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Construction and Projects 2010/11 Country Q&A Germany

PLCCROSS-BORDER HANDBOOKS www.practicallaw.com/constructionhandbook 65

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Germany

Oliver Moufang, Stefan Koser, Manteo Eisenlohr, Uwe Pirl, Lorenz Claussen, Martin Bünning and Oliver Koos

GSK Stockmann + Kollegen

www.practicallaw.com/5-502-1518

The ConsTruCTion seCTor

1. Please briefly describe the main trends in the construction market in your jurisdiction. What have been the most significant deals?

The financial crisis caused a significant reduction in construction-related transactions. Because of the credit crunch, project devel-opment in Germany has also been weakened. Real property project developers are suffering declining order volumes, a drop in de-mand for rental areas for commercial property and a decrease in the number of financially strong purchasers for new buildings.

The federal government reacted to the international financial and economic crisis with two economic stimulus packages that were also designed to enable investment by the federal states and the communities in urban development and road construction.

Despite these difficult economic conditions, the following most significant construction projects are being developed in Germany:

� Infrastructure project concerning Deutsche Bahn Stuttgart 21 and the new railway line from Wendlingen to Ulm.

� Skytower: a new building for the European Central Bank in Frankfurt am Main.

� Airrail Centre at Frankfurt am Main Airport.

� Palais Quartier (FrankfurtHochVier) in Frankfurt am Main.

� Reconstruction of the Berlin City Palace.

� Project Harbour City in Hamburg.

TrAnsACTion sTruCTures And finAnCe

2. What transactional structures and corporate vehicles are most commonly used in construction projects in your jurisdiction?

Typically, multi-layer holding structures are used. Many investors use a German limited company (GmbH) or a limited partnership (GmbH & Co KG) as a special purpose project company with an-other limited company or limited partnership as parent company.

This parent company is often used as the vehicle to incorporate a joint venture structure (that is, the joint venture partners are direct or indirect shareholders in the parent company). This enables every joint venture partner to use its own investment structure to optimise taxation. However, in cases with only one sponsor, foreign structures are sometimes used at every level (including the project company).

Sometimes large construction companies form civil law partner-ships (Arbeitsgemeinschaft) (ARGE) under German law to un-dertake large projects. As this structure may not allow for ring fencing of the project (since all partners are fully liable for all liabilities of the civil law partnership by law) it is increasingly be-ing replaced by more complex holding structures.

3. how are construction projects generally financed?

Depending on the size of the project, a variety of finance struc-tures are used in Germany. Small-scale projects are often fi-nanced with senior bank debt and equity only. Larger projects are usually financed by way of a mixture of senior bank debt, mezza-nine loans, subordinated shareholder loans and equity. The senior bank debt may be structured in various tranches and syndicated to larger pools of lenders.

In recent times, public subsidised loans have been used more often, especially with regard to renewable energy or infrastructure projects. In addition, since bank debt has become harder to ob-tain at favourable rates, some investors have started to use tailor made bond issues to obtain financing from pension funds or open ended funds that could invest in bonds but are prohibited by law from making direct loans.

In general, the credit crunch has resulted in a more creative ap-proach to the financing of German projects.

4. What forms of security and contractual protections do funders typically require to protect their investments?

security

Bank debt is usually secured by a package of single security documents. As a global charge is not available in Germany, the lenders take individual security by way of first ranking mortgages or land charges. This main security is usually accompanied by:

� Insurance assignments.

� Bank account pledges.

� Rent receivable assignments.

� Sales receivables assignments.

� Project receivables assignments (for example, the assign-ment of remuneration for energy produced by wind parks or solar panels).

� Security transfer of inventory (that is, for hotel projects).

© This chapter was first published in the PLC Cross-border Construction and Projects Handbook 2010 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact [email protected], or visit www.practicallaw.com/constructionhandbook.

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Country Q&A Germany Construction and Projects 2010/11

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The main security is also often accompanied by share pledges or interest pledges over the shares or interests in the project company.

Subordinated security is usually provided for mezzanine lenders (that is, by way of second ranking mortgages or land charges and security assignment of the borrowers claim against the senior lenders for the (re)transfer of security or enforcement surpluses).

Contractual

Contractually, lenders typically require loan agreements with comprehensive covenants on the property, the project to be com-pleted in accordance with milestone plans, financial covenants, negative pledges and so on. In more complex structures, inter-creditor or subordination agreements are commonly found. In ad-dition, in large bank syndicates, separate syndication and security pool agreements are used. Banks typically require the assignment of all project-related warranties and any security provided by the contractors (that is, bank guarantees) and step-in rights into the main project agreements. Assurances such as parent guarantees or comfort letters are often also required by banks.

MAin PArTies

5. What are the main parties involved in a construction project in your jurisdiction? What are the most common procurement arrangements between them?

Apart from the builder, the parties typically involved in a con-struction project are planners, engineers, building contractors and project managers.

Builders can be both public bodies (for example, the EU, a state or the federal government) and legal persons under private law (GmbH, GmbH & Co KG and so on). While private builders as a rule can com-mission their construction works by direct agreement, public bodies must follow sophisticated procurement regulations specified in:

� Part A of the General Contract Provisions for the Perform-ance of Construction Works (Vergabe- und Vertragsordnung für Bauleistungen, Teil A) (VOB/A).

� Procurement Ordinance (Vergabeverordnung) (VgV).

� Sections 97 to 129 of the German Restraints of Competition Act (Gesetz gegen Wettbewerbsbeschränkungen) (GWB).

� European legal regulations as set out in the Procurement Co-ordination Directive (Vergabekoordinierungsrichtlinie) (VKR) and the Sector Procurement Co-ordination Directive (Sektorenkoordinierungsrichtlinie) (SKR).

Building contractors act both as general contractors and as sub-contractors. A general contractor is commissioned to do all works required for the construction project, which are then done partly by the general contractor itself and partly by subcontractors. The general contractor also often carries out execution planning tasks. For large projects, building contractors often join by way of an ARGE (see Question 2). The ARGE is essentially an external consortium, as it is known in the international construction sector.

Planners are primarily architects, structural engineers and oth-er engineers. The project manager supervises the construction works in the interest of the builder. Contractual agreements are entered into between the builder on one side and the architect,

general contractor, project manager and structural engineer on the other side. The general contractor instructs the subcontrac-tors. In turnkey constructions, the general contractor often also undertakes planning works.

sTAndArd forMs of ConTrACTs

6. What standard forms of contracts are used for large construction projects in your jurisdiction? Which construction organisations typically produce them?

German law differentiates between individually negotiated con-tracts and unilaterally provided contractual provisions that are pre-formulated for numerous contracts (so-called standard terms and conditions (STC)). The content of STC are governed by the Civil Code (Bürgerliches Gesetzbuch) (BGB). In general, the Civil Code imposes much stricter requirements on STC for them to be legally valid than it does on individually negotiated contractual provisions.

In sections 631 and following of its regulations on contracts for works and services, the Civil Code also contains incomplete but fundamental statutory regulation of construction contracts. The regulations apply to the extent that the construction contract does not contain any explicit regulation on a legal issue.

In addition, it is usual for the parties to agree on Part B of the General Contract Provisions for the Performance of Construction Works (VOB/B) for construction contracts. The VOB/B is devel-oped by the German Committee for Public Procurement and Contracts in Construction (Deutscher Vergabe- und Vertragsauss-chuss für Bauleistungen) (DVA). The regulations of the VOB/B also constitute STC, whose content is valid only if compatible with section 305 of the Civil Code, if the contracting parties do not assume the VOB/B without change.

Among other things, the VOB/B contains regulations on:

� The works and the performance of those works.

� The attribution of risks between the parties.

� Notice of termination.

� Liability.

� Contract penalties.

� Acceptance.

� Claims based on defects.

� Accounting and payment.

� The provision of collateral.

Technical requirements are regulated in Part C of the General Contract Provisions for the Performance of Construction Works (VOB/C), which is also often agreed as a contractual component.

7. do construction contracts for international projects differ from the standard forms of contract set out in Question 6? if yes, please give brief details.

Within the EU, a public sector construction project must also comply with the European Procurement Directives if it has an in-




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ternational component. Apart from this consideration, the agreement on contractual terms strongly depends on the location of the construc-tion project and the parties involved.

The contractual terms set out above (see Question 6) are usually ad-hered to by German builders for construction sites in Germany. Ger-man law guarantees high legal certainty, and in comparison with other jurisdictions, German legal proceedings are of a reasonable duration.

In any projects with a foreign element, the applicable law and place of jurisdiction should be expressly agreed.

In cross-border projects, it is quite common to agree on the Interna-tional Federation of Consulting Engineers (FIDIC) construction con-tract terms (see Question 8).

8. do contracts for engineering projects differ from the contracts set out in Questions 6 and 7? if yes, please give brief details.

Contracts for plant engineering projects are different in that, apart from governing the building and engineering work, they also seek to govern the testing and handover plant for commer-cial operation (for example, a power station). The contract has more content than a traditional contract for building works and services. It often, for example, includes for the provision of per-sonnel, for training and/or the operation and maintenance of the plant after completion and handover. Therefore, the VOB/B are generally not agreed on in engineering contracts.

Build, operate, transfer (BOT) models are becoming more popular for major projects. Under these models, the contractor is required to construct, finance and, for a contractually agreed period, oper-ate the project and then transfer the project back to its contract partner and owner.

In cross-border engineering projects, FIDIC-based forms of con-tracts are popular, as they are well understood by international contractors, owners and their advisers and project funders (for example, the FIDIC contracts are the contract of choice for many multilateral development banks who provide finance for interna-tional construction and engineering projects). FIDIC publishes a variety of contracts to suit the particular requirements of different types of projects.

The modern range of FIDIC Contracts (first published in 1999) with three major forms (Red, Yellow and Silver) comprise:

� Conditions of Contract for Construction, for building and engineering works designed by the Employer (Red Book).

� Conditions of Contract for Plant and Design-Build, for elec-trical and mechanical plant, and for building and engineer-ing works, designed by the Contractor (Yellow Book (in some ways the second edition of the Orange Book)).

� Conditions of Contract for EPC Turnkey Projects (Silver Book).

� Pink Book - Multilateral Development Bank Harmonised (New Version of FIDIC Red Book), May 2005 (republished in March 2006).

� Gold Book − Contract for Design, Build and Operate Projects, September 2008.

� Blue Book − Contract for Dredging and Reclamation Work.

� White Book − Model Services Agreement (for Construction Professionals for example, Engineers).

ConTrACTuAl issues

9. What risks are typically allocated to the contractor? how are these risks (such as material price escalation and ground conditions) offset or managed?

The principal generally bears the building site risk (Civil Code). This may be different if particular risks follow from any expert opinions that the principal obtains regarding the building site, which are provided to the contractor for inspection and examina-tion. In such cases, risk bearing is determined on an individual basis, based on both technical and legal considerations.

Under public law regulations, the principal is also responsible for compliance with the building permit and safety on site.

Construction contracts often contain regulations that attempt to transfer the above risks to the contractor (at least in part). In STC, however, such a transfer of risk is possible only to a limited extent; otherwise the terms will not be legally valid under the Civil Code (see Question 6).

The contractor bears the risk of incidental loss of its construc-tion works up to the time of acceptance (Civil Code). If partially or fully completed construction works are destroyed before their acceptance by the principal, the contractor must reconstruct them without additional remuneration. This risk is contractually limited, particularly under the VOB/B and in the case of plant engineering contracts.

The parties to a construction contract usually agree on binding fixed prices, which remain unchanged in the event of unexpected cost increases (for example, a distinct increase in steel prices in the world market).

10. how can liability be excluded? for example, can the contractor exclude liability for indirect or consequential loss, and loss of business or profits?

The contractor is liable for achieving the work result promised. However, under German law the contractor is liable for damages only if it has culpably breached a duty or impaired a legally protect-ed right of the principal. If these requirements are met, the con-tractor is generally liable without limitation for any damage caused.

Liability for intentional damage cannot be excluded beforehand. It is, however, possible to agree on a limitation of liability for negligence. In respect of agreements that use STC, however, the Civil Code restricts the ability to limit liability.

The contractor cannot rely on an agreement that excludes or lim-its the principal’s rights based on defects if the contractor fraudu-lently concealed the defect or gave a guarantee for the quality of the work (section 639, Civil Code).

The customer usually has several rights in case of defects, he can (section 634, Civil Code):

� Demand subsequent improvements.




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� Remedy the defect himself and demand reimbursement for required expenses.

� Withdraw from the contract or reduce payment.

� Demand damages or reimbursement of futile expenditure.

The contractor can limit its warranty for defects to subsequent improvement if the right to reduce the price is maintained for the case of failure of remedy. Otherwise in STC the limitation to subsequent improvement is invalid.

In individual contracts, it is acceptable to agree a cap on liability, and liability may be limited to direct damage and exclude indirect consequential damage. However, under STC, such a limitation is invalid, as is a limitation in the case of gross negligence.

11. do the parties usually agree a cap on liability? if yes, how is this usually fixed?

A cap on liability is unusual in construction contracts and can be validly agreed on in STC only for damage not relating to per-sonal injuries. In architects’ and engineers’ contracts, liability for slight negligence may be limited to insurance coverage as agreed between the parties. In standard contracts, liability for non-insurable damage not related to personal injuries cannot be limited to the amount of the fee charged by the contractor.

12. Are force majeure exclusions available and enforceable in your jurisdiction?

The contractor is liable for incidental loss of its works before ac-ceptance, in that reproduction of those works without additional remuneration is required (see Question 9). Exceptions apply if production is impossible or unacceptable.

Under the VOB/B, if any damage or destruction of construction works by unavoidable circumstances occurs before acceptance, for which the contractor is not responsible, the contractor re-ceives remuneration for those parts of the works performed. This amounts to a contractual change to the statutory rules on the bearing of risks.

Apart from the above, it is common for the contractor to limit its risk of liability by taking out so-called contractor’s all risk insur-ance (Bauleistungsversicherung).

13. how are construction professionals usually appointed? how are their liabilities dealt with in the contract?

In relation to the awarding of construction contracts, a distinction must be made between those where the builder is a public body and those where the builder is a private entity (see Question 5).

In principle, the contractor can transfer the performance of works to subcontractors. However, principals regularly contractually re-strict contractors from subcontracting by excluding any subcon-tracting of works or by stating that subcontracting is subject to approval by the principal.

The contractor is liable for the works performed by its sub-contractors to the same extent as it is for its own performance (see Question 17).

In general, the awarding of contracts is subject to the principal’s STC, which are usually used in addition to the VOB/B and the statutory regulations of the Civil Code. However, any individually negotiated provisions prevail over any standard terms.

14. What are the usual methods of payment for construction work? Are there ways to secure payment or mitigate risks of non-payment?

As a general rule, remuneration is paid either as a lump sum or according to final measurement (that is, of the works and quanti-ties actually provided). In addition, cost plus fee contracts and guaranteed maximum price (GMP) contracts also exist.

Payment for construction works falls due on acceptance (Civil Code). However, the Civil Code provides for payments on account for contractually provided works. The VOB/B also allows for pay-ments on account, usually on the basis of construction progress.

The principal must provide collateral to cover the contractor’s claim for payment; this requirement cannot be excluded from the contract. The contractor can request the creation of a security mortgage over the construction site of its contract partner for the amount of the works already performed. In practice, however, this often fails due to the fact that the principal is not the owner of the real property.

In addition, contract performance guarantees are often agreed as collateral.

The law on securing construction claims (Gesetz über die Sicherung von Bauforderungen) (BauFordSiG) includes important regulations on the handling of building capital.

15. What contractual provisions are typically negotiated to cover material delays to the project?

Construction contracts usually set concrete completion dates. In addition, contractual milestones are often set to monitor the progress of construction. Compliance with these set dates is en-sured by agreement on contract penalties. In this respect, sophisti-cated rulings of the Federal High Court of Justice must be observed concerning the amount and requirements of contract penalties.

16. how are material variations to the works usually dealt with in the contract (for example, the effect on timing and cost)?

The ways in which material variations are dealt with depend on the circumstances:

� If the principal unilaterally changes the contractual per-formance obligations, the performance period and payment must be adjusted (sections 1 and 2, VOB/B).

� If the deviation is based on defective work by the contractor,




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the performance period and payment remain unchanged. The contractor must remedy the defect within the perform-ance period without receiving any additional payment. If the contractor fails to remedy defects arising after acceptance, despite an additional period of time fixed by the principal, the latter can generally choose to do any of the following:

� request further subsequent improvement;

� reduce the payment provided;

� claim damages;

� withdraw from the contract;

� remedy the defect itself against an advance of costs.

17. how do the parties typically manage their relationships with subcontractors?

Typically, contractors want to transfer obligations owed to the principal to their subcontractors. This particularly applies to con-tractual time limits and contract penalties. Subcontractors are generally fully liable for any damage for which they are respon-sible. Under STC, however, contract penalties can be passed on to subcontractors only under specific circumstances (see Question 13).

The subcontractor’s claim for payment is due at the latest when the contractor has received payment for the works from its princi-pal (section 641, para. 2, sentence 1, Civil Code).

The principal frequently requests that the general contractor’s claims against the subcontractor based on defects be assigned to the principal.

18. What other main contractual provisions do the parties usually heavily negotiate?

Apart from the contractual provisions mentioned above (mile-stones, time limits, contractual penalties, warranties and liabili-ties), the scope of works and prices are extensively negotiated. While the principal usually tries to pass on the completion risk to the contractor by functional specifications, contractors usually try to agree on explicit descriptions of their performance duties, as this simplifies the possibility of asserting further payment claims for additional work (supplements).

liCensing reQuireMenTs

19. What licences and other consents must contractors have to carry out construction work in your jurisdiction?

Any proposed construction or change to existing buildings in Ger-many is subject to a building permit. The builder must apply for such a permit by explaining the location and type of building project before commencing works.

Under German law, the commercial provision of services requires, in particular, a trade licence. Individual contractual construction works can only be undertaken by experts who have a correspond-ing licence. This, for example, applies to structural engineering.

Generally, however, the performance of construction works is not subject to approval by authorities.

insurAnCe

20. What types of construction-related insurance must be main-tained by law? Are other non-compulsory types of insurance maintained under contract?

It is common and advisable for the builder to take out builder’s risk insurance.

The contractor should, in addition to business liability insurance, take out contractor’s all risk insurance (see Questions 9 and 12), which in any case is often contractually required. Architects and engineers are by law obliged to take out liability insurance.

Accident and health insurance for employees and contribu-tions to the statutory pension fund are mandatory for all em-ployers in Germany, but not particular to construction projects (see Questions 21 to 24).

lAbour lAWs

21. Are there any labour law requirements for hiring (domestic and foreign) construction employees?

Article 39 of the EC Treaty secures freedom of movement for all workers within the EU. As a result, all EU citizens can live and work in all member states under the same conditions as nation-als. They do not need any work or residence permit. This also applies for nationals of the European Economic Area (EEA), Swit-zerland and, with some restrictions, Turkey.

Restrictions apply for nationals of the member states that joined the EU in 2004 and 2007. Nationals of these new member states do not need a visa to enter an EU member state, nor do they need a residence permit. However, they need a work permit allowing work only in the issuing member state. These restrictions apply until 2011 or 2014.

Nationals from countries outside the EU need a visa to be enti-tled to enter a member state; they also need a work permit and a residence permit.

The employee needs to apply for any relevant authorisations himself. However, the employer will be asked to submit relevant documents and issue statements concerning the employment. Employing a foreign employee without the required authorisation is an offence for both the employee and the employer, punished by a fine.

There are no specific hiring requirements for domestic employees.

22. Which labour laws are relevant to construction projects?

In the building and construction sector, the German Posted Workers Act (Arbeitnehmer-Entsendegesetz) (Act) applies. The Act aims to:




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� Create and enforce an adequate minimum standard of work-ing conditions for construction workers.

� Provide equal working conditions and provide for fair com-petition, as all employees are entitled to the same working conditions regardless of whether they are employed by a national or foreign employer.

The Act declares all labour laws and certain collective bargaining agreements applicable for all employees in the construction sector.

German labour laws provide minimum standard working conditions on:

� Remuneration.

� Holiday entitlement (in general 20 to 24 days per year (Ger-man Federal Leave Act (Bundesurlaubsgesetz)).

� Daily working hours (in general eight to ten hours per day).

� Working at night, on Sundays and on public holidays (Ger-man Working Time Act (Arbeitszeitgesetz)).

� Safety, sanitary protection and hygiene.

Collective bargaining agreements and shop agreements can pro-vide further working conditions. Collective bargaining agreements are concluded between trade unions and employer associations for all employers who are members of the association. Under certain circumstances, collective bargaining agreements can be declared by the federal government as generally applicable to all employees. Shop agreements are concluded by the works council and the employer for each individual enterprise.

23. does an employer have to pay statutory redundancy or other payments at the end of a construction project? Are all employees eligible?

Employment is independent of the respective construction project. As a result, employment continues after the termination of the construction project. However, employment may be limit-ed, either in time or by reason. Fixed-term employment then ends either after the time agreed on has expired or the purpose of the employment is fulfilled, for example, if the construction works on a building are completed. An agreement on fixed-term employ-ment is possible only under strictly regulated circumstances.

Termination payments are neither statutory nor common under Ger-man labour law, and particularly not for construction employees.

Special regulations on termination (for example, terms of notice) are subject to collective bargaining agreements.

heAlTh And sAfeTy lAWs

24. What health and safety legislation applies to construction projects in your jurisdiction?

The relevant legislation on health and safety applying to con-struction projects is:

� Work Protection Act (Arbeitsschutzgesetz), concerning safety and health protection.

� Administrative Order for Construction Sites (Baustellen-verordnung), concerning safety measures such as noise protection, dealing with hazardous substances, handling of tools and machines.

In addition, collective bargaining agreements may set special health and safety requirements.

Due to the risks involved in construction works, occupational safety and health protection is separately regulated by the Administrative Order for Construction Sites (Order). Under this, larger construction works must be reported to the competent authority and, if several contractors work at a site at the same time, a so-called safety and health protection coordinator (SiGeKo) must be appointed. The Or-der sets additional requirements for particularly dangerous works.

environMenTAl issues

25. Please briefly set out local legislation regulating the effect of construction projects on the environment, in particular in the areas of:

� Air.

� Water.

� Waste.

� environmental impact assessments.

� sustainable development.

Air

The law on the protection against harmful environmental impacts by air pollution, noise, vibrations and similar events (Federal Emission Control Act) (Bundesimmissionsschutzgesetz) (BIm-SchG) includes thresholds for air pollution, noise and so on.

According to sections 324 and following of the Penal Code (Straf-gesetzbuch) (StGB), specific environmentally harmful measures are subject to criminal liability.

Water

Water protection is mainly regulated in the Federal Water Act (Wasserhaushaltsgesetz).

Waste

German law contains a variety of waste regulations. The Circulation Economy and Waste Act (Kreislaufwirtschafts- und Abfallgesetz) is fundamental. The Waste Catalogue Ordinance (Abfallverzeichnis-verordnung) is a European regulation which classifies the danger level of different types of waste. The Ordinance on Waste Recovery and Disposal Records (Nachweisverordnung) relates to the documentation of waste disposal. Note that soil excavation must be disposed of at disposal sites, sometimes at great expense depending on its danger classification. Construction waste must be separated before disposal.

environmental impact assessments

Under the Environmental Impact Assessment Act (Gesetz über die Umweltverträglichkeitsprüfung), projects which due to their nature, size or location might have a considerable impact on the environment may require particular examination under the act’s permission procedure.




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sustainable development

The above regulations serve to protect the environment and aim to achieve sustainable development.

26. Must buildings meet carbon emissions or climate change targets?

CO2 and energy saving take high priority in Germany and are subject to the Energy Conservation Act (Energieeinsparungsge-setz) (EnEG) and the Energy Saving Regulations (Energieein-sparverordnung) (EnEV), both of which were amended in 2009. In addition, German Standard DIN 4108 (thermal protection in construction engineering) applies.

The reduction of CO2 in the industry is regulated in the Green-house Gas Emission Trading Act (Treibhausgasemmissionshan-delsgesetz) (TEHG). These regulations in particular apply to the transition and transformation of energy, the production and processing of iron metal and the mineral processing industry, as well as individual and other industrial sectors. In this context, it is only relevant in relation to plant engineering.

CorruPT PrACTiCes

27. Are there any rules prohibiting corrupt business practices and bribery (particularly affecting construction projects)? Please set out any applicable civil and criminal penalties.

Criminal offences in violation of competition are set out in sec-tions 298 and following of the StGB. The regulations contain severe punishment for convicted individuals. The StGB does not provide for criminal liability of companies. Under the Administra-tive Offences Act (Ordnungswidrigkeitengesetz) (OWiG), however, fines can also be imposed on companies. Administrative fines and profit skimming can also be imposed.

Both authorities and large principals in the construction industry keep or intend to introduce so-called black lists for companies involved in corruption. Black-listed companies can be excluded from work.

At an international level, European and international anti-bribery laws apply.

The acceptance of benefits by officials, corruption, and the grant-ing of benefits to, and bribery of, officials is subject to criminal liability (sections 331 and following, StGB).

If a criminal action is committed, there is also a high risk that a claim for damages under civil law will follow. Contracts concluded on the basis of corruption also risk being found invalid and voidable.

insolvenCy

28. What rights do the client and funder typically require on the contractor’s insolvency?

A principal can terminate a contract for works and services at any time (section 649, German Civil Code and section 8, No. 1, VOB/B). In this case, however, the principal must pay the agreed remuneration to the contractor, minus expenses saved.

If the parties have agreed to the VOB/B, special rules apply on the insolvency of the contractor. If the contractor ceases to make pay-ments, or if any of its creditors files a valid insolvency petition, the principal can terminate the contract (extraordinary termina-tion) (section 8, No. 2, Para 1, VOB/B). The same rule applies if the petition for opening insolvency proceedings is denied by a court finding for lack of assets required to cover the cost of pro-ceedings. If the principal exercises its right to extraordinary ter-mination, the contractor only receives remuneration for the works performed to that point. In addition, the principal has a claim for compensation in relation to the damage incurred as a result of non-performance of the contract by the contractor.

There is some dispute as to whether the extraordinary termination right also exists when insolvency proceedings have been opened. In practice, this issue is rarely relevant, as the contract has usu-ally been terminated after the filing of the insolvency petition.

The Civil Code does not contain an extraordinary termination right in the case of insolvency.

Once insolvency proceedings have begun, the insolvency ad-ministrator has the right to choose whether performance should occur where there are mutually unperformed contractual obliga-tions (performance right) (section 103, Insolvency Act). If the insolvency administrator decides that the contract should be per-formed, performances owed by the contractor must be provided by the insolvency administrator, that is, out of the insolvency es-tate. The principal must pay the agreed remuneration.

If the insolvency administrator decides that the contract should not be performed, then the principal cannot request performance from the insolvency estate. The principal remains obliged to pay for works that have already been done, but in practice this is usually set off against claims for damages resulting from the pre-mature termination of the contract.

As a rule, the insolvency administrator’s performance right con-tinues to exist after acceptance of the work has occurred in rela-tion to the remedy of any defects. As a result, to the extent that warranty claims exist, requests for remedy of defects must be addressed to the insolvency administrator. In most cases, the in-solvency administrator will refuse such a request.

During insolvency proceedings, claims by the principal can only be asserted in accordance with the insolvency law regulations, that is, by registration with the schedule of creditors’ claims. In the case of an insolvency-related termination of contract, the principal can often set off payments to the contractor against its claim. The fulfilment of typical securities such as performance guarantees and warranty guarantees is not affected by insolvency.

PPPs/ProjeCTs

29. Are public private partnerships (PPPs) common in construction projects in your jurisdiction? if yes, which sectors commonly use PPPs?

PPP projects are common in the areas of construction engineer-ing (in particular for the construction of government buildings), health care and infrastructure (motorways and so on). They have become increasingly prominent in recent years.




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30. What legislation applies to PPPs in your jurisdiction?

The only law that specifically regulates PPP projects relates to the construction and financing of federal roads by private parties (Gesetz über den Bau und die Finanzierung von Bundesfernstraßen durch Private). All other PPP projects are governed by general contract law.

31. Please briefly outline the typical procurement/tender process in a PPP transaction.

The principal in a PPP project is typically a public body. As a result, public procurement procedures must be observed (see Question 5).

Usually, invitations to tender for PPP projects are preceded by a competitive process. Applicants to be invited to tender are then chosen on the basis of their suitability and references. To achieve comparable bids, the party inviting tenders usually sets the contractual terms.

ConsTruCTion disPuTe resoluTion

32. What are the most common dispute resolution methods used in your jurisdiction?

Disputes are commonly resolved by one of the following methods:

� Litigation.

� Arbitration.

� Obtaining an expert opinion.

� Conciliation during the construction process.

� Mediation.

The disadvantages of litigation are usually cited as being the length of the proceedings (often two to four years), unforesee-able risks, and court decisions that are only partially appropriate. Decisions at first instance (at least) are often made by judges that do not specialise in construction law. Special chambers for construction law are established only in some federal states.

33. What are the most common alternative dispute resolution (Adr) methods used?

See Question 32.

Arbitration proceedings

The parties can determine that they will pursue arbitration pro-ceedings instead of litigation. If such an agreement is reached, liti-gation is then excluded as a dispute resolution option. The parties can enter into an arbitration agreement before or after the occur-rence of the dispute, and that agreement can determine both the course of the proceedings and the subject matter of the dispute.

The Code of Civil Procedure (Zivilprozessordnung) (ZPO) contains extensive regulations on arbitration proceedings. However, the

parties are free to agree on different rules of arbitration. In private construction law disputes, the parties often choose to adhere to either of the following arbitration rules:

� Concilation and arbitration rules for construction disputes (Schlichtungs- und Schiedsordnung für Baustreitigkeiten) (SOBau) as issued by the ARGE Construction Law of the German Bar Association (Deutscher Anwaltsverein e.V.)

� Rules of arbitration for the construction industry including plan construction) (Schiedsgerichtsordnung für das Bauwesen einschließlich Anlagenbau) (SGOBau) as issued by the German Society for Concrete and Construction Technology (Deutscher Beton- und Bautechnikverein e.V) and the German Construction Law Association (Deutsche Gesellschaft für Baurecht e.V.).

These rules of arbitration differ only on specific points rather than on fundamental issues.

At the completion of the arbitration, one or several arbitrators make an award unless the parties settle during the proceedings. The ar-bitration award is binding on the parties and replaces a court judg-ment. In general, the award decision cannot be appealed.

The main aim of arbitration is to find a comprehensive resolution of the conflict. This is in contrast to mediation, conciliation and ex-pert opinions, which usually seek to resolve individual issues only.

The advantages of arbitration are often cited as being that it is quicker than litigation, and that the arbitrators normally have a higher level of expertise than judges. One disadvantage of arbitra-tion is that third parties cannot be involved in arbitration against their will, unlike litigation.

expert opinions

Arbitration experts typically become involved in a matter if the parties agree on the general legal issues but want some technical issues clarified. Expert opinion clauses are often incorporated in the initial contract between the parties. The procedure is volun-tary and must be agreed on by the parties. In particular, the par-ties’ agreement typically regulates:

� The expert’s scope of activities.

� The specific issues to be addressed by the expert.

� Costs.

� The length of the proceedings, if possible.

The findings of the expert are binding unless the parties have stipu-lated in their agreement that the expert’s opinion can be questioned.

Conciliation during construction

A conciliator cannot resolve a dispute with binding effect on the par-ties. Rather, he is limited to putting forward proposals to resolve the dispute. In this respect, he takes the mutual interests of the parties into account, as well as the factual and legal situation. The parties must agree to the procedure beforehand and on how it is to be run.

Mediation

A mediator provides the contracting parties with support to assist them in finding a solution during voluntary negotiations. The mediator’s job is to work out a reasonable and economically




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attractive solution for both parties so that the conflict can be resolved amicably. The mediator does not have authority to impose a binding solution on the parties.

34. Which courts usually deal with construction disputes in your ju-risdiction? Are there any specific construction courts or tribunals?

There are no special courts for construction disputes in Germany. They are generally dealt with by the normal civil courts.

35. Which organisations are usually used to arbitrate construc-tion disputes in your jurisdiction (please include their website address)?

Arbitration institutions that can be used to arbitrate construction disputes include:

� German Institution of Arbitration (DIS) (www.dis-arb.de).

� International Chamber of Commerce (www.iccwbo.org).

� ARGE Baurecht (the working group on construction law) (www.arge-baurecht.com).

These institutions provide rules of procedure and (for a fee) can assist in choosing the arbitrator(s).

Construction arbitrations can also be run on an ad hoc basis.

ConsTruCTion TAx

36. What are the main tax issues arising on construction projects in your jurisdiction? for example:

� value added tax (vAT)?

� stamp duty/transfer tax (or equivalent)?

In construction projects, VAT is an issue to the extent that the build-ing is used by an owner or tenant who either is not a taxable person for VAT purposes or who does not exclusively provide taxable serv-ices or deliveries to its customers or clients. In this case, input VAT charged on the construction cost is not deductible for the owner of the new building. As a result, the (capitalised) building cost is increased by 19% VAT, which is eventually passed on to the tenant.

Once a project is completed, the building is typically transferred to the new owner. The transfer of title triggers real estate transfer tax at a general rate of 3.5% or 4.5% in the federal states of Ber-lin, Hamburg and Sachsen-Anhalt. Other states are also currently considering whether to increase their real estate transfer tax rate.

Increasing real estate transfer tax rates are an incentive for mar-ket participants to look for structures that mitigate their tax ex-posure. One way of tax efficiently structuring a transaction is to organise it as a share deal (involving the transfer of interests in partnerships or corporate entities with limited liability).

If the acquirer finances the project with (bank) debt, interest expenses are only deductible from the future income up to 30% of the taxable

federal Chamber of german Architects (Bundesarchitektenkammer) (bAK)

Main activities. BAK represents the interests of architects in the political sphere and in relation to the public at a national and international level.W www.bak.de

federal Chamber of engineers (Bundesingenieurkammer) (bingK)

Main activities. BIngK represents the 16 German state engineers’ chambers, that is, engineers, at a federal level and within the EU. W www.bingk.de

federal building Materials Association (Bundesverband Baustoffe, Steine, Erden) (bbs)

Main activities. BBS represents the building materials industry before the government and the federal states, as well as in rela-tion to the economic and public sectors. W www.bvbaustoffe.de

german Construction industry federation (Hauptverband Deutsche Bauindustrie) (hdb)

Main activities. HDB represents the interests of the German construction industry before the legislator, the government and administrative bodies. W www.bauindustrie.de

industrial union Construction-Agriculture-environment (Industriegewerkschaft Bauen-Argrar-Umwelt) (ig bau)

Main activities. IG Bau represents the interests of workers in the construction industry. W www.igbau.de

german Association of Consulting engineers (Verband beratender Ingenieure) (vbi)

Main activities. VBI is the leading occupational organisation of independent consulting and planning engineers and engineering companies. W www.vbi.de

german engineering federation (Verband deutscher Maschinen- und Anlagenbau) (vdMA)

Main activities. VDMA represents the interests of mechanical and plant engineers. W www.vdma.org

german Construction Confederation (Zentralverband Deutsches Baugewerbe) (Zdb)

Main activities. ZDB represents the interests of building trade enterprises. W www.zdb.de

MAin ConsTruCTion orgAnisATions




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earnings before interest, taxes, depreciation and amortisation (EBIT-DA) of the entity to the extent that net interest expenses are at least EUR3 million (about US$4 million) per year (interest barrier rule). Non-deductible interest expenses are carried forward to future years.

Financing expenses accruing during the construction period gen-erate a tax loss (or interest) carry forward, which in principle can be used to off set future operating income (or a capital gain from the disposal). However, such a loss carried forward is forfeited on the transfer of the property by way of a share deal if the interest is not capitalised as an additional cost of construction.

37. Are any methods commonly used to mitigate tax liability on construction projects? Are there any tax incentives to carry out construction regeneration projects?

Real estate transfer tax exposure can be mitigated by structuring a project development as a share deal (see Question 36).

German tax law provides a number of tax incentives in the field of real estate transactions, including:

� The acquirer of real property can roll over (untaxed) built-in capi-tal realised from the disposal of another real estate asset in the same year of the acquisition or in the four preceding years (this can be up to six years in certain cases involving new buildings).

� The regeneration of architectural monuments or build-ings in certain urban development areas is encouraged by enhanced depreciation rates.

� The construction of certain commercial real estate projects in specific areas in the eastern part of the country is subsidised.

Cross-border issues

38. Please outline any special considerations for foreign contractors operating in your jurisdiction. for example:

� special licensing or other requirements for foreign contractors.

� legal or practical considerations that may restrict foreign contractors.

Depending on the country of origin, special requirements apply to foreign contractors looking to work in Germany. The foreign

chambers of commerce provide reliable information on this (see, for example, ahk.de/en/ahk-locations).

The complexity of German law can deter foreign entities from oper-ating in the country. However, German law can give the advantage of certainty. In addition, available dispute resolution options can ensure the effective enforcement of legal outcomes (see Questions 32 and 33). However, compared with less demanding countries, the high quality construction standard in Germany gives rise to ad-ditional costs have to be factored in at an early stage.

reforM

39. Are there any proposals to reform construction law in your jurisdiction?

Under the coalition agreement of the federal government, reform is currently being considered in the following areas of law:

� Construction.

� Contracts.

� Fees for services of architects and engineers.

� Procurement.

As yet there is no implementation date for reform. However, the official scale of fees for services by architects and engineers (Honorarordnung für Architekten und Ingenieure) (HOAI) was reformed in 2009.

ConTribuTor deTAilsoliver Moufang, stefan Koser, Manteo eisenlohr, uwe Pirl, lorenz Claussen, Martin bünning and oliver KoosGSK Stockmann + Kollegen T +49 69 71 000 30f +49 69 71 000 31 +49 69 71 000 44e [email protected] www.gsk.de

“Any lawyer involved in structuring cross-border transactions would find the service useful.”Alec burnside, Partner, Linklaters LLP.

PLCCross-border is the essential know-how service for lawyers advising internationally in the commercial arena. Never miss an important development and confidently advise your clients on law and its practical implications. www.practicallaw.com/crossborder

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