Law on Works Contracts in Germany
A contract for producing a work is called a “Werkvertrag” in German. If a work produced under a works contract is defective, then the basic right of the party ordering the work is the right to have the defect cured by the contractor of the work. If the curing of the defect proves unsuccessful, then the ordering party has the right to a reduction of the purchase price or to rescind/terminate the contract. If a work is defective, then the warranty period is generally for two years from the time the work was accepted as contractually conform (German: “Abnahme”).
Please note that on January 1, 2018 the new law an works contracts will come into force. That new legal framework will be effective for all works contracts concluded after December 31, 2017. There will be specific types of works contracts for consumers, architects and engineers. The works contracts for consumers for example will stipulate further conditions for the benefit of consumers, such as the right to withdraw from a contract within a certain deadline, a discription of the specifications of an ordered building and a cap for advance payments.
On January 1, 2002, the Act Modernizing the Law of Obligations came into force in Germany. This law also changed parts of the law on works contracts. The changes affecting contractors of works are found in the following areas: cost estimates, definition of defect, remedying defects, limitation periods, applicability of the law on works contracts.
2. Cost estimates
In the absence of an agreement to the contrary, cost estimates are free of charge.
3. Definition of defect
The definition of a defect in the law on works contracts was brought into line with that of the law of sales. A work is therefore defective if:
- it does not possess the attributes/qualities agreed to between the party ordering the work and the contractor of the work,
- it is unfit for the purpose contemplated in the contract,
- it is unfit for the usual purpose and it does not exhibit attributes/qualities that are common to works of the same kind and that the ordering party can expect in works of this kind or
- a work other than the work ordered is produced or the work is produced in insufficient quantities.
4. Remedying defects
The rights and claims of the ordering party are largely parallel to those of a buyer.
The ordering party can demand the curing of the defect (= remedying of the defect or production of a new work). But unlike sales law, it is the contractor here who has the option to either remedy the defect or produce a new work.
Ordering parties are generally entitled to remedy the defect themselves and then demand reimbursement of their costs from the contractor. But in order to do this, they must set a deadline for the contractor to cure the defect and the contractor must fail to do this before the expiry of the deadline. For defects remedied by ordering party themselves, advance payment of the costs can be demanded from the contractor. Ordering parties are not entitled to remedy defects themselves in cases where the contractor refuses to cure the defect because of the unreasonableness of the costs of doing so.
In lieu of the right to have the defect cured, the ordering party has the right to rescind/terminate the contract or to have the purchase price reduced. This only applies, however, if the ordering party has first given the contractor a reasonable deadline to cure the defect and the contractor fails to do this before the deadline expires.
The ordering party also has a right to claim damages from the contractor. This requires that the ordering party first set a deadline for the contractor to perform the work or cure the defect and that the deadline expires without successful performance or cure. Also required is fault [intent and negligence] on the part of the contractor. Fault also includes ordinary negligence. The claim for damages may be higher than the price of the work.
5. Warranty periods
Like in the law of sales, the warranty period is generally two years from the time performance is accepted as contractually conform. The warranty period for building structures is five years from the time performance has been accepted as contractually conform.
The regular limitation period of three years applies in cases where a contractor has fraudulently concealed a defect. This begins to run at the close of the year in which the warranty claim arose and the creditor obtained or, in the absence of gross negligence, had to have obtained knowledge of the facts in support of the warranty claim and of the identity of the debtor. However, in the case of a building, claims are not statute-barred before the end of the period specified there .
In the case of incorporeal works, for example building plans, the regular three-year limitation period applies.
For more information on the limitation of actions, please consult our leaflet “Limitation of Actions”.
6. Does the law on works contracts or the law on sales apply?
Contracts for the production of movable goods are now governed solely by the provisions of the law on sales. The so-called “Werklieferungsvertrag” (contract for work and materials) no longer exists.
Contracts for the production of building structures and contracts for incorporeal works, such as building plans, are governed by the law on works contracts.
7. Further Information
This online information can only provide you with a very summarized overview of these topics and does not claim to be complete. If you need more information, you can visit our Commerzbibliothek (Library of Commerce) where you will find all the usual legal literature such as legislation, legal commentaries, collections of judicial decisions, periodicals, and monographs. The Commerzbibliothek is located on the ground floor of the Hamburg Chamber of Commerce at Adolphsplatz 1 in 20457 Hamburg. It is open Monday to Thursday from 10 am to 8 pm and on Friday and Saturday from 10 am to 3 pm.