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Reform of the German Law of Obligations in Manufacture Contracts

by Dr. Götz-Sebastian Hök Berlin  and Francis Wallace Uckfield
 

* * *

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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1) The Deutsche Bundestag, the lower house of German Parliament enacted the modernization of the German law of Obligation on 11.10.2001. It became effective on 01.01.2002.

2)Unless otherwise stated all cited paragraphs in this text refer to the BGB.

3) a guaranteed remedy which does not require that the defectiveness of the product is the manufacturer ´s fault

4)  repair by the purchaser or by a constructor on his behalf

5)  which requires that the defectiveness of the product is the manufacturer ´s fault

6)  standard forms which are used very often but originally drafted for the public market

 

 


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