Taking over, Acceptance and Completion Certificate under German law

by | 1. September 2014 | Commercial Law

Although it is still uncommon to use standard forms of contract in English language for German projects it sometimes happens that FIDIC standard forms are used. In particular for off-shore windfarm projects FIDIC contracts are currently en vogue. Contractors and employers shall then read FIDIC contracts in the context of the German law (see Sub-Clause 1.4 FIDIC General Conditions). German law is a codified law. In particular contract law is covered by the German Civil Code (Bürgerliches Gesetzbuch, abbreviated BGB). The BGB follows the principle of nominated contracts. Construction contracts fall under the type of Werkvertrag (locatio conductio operis). It is inherent in a Werkvertragthat the contractor owes a success. In other words according to German law a contractor shall complete the works fit for the intended purposes or as Section 633 BGB confirms the works shall be suitable for the use envisaged in the contract (see below).

If German law governs a construction contract the contractor is bound by statue to execute the works as promised (Section  631 German Civil Code). The contractor shall execute and complete the works free from any physical defects in respect to quality and free from any legal defects in respect to title. The works are free from any physical defects if they have the quality agreed upon. If there is no language in the contract in respect to the applicable standard of quality the statue (Section 631 German Civil Code = Bürgerliches Gesetzbuch, abbreviated BGB) imposes the following definition on the parties:

The works are free from any physical defects

1. if they are fit for the usage contemplated by the contract

2. or for the general usage and if they comply to  the average quality standard, that generally applies to works of this or a similar kind and that can reasonably be expected by the contractor in respect to works of this or a similar kind.

The employer is obliged to accept the completed works which are in accordance with the contract unless the unphysical nature of the works makes acceptance impossible (e.g. the concert of a musician). Acceptance may not be rejected because of immaterial defects. If the employer accepts the works though defects are apparent the employer will be foreclosed with further claims.

To accept the works means that the employer shall expressly or tacitly express his Intention to take the works over and to accept th works as they are as compliant with the contract. In other words the declaration of acceptance is dealt with as a declaration of intent (Willenserklärung).

Thus, acceptance of the works is a complex legal concept from which several legal consequences flow:  the defects liablity limitation period starts running(Section 634 a German Civil Code), the risk of loss (care of the works) shifts to the employer (Section 644 German Civil Code) and the payment claim of the contractor becomes due (Section 641 German Civil Code).

Although, acceptance of the works is defined by statue practically the question of fact whether the works have been accepted or not is frequently heavily disputed between the parties to a lawsuit. The reason for this is that theoretically cash from the employer to the contractor only starts to flow when and to the extent to which the works have been accepted, unless they have been rejected without good cause, e.g. only because of minor defects. Thus, notwithstanding the fact that acceptance is a clear legal concept in a great number of real world cases the situation remains unclear and this is not satisfying at all. In other words employers may misuse the concept of acceptance in order to save money.

International standard forms, which are based on common law concepts (FIDIC and NEC for example), do not refer to a clear legal concept but provide a detailed procedure for acceptance. Quality has to be tested and certified. Thus Sub-Clause 10.1 FIDIC Red Book provides:

The Engineer shall, within 28 days after receiving the Contractor’s application:

(a) issue the Taking-Over Certificate to the Contractor, stating the date on which the Works or Section were completed in accordance with the Contract, except for any minor outstanding work and defects which will not substantially affect the use of the Works or Section for their intended purpose (either until or whilst this work is completed and these defects are remedied); or

(b) reject the application, giving reasons and specifying the work required to be done by the Contractor to enable the Taking-Over Certificate to be issued. The Contractor shall then complete this work before issuing a further notice under this Sub-Clause.

If the Engineer fails either to issue the Taking-Over Certificate or to reject the Contractor’s application within the period of 28 days, and if the Works or Section (as the case may be) are substantially in accordance with the Contract, the Taking-Over Certificate shall be deemed to have been issued on the last day of that period.

Additionally, typically a completion certificate, a performance certificate or a defect correction certificate will be issued after expiry of the Defects Notification Period (under FIDIC) or the defects correction period (NEC3) (compare clause 11.9 FIDIC Red Book, clause 43.2 NEC). These certificates are aimed at showing evidence for discharge of the contractor from further liability under the contract.

German lawyers, contractors and employers are usually not really familiar with these widely accepted FIDIC concepts. According to German law the employer can either accept the works or reject it and normally he will not accept the works if there are material defects whereas under the FIDIC and NEC concepts even such defects could be corrected during the correction period without any impact on e.g. the statue of limitations. Thus, once being bound by a FIDIC or NEC-contract the wording of the aforementioned standard forms are likely to cause misunderstandings as German law requires lawyers respectively the parties to determine the point in time when acceptance takes place in order to enable the parties to fix the points when the risk of loss passes to the employer, and when the statue of limitations for the legal remedies for breach of contract, regulated in Section 634 German Civil Code, starts to run.

We suggest to adopt the view that under a FIDIC contract acceptance in the sense of Section  640 German Civil Code only occurs when the Engineer (FIDIC) or Supervisor (NEC3) has certified completion, correction or performance under either Sub-Clause 11.9 FIDIC Red Book or Sub-Clause 43.2 NEC3. The reason is that under German law the occurrence or remaining of material defects justifies rejection of the works, so that the contractor will still be obliged to complete the works, which is an enforceable obligation not depending on the discretion of the judge. Furthermore, we believe that the contractual remedies under the FIDIC or NEC forms are additional remedies that do not preclude any statutory remedies under the governing substantive law. Therefore legal remedies (see Sections 634 et seq. BGB) with regard to defective work will only be given when the Performance Certificate (Sub-Clause 11.9) has been iussed. However, in so far as the wording of the FIDIC standard form suggests that some of the consequences, that depend upon acceptance under German law ( e.g. transfer of the risk of loss under Sub-Clause 17.2 FIDIC Red Book),  will happen earlier under the contract forms, German law will accept that.

Complementary to this reasoning we still recommend to add a special provision to the Particular Conditions that makes it clear at what point in time all the consequences of acceptance (under German law) take place under the contract. For FIDIC contracts this means that the parties should make clear which of the consequences, which normally flow from acceptance under German law, shall depend upon the issuance of the Taking Over Certificate or upon the Performance Certificate. The most important consequences of acceptance under German law are: (1) transfer of risk (care of the works), (2) transfer of burden of proof concerning defects to the employer (3) beginning of the time limitation period for breach of contract remedies, (4) that the contract price becomes due.

By the way: another potential source of confusion were the similarities and contradictions between Section 641 a German Civil Code [Completion certificate], which provided a special procedure to enforce acceptance of the works by the – out of court appointment – of an impartial expert and the completion certificate regulated under the contract forms. The statutory rule had been implemented by the German legislator for the purpose to accelerate payments by employers. Due to the fact that the provision was very complicated it was rarely used. Finally the Gemran legislator has abrogated the provision.

After application by the contractor an expert is appointed by the Chamber of Commerce (or the Chamber of Architects or the Chamber of handicraftsmen or the Chamber of Engineers) or agreed upon between the parties. Having closely examined the works this expert can issue a certificate to the contractor that is conclusive evidence of the following issues: (1) the promised work in whole or in part (see § 641 section 1 sentence 2 German Civil Code) have been produced in accordance with the contract and (2) the works are free from any defects previously alleged by the contractor or which can be discovered by the expert upon a reasonable inspection (completion certificate). On a first glance this procedure seems to be very similar to the completion certificate of an engineer under the FIDIC forms of contract. Comparing both concepts in greater depth reveals that the German completion certificate turns out to be something completely different. Firstly, Section 641 German Civil Code provides that the expert is appointed by the contractor and not by the employer. Secondly, the expert has to follow certain procedural rules that must be obeyed very strictly because otherwise the certificate will not have the strong evidentiary effect that it is supposed to have. The expert must inspect the site at least once; both parties must be subpoenaed to this inspection at least two weeks in advance by the expert. The question if the works are free from any defects must be determined by the expert by comparing the works as built with the requirements determined in a written contract. Modifications to this contract may only be considered if they are also in writing. If the contract fails to mention particularities, generally accepted technical rules are applied. Defects alleged by the contractor after the inspection will not be covered by the scope of the certificate. The reason for all of this is that in the event that if the expert has issued a completion certificate it is conclusive evidence of the facts matters mentioned therein and the contractor can start special court proceedings that will give him a very quick money judgment without any chances for the employer to dispute the facts certified. Unfortunately, this concept does not work outside of Germanybecause it requires special procedural rules allowing the court to ignore most objections by the employer.

Section 641a German Civil Code has been completely deleted by a law which came in force on Januar 1st, 2009.

It is worth to note that Sub-Clause 10.2 puts the Engineer under the obligation to issue the Taking-Over Certificate if the Employer makes use of parts of the Works even though they had not yet been tested or completed. Failure to do so may result in disadvantage to the Employer.

WARNING: the material contained in these notes is a simplified guide to some of the major topics in German construction law. It is not intended as a substitute for legal advice on individual transactions, and does not necessarily stand on its own. Whilst the contents are believed to be correct, the author cannot accept any responsibility for errors or omissions.