Construction Defects Claims in Germany

Construction defects: the legal framework

Construction defects claims in Germany are governed by the rules on contracts for work in the German Civil Code (Bürgerliches Gesetzbuch, BGB), supplemented since 2018 by specific rules on construction contracts in §§ 650a ff. BGB. Many commercial projects also incorporate the German Construction Contract Procedures (Vergabe- und Vertragsordnung für Bauleistungen, Teil B, VOB/B), a set of standard terms that modifies the statutory rules in several respects. The contractor owes a work free from defects: it must have the agreed quality, be suitable for the use presupposed by the contract and otherwise for the usual use, and comply with the generally recognised rules of technology.

If the work is defective, the employer (Besteller) has the rights listed in § 634 BGB: subsequent performance, self-remedy with reimbursement of costs, withdrawal or price reduction, and damages or reimbursement of wasted expenditure. Most of these rights require that the employer has first set the contractor a reasonable deadline for subsequent performance which has expired without success.

This article explains the main stages of a construction defects claim – acceptance, limitation, choice of remedy, evidence – and the drafting and strategy points that owners, developers, contractors and investors should consider.

Acceptance: the turning point

Acceptance (Abnahme) divides a construction project into two phases. Before acceptance, the employer can insist on a defect-free work as part of performance; after acceptance, it must rely on defect rights. Acceptance also makes the remuneration due, shifts the risk of accidental loss, starts the limitation period for defect claims and shifts the burden of proof: after acceptance, the employer generally has to prove that a defect exists.

Under § 640 BGB, the employer must accept a work that complies with the contract and cannot refuse acceptance because of insignificant defects. A work is deemed accepted if the contractor has set a reasonable deadline for acceptance after completion and the employer has not refused acceptance within that period by stating at least one defect. If the employer accepts a work knowing of a defect, it keeps its rights to subsequent performance, self-remedy, withdrawal and price reduction only if it reserves them at acceptance (§ 640(3) BGB).

Joint inspection when acceptance is refused

If the employer refuses acceptance citing defects, the contractor can require it to take part in a joint inspection of the state of the work (§ 650g BGB). If an obvious defect is not recorded in that inspection and the work has been handed over, it is presumed to have arisen afterwards and to be the employer's responsibility, unless by its nature it cannot have been caused by the employer. Employers should therefore take inspections seriously and record all visible defects.

Limitation periods for construction defects

Under § 634a(1) BGB, claims for subsequent performance, self-remedy costs and damages become time-barred:

For contracts based on the VOB/B, the standard limitation period for buildings under the VOB/B is shorter – four years – unless the parties agree otherwise, which is why employers frequently agree five years expressly. The VOB/B also provides that a written notice of defects can trigger a new limitation period for the notified defect, a feature that the statutory law does not have.

Limitation can be suspended, in particular by negotiations, by bringing an action and by applying for independent evidence proceedings (§ 204(1) no. 7 BGB). For latent defects in large projects, it is common to agree longer periods for specific elements, such as roofs or waterproofing.

Choosing the right remedy

Subsequent performance

The first step is almost always to demand subsequent performance (Nacherfüllung) and set a reasonable deadline. The contractor can choose whether to repair the defect or produce a new work, and bears the necessary costs. The employer may withhold an appropriate part of the payment, normally twice the cost of remedying the defect.

Self-remedy and advance payment

If the deadline expires without success, the employer may remedy the defect itself and claim reimbursement of the necessary expenses (§ 637 BGB). It may also demand an advance (Vorschuss) for the expected costs (§ 637(3) BGB). The advance must be used for the repair and settled afterwards; unused amounts must be repaid. For employers, the advance is often the most effective remedy, because it finances the repair without waiting for the contractor.

Price reduction and withdrawal

The employer can reduce the price in proportion to the reduced value or, for significant defects, withdraw from the contract. Withdrawal is rarely practical for buildings, but price reduction is useful where repair is uneconomic or the employer chooses to live with the defect.

Damages – and the end of notional repair costs

Damages claims under § 634 no. 4, §§ 280, 281 BGB require fault, which is presumed. Until 2018, employers frequently claimed damages calculated on the basis of the estimated repair costs, without actually repairing the defect.

In its judgment of 22 February 2018 – VII ZR 46/17, the Federal Court of Justice abandoned that case law for contracts concluded from 1 January 2002. An employer who keeps the defective work and does not have the defect repaired can no longer measure its damages by notional defect removal costs. Instead, it can claim the reduction in value of the work, or estimate the defect-related reduction in value based on the contract price. The court also confirmed that an employer who wants to repair the defect generally retains the right to demand an advance under § 637 BGB.

The decision changed litigation strategy. Employers who intend to repair should claim an advance or reimbursement; employers who do not intend to repair must prove a loss in value. Contractors facing damages claims should check how the claim is calculated.

Evidence: independent proceedings and experts

Construction defects disputes are usually decided by experts. To secure evidence early – for example before the defect is repaired or the site is changed – a party can apply for independent evidence proceedings (selbständiges Beweisverfahren) under § 485 ZPO. Where no lawsuit is pending, a party with a legal interest can request a written expert opinion on the condition of a thing, the cause of a defect and the cost of removing it. The opinion can later be used in the main proceedings, and the application suspends limitation.

Employers should also document defects themselves: photographs, notices to the contractor, protocols of site inspections and repair invoices. Contractors should keep records of instructions, change orders, hindrance notices and concerns raised about the employer's specifications, because a contractor that warned of problems with the employer's design may avoid liability for resulting defects.

Multiple parties, security and drafting

Large projects involve architects, engineers, general contractors and subcontractors. A defect may result from both planning errors and execution errors. Architects and contractors can be jointly and severally liable, with internal compensation between them. The employer must also manage limitation against each party, which may start on different dates.

Liability of architects and engineers

Architects and engineers are liable for defects in their planning and supervision under the same rules on contracts for work, with a five-year limitation period for planning and supervision services for a building. Where a defect results from both a planning error and an execution error, the employer can generally choose whom to pursue, although it must accept a contribution for its own planner's errors when claiming against the contractor.

The supervising architect may be liable for failing to detect execution defects during site supervision. Since 2018, an architect who is held liable for a supervision error can refuse performance until the employer has unsuccessfully set the liable contractor a reasonable deadline to remedy the defect (§ 650t BGB), which shapes the sequence of claims.

Security plays a major role. Employers typically retain a percentage of the contract price or require warranty bonds to secure defect claims during the limitation period. Contractors, for their part, can demand security for their remuneration under § 650f BGB. Contractual exclusions or limitations of defect rights are ineffective if the contractor fraudulently concealed the defect or gave a quality guarantee (§ 639 BGB), and in standard terms they are subject to §§ 305 ff. BGB.

Drafting points for owners include clear quality specifications, defined acceptance procedures, agreed limitation periods for critical components, warranty security of adequate amount and duration, assignment of claims against subcontractors as a fallback, and a dispute resolution mechanism that can involve experts early. Our article on construction disputes explains alternatives such as adjudication and expert determination.

Construction defects in property transactions

Construction defects also matter when buildings change hands. A buyer of a newly built property from a developer typically acquires under a property developer contract (Bauträgervertrag), to which the rules on contracts for work apply for the construction element, including the five-year limitation period for defects in the building. A buyer of an existing building, by contrast, acquires under sales law, where sellers usually exclude liability for defects except for fraudulent concealment and specific guarantees.

In asset deals for recently completed buildings, buyers therefore ask the seller to assign its defect claims against contractors and planners, or to pursue them on the buyer's behalf. The assignment should cover warranty security, such as bonds, and the relevant documentation, including acceptance protocols, defect lists and correspondence. Without these documents, the buyer will struggle to prove when limitation started and which defects were reserved. In share deals, the claims remain with the property company, but buyers should still review their status and limitation.

Due diligence on a recently completed building should cover the acceptance status of all trades, open defect lists, ongoing evidence proceedings and disputes, retentions and security, and the limitation dates for the main components.

How TRW & Co helps with construction defects

We advise owners, developers, investors, contractors and planners on construction defects. We prepare acceptance strategies, assess defect claims and limitation, pursue and defend claims for advances, damages and price reduction, run independent evidence proceedings, and coordinate technical experts. We also draft construction and planning contracts that allocate defect risk clearly. Our work connects with our construction law and commercial litigation practices and our article on construction contract variations. Please contact us. This article is general information and not legal advice.