Effects of COVID-19 on the future drafting of construction contracts
What effects does the COVID-19 Pandemic have on the drafting of new construction contracts? What contractual clauses could be included from the principal’s and the contractor's point of view in order to safeguard their interests in the event of a second wave of the COVID-19 Pandemic or other far-reaching crises? - The following article provides initial answers to these questions.
- I. Remuneration
- II. Additional services, ancillary services, special services
- III. Deadlines
- IV. Liability
- V. Acceptance
The COVID-19 PPandemic has had considerable impact on most segments of the German real estate sector in recent months - and is very likely to continue to have considerable effects in the coming months. At the same time, the German construction sector proved to be relatively stable despite the Pandemic-induced crisis, at least according to market estimates. Although the Central Association of the German Construction Industry is currently (as of June 2020) assuming an overall decline in sales of approx. 3 % for 2020, work is still going on or is largely back to normal operations for the majority of companies.
Nevertheless, the COVID-19 Pandemic will also have consequences for the construction industry, especially when it comes to the current and future drafting of construction contracts. This is not least because market participants will try to build the experience gained in view of the Pandemic into the contractual documentation and the occurrence of a second wave of the COVID-19 Pandemic or new comparable pandemics cannot be ruled out.
So what lessons can be learned from the COVID-19 Pandemic with regard to the drafting of construction contracts and what clauses should be included in construction contracts in future from the client's and contractor's point of view? In the following, initial answers will be given in the form of an overview.
In addition to the scope of services or the service description, the core element of every construction contract is the remuneration regulation. While experience shows that clients are very interested in agreeing on fixed lump-sum prices, contractors prefer flexible remuneration arrangements. For understandable reasons, this applies all the more in times of pandemics and other crises.
At least and the latest for construction contracts concluded since 11 March 2020 - on 11 March 2020, the WHO classified the spread of the COVID-19 virus as a pandemic - the calculation risk for the prices offered should - in any case according to the conventional view and subject to the applicability of the principles of frustration of contract (clausula rebus sic stantibus) - lie entirely with the contractor, since the circumstances of the COVID-19 Pandemic were and are known at the time of calculation. Subject to regulations of the contract stipulating otherwise, the contractor therefore bears the risk of the procurement prices in principle alone.
Nevertheless, from the point of view of the client, there is a threat of additional charges from the contractor due to increased material prices, limited availability, increased expenses due to official restrictions and personnel price increases.
From the Principals perspective, it can therefore be reasonable to impose the price risk for COVID-19 Pandemic and other crisis-related price increases explicitly on the contractor by corresponding contractual provisions. Been doing so, - in order to avoid an obvious invalidity of the clause according to the GTC content control at least in the case of the usage of standard contract models - the inclusion of a temporal or amount-related maximum limit would seem recommendable.
From the contractor's point of view, the situation is of course different, if not contrary. In order not to bear the price risk alone, since even in the case of a known crisis the concrete effects on the price development are difficult for the contractor to predict, it would be advisable for the contractor to try to explicitly exclude the price risk for COVID-19 Pandemic and other crisis-related price increases exceeding a percentage to be determined by contract.
In view of the conflicting interests of the contracting parties and the fact that pandemics are neither foreseeable nor attributable to the sphere of risk of a contracting party, and that the economic effects of a pandemic are not foreseeable for any of the parties, mediatory solutions are likely to prevail, according to which additional costs caused by pandemics or by (other) force majeure events are shared between the parties, either by maximum amounts or by percentage distribution.
II. Additional services, ancillary services, special services
Construction contracts often containclauses according to which the agreed remuneration covers the construction work due, including necessary ancillary services, supplies and other obligations.
The COVID-19 Pandemic as well as the measures taken in order to contain its consequences for public health, however, has made additional measures necessary, e.g. protective measures, increased requirements for construction diaries, the erection of additional accommodation containers to prevent infection, the deployment of area-specific permanent construction teams and other extended public safety measures. This also applies, of course, to other epidemics and pandemics. Therefore, the question arises whether these measures are to be qualified as so-called “additional services” that must in principle be paid for, whether they merely qualify as so-called “ancillary services” that have already been paid for, or whether they are even to be considered so-called “special services” that must be paid for additionally.
In order to avoid the expected argumentation of the contractor that Pandemic-related measures are all additional services, it could be in the interest of the client to include a clarifying regulation according to which measures based on an official order are to be implemented by the contractor without entitlement to additional payment, while extra services expressly ordered by the client are to be paid for separately according to the respective contractual agreements.
From the contractor's point of view, however, it appears sensible to aim for a regulation according to which additional services as well as ancillary services and special services on the occasion of the Pandemic, which are either due to official or legislative orders and which could not be foreseen by the contractor at the time of conclusion of the contract or which were ordered by the customer, are to be paid for additionally.
Depending on the respective negotiation situation, it may also be appropriate to look for mediatory solutions here. It should be clear to the parties to the contract that a one-sided burden on one of the two parties with additional costs for which neither party is responsible is unlikely to appear justified.
Another important issue is the agreement of contractual deadlines, which is often accompanied by contractual penalty provisions.
The client will and should continue to insist on agreeing fixed contractual deadlines in order to ensure a smooth construction process and timely completion of the construction project - especially in the case of planned resale or leasing - or to ensure that the contractor be obligated to pay compensation in case the building is or the corresponding works are not finalized in time.
The contractor, on the other hand, may not be able to avoid seeking an extension of the contractual deadlines. In the case of the conclusion of a VOB/B (German Construction Contract Procedures) construction contract, however, the applicability of Section 6 VOB/B, i.e. the extension of the construction period due to impeding circumstances, is questionable, as many of the Pandemic-related restrictions, at least according to the conventional view and disregarding frustration of contract principles, are likely to be considered the responsibility of the contractor and cannot be eliminated by the principal.
Therefore, from the contractor's point of view, it is ideally to be agreed that contractual deadlines are dependent on the course of the Pandemic, in particular on official restrictions, and are to be adapted to the Pandemic-related circumstances, although the contractual deadlines were agreed in principle with knowledge of the COVID-19 Pandemic.
In addition, the definition of "force majeure" could be explicitly extended to include, for example, official and legal restrictions. Whether, to what extent and with what conditions the principal side agrees to such regulations will be a matter of negotiation
At first glance, the COVID 19 Pandemic does not appear to have any influence on the liability provisions in the construction contract. However, there are constellations in which special attention should be paid to the liability regulations.
For example, if the client provides accommodation containers for construction workers, this can be seen as a rental agreement. It is controversial whether the inability to use a rental object due to official Pandemic-related orders constitutes a defect of the rental object and thus justifies claims for damages by the tenant. In addition, the question arises whether the client is liable if construction workers on the construction site become infected with the COVID 19 virus.
The client is therefore advised to limit the liability for damages of the contractor and its subcontractors due to the use or inability of usage of construction site equipment provided by the client to intent and gross negligence. A limitation of the amount of damages is also conceivable. However, in standard contracts, very careful attention must be paid to the wording of the limitation of liability in order to avoid an obvious invalidity of the clause according to the content control of general terms and conditions as provided for by German law.
From the contractor's point of view, on the other hand, the focus is on avoiding any possible limitation of liability of the principal.
Again, mediating solutions seem indispensable. Not least against the background of the risks that can be associated with the creation of a "hotspot", also in connection with the making available of construction site equipment in the broader sense, the parties would do well to "price in" possible additional expenditure and regulate it contractually.
Acceptance is a prerequisite for the remuneration to be due - advance payments not taken into account. With the acceptance, the warranty and limitation periods begin to run. As a rule, the transfer of risk also takes place upon acceptance. If the work is accepted, the client shall also bear the burden of proof for the existence of defects. Therefore, especially for the contractor, the short-term execution of the acceptance is of essential importance.
The contractor should therefore make contractual provisions for the case that acceptance is not possible due to a Pandemic. In any case, with regard to the effects of acceptance, the transfer of risk, reversal of the burden of proof and the due date of remuneration, a provision would be conceivable according to which both parties waive formal acceptance if this cannot be carried out at short notice due to a Pandemic. The prerequisite for this, however, will be that the work is completed and free of material defects.
An explicit regulation of the acceptance procedure for the aforementioned case could also be in the interest of the client, who should avoid a delay in acceptance with the corresponding consequences, for example with the consequence of the fiction of an unconditional acceptance.
If the parties have agreed on the applicability of the VOB/B, Section 6 (7) VOB/B must be observed, according to which both parties can terminate the construction contract if an interruption of the construction project lasts longer than three months. If the contractor is not responsible for the interruption, the provision also stipulates that the costs of clearing the construction site must be remunerated, insofar as they are not included in the payment for the services already performed.
In times of a Pandemic, the regulation could possibly be inappropriate from the principal#s point of view of the client, for example because the deadline is too short or because the bearing of costs does not seem appropriate in view of the fact that the client is not responsible for the Pandemic either.
If, on the other hand, the construction contract is a BGB (German Civil Code) contract, the contractor might be disadvantaged by the fact that it has no right to terminate the contract despite a long Pandemic-related interruption of construction. The contractor would therefore be advised to include in the contract a right of termination similar to Section 6 (7) VOB/B - albeit unilaterally in favour of the contractor.
The recommendable, since appropriate solution lies - one suspects it - again in mediating regulations
VII. Other regulations
In addition to the issues presented above, with regard to which the inclusion of additional regulations may be useful in response to the COVID-19 Pandemic, there are of course other individual demands for specific clauses, such as the requirements for keeping construction diaries, requirements for the client's obligation to cooperate or regulations on special insurance obligations of the parties involved.
VIII. Summary and recommendations
The real estate industry is currently facing a multitude of requirements and legislative changes. At the same time, the Pandemic has made it clear that sample contracts used up to now only inadequately reflect certain circumstances and/or constellations and/or do not always lead to appropriate results. Against this background, the parties to the contract are urgently recommended to exercise care when concluding new construction contracts and not to continue to use samples from the Pre-COVID-19-Period "out of convenience". Instead, emerging or already passed legislation should be included in the contract negotiations, as well as experience gained during the pandemic. In this way, the parties to the contract can help to avoid disputes that are unpleasant for both sides and contribute to a rapid completion of the construction work.
In any case, it is advisable to regularly check and adapt the "traditional" contract models used - but this often takes a back seat in day-to-day business. Therefore, the above article can perhaps also be an incentive and opportunity to check slightly "antiquated" (standard) contracts for their topicality and suitability.