung) of a manufacture contract
is that in the latter case the customer still has all remedies which do
not depend upon the question whether the defects in the product are caused
by intention or negligence of the manufacturer, therefore he still can
claim for post performance; whereas the fee for the part of the product
which is not defective finally is to be paid in both cases. It is to be
regretted that legislation has failed to clarify the distinction between
rescission and post performance. However, it would lack consistency if
one now supposed that even in the cases of rescission the right to make
a claim for post-performance should cease to exist, just because of the
lack of a legislative clarification.
Construction contracts which include provisions of the VOB/B6)
usually exclude the right to rescind. It can be assumed that this remains
permissible as the VOB/B is now explicitly mentioned in § 309 Nr.8
b) ff and as this provision allows one to restrict the legal limitation
deadlines in accordance with the VOB/B, if its provisions are included
in the contract entirely.
§ 639 establishes a provision about the possibility of contractually
limited liability for defects. If the manufacturer intentionally conceals
a defect or if he guarantees a certain quality of the product, liability
limitation clauses are invalid.
Finally the legislator has also reformed the limitation periods applicable
to manufacture contracts. In this area the reform is complicated and badly
arranged. Basically, the limitation period for the remedies of the customer
regulated in § 634 Nr.1,2, and 4 (post performance, self-reparation
and damage claims) is two years starting at the time at which the customer
accepts the product as good (Abnahme). For construction contracts and for
manufacture contracts whose result is the design and control of a construction
process this period is extended to five years. Otherwise, e.g., for contracts
about immaterial or intangible products (unkörperliche Werke) the
ordinary limitation period, which is three years (§ 195), is applicable.
Special limitation periods run for the right to reduce the price and for
the remedy of rescission (§§ 634,218). It is of the highest importance
that the customer who has the right to rescind can counter the claim of
the manufacturer for payment, even if the two years limitation period for
other remedies (see above) has passed.
Until now § 321 (old version) established a counter-claim if the
solvency of the other party substantially diminished after the time at
which the contract had been concluded. To nullify the contract accor. to
§ 119 II used to be the only remedy if solvency was already diminished
at the time the contract was concluded. After the reform, the time at which
diminished solvency first occurs is no longer decisive. The only question
is if it is discernible at the time at which the contract is concluded.
If as a result the claim of the manufacturer for payment is endangered,
he can refuse further performance (Zurückbehaltungsrecht).
Warning: these notes are intended as a guide to the main provisions
of the reform. They are not a substitute for detailed study of the reform
and should not be used as the basis for detailed legal advice. The authors
believe them to be correct, but cannot accept responsibility for any accidental
errors or omissions.
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