If defects arise in a construction project within the warranty period, the client is entitled to have them remedied free of charge. With increasing frequency, however, warranty claims cannot be enforced because the construction company has run into economic difficulties.
This can be prevented by withholding a portion of the final payment, which is not due until after the warranty period has expired and can be accessed if the contractor does not fulfill the warranty claims.
A retention is only permissible if a corresponding agreement is included in the construction contract. Otherwise, the client is not entitled to withhold a security deposit under either the BGB or VOB/B. This applies even if the construction company has already filed for bankruptcy, and it is therefore certain that the company will no longer be able to fulfill any warranty claims.
The agreement must be clear and unambiguous. In individually negotiated contracts, there is a relatively large amount of leeway here. Security deposits can also be agreed in form contracts or general terms and conditions (GTC). General terms and conditions are already deemed to exist if, during a renovation, several independent contracts are concluded with the heating engineer, an external plasterer and a roofing company and the client specifies an identical clause for these three contracts for the security deposit. Therefore, the agreement should be made within the limits prescribed by law (Section 305 et seq. BGB) and by case law for form contracts in order to exclude the risk of ineffectiveness.
A security deposit of 5 percent of the gross order amount for the warranty period can also be agreed in the general terms and conditions if the entrepreneur is simultaneously granted the right to replace the security deposit with a bank guarantee or payment to a blocked account. The previously common practice of allowing the release only with a bank guarantee on first demand is, in the opinion of the Federal Court of Justice, invalid.
The most common means of replacing the security deposit is therefore a "normal" bank guarantee. Contractors often also offer guarantees from insurers, as the capital commitment and costs for the company are lower.
Attention must be paid to the text of the warranty bond, which contains the contractual agreements between the guarantor and the building owner. The bond must not be subject to conditions. Here, restrictions are often found to the effect that the surety only applies if the contractor's work was initially accepted unconditionally and without defects. This leads to the unfortunate result that the builder-owner has no recourse to the surety for the defects that he had already recognized and complained about at the time of acceptance.
The surety must be unlimited and must not contain an expiry date at the end of the calculated five-year warranty period. The warranty period can be considerably extended by legal disputes regarding defects, and the question of whether claims exist and the guarantor is liable to pay can only be clarified well after the five-year period has expired.
Finally, the guarantee should be formulated as a joint and several guarantee. This means that if defects occur, the guarantor can be held directly liable and that the dispute with the contractor does not have to be settled first.
It should be noted that the client's claim is initially for rectification and only if the contractor falls behind in fulfilling this obligation is it for reimbursement of the costs of substitute performance. The guarantor can only be held liable for this claim for payment. The prerequisites for this must first be created by the client, i.e. the contractor must be notified of the defects and requested to rectify them by a specified deadline. This also applies to an insolvency administrator if the construction company is insolvent.
If the contractor fails to take action, the costs of the rectification of defects can be claimed from the guarantor. The guarantor then has the option, as did the contractor, of disputing the existence of the defect. Here too, a potentially lengthy process must be taken into account. However, if the client has a bank or insurance company guarantee, he can be certain that he will receive payment in the event of a successful judgment.
Recommendation:
- The construction contract should stipulate a five percent security deposit for the warranty period, which can be replaced by a bank guarantee or a deposit into a blocked account.
- The guarantee must be assumed in a directly enforceable, unconditional and unlimited manner.
- Before the guarantor can be held liable, the company must be given a deadline to rectify the situation.
The statements represent initial information that was current for the law applicable in Germany at the time of initial publication. The legal situation may have changed since then. Furthermore, the information provided cannot replace individual advice on a specific matter. Please contact us for this purpose.