Germany Update: Client Terminates Lump-Sum Contract – Contractor Must Prove that he is Allowed to Keep the Remuneration Paid!

Circumstance

The client (in this case the defendant in the legal dispute) and the contractor had concluded a general contractor agreement with a flat-rate price agreement. The contractor received an advance payment of € 400,000. A bank (in the present litigation the plaintiff) had taken over a guarantee on first request in the event of the return of the € 400,000. During the construction project, the contractor becomes insolvent. The client terminated the contract, had the construction work completed by third parties and demanded payment of € 400,000 from the guarantor because the contractor had been overpaid. The guarantor is defeated in that lawsuit because “in the case of a guarantee on first request, substantive objections to the principal claim are not to be examined in the requisition process, but in the reclaim process”. The guarantor then pays, but initiates a reclaim process against the client (and the defendant here).

The guarantor (= plaintiff) demands repayment of a partial amount from an advance payment guarantee from the client (= defendant). The defendant, on the other hand, claims that the insolvent contractor was overpaid and submitted a corresponding expert opinion in which the contractor’s performance is assessed according to the market price level. The Higher Regional Court agrees with the guarantor. The defendant client appeals against this decision.

Decision

With success! The Federal Court of Justice (BGH) overturns the decision of the Higher Regional Court and refers the matter back for a new hearing. The Federal Court of Justice clarified that in the recovery process, the burden of presentation and proof of the parties is to be treated analogously to a dispute between the customer and the contractor over an advance payment of wages.

If the customer demands the repayment of an advance payment for work and services after the contractor has rendered services, the customer only has to conclusively present the prerequisites for a balance surplus from a final statement. It is sufficient to have an invoice showing the amount of advance and advance payments made by the customer and that these payments are not offset by a corresponding final claim for remuneration on the part of the contractor. The customer could limit himself to the submission that corresponded to his level of knowledge if the sources available to him were reasonably exhausted. If the purchaser has submitted sufficient submissions in accordance with these principles, the contractor must demonstrate and prove that he is entitled to keep the advance and advance payments definitively.

The submission that could be demanded of the purchaser in the event of the settlement of a terminated flat-rate price contract without a detailed price list, making reasonable use of the sources available to him, in order to reclaim an advance payment of wages for work, was said to depend on the overall circumstances, in particular on the content of the contract and pre-contractual agreements.

By submitting the expert report, the defendant had distinguished the services provided from the services not provided. According to its further submissions, it had concluded a lump-sum remuneration agreement with the insolvent contractor without a detailed price list and had also otherwise had no knowledge of the calculation on which this agreement was based. On this basis, the defendant could not be required to make submissions on the contract price level of the individual services of the construction contract to be evaluated. The plaintiff as guarantor was burdened with the burden of presentation and proof.

Practical note

The judgment confirms the established case law of the Federal Court of Justice that in the event of a reclaim of advance payments for wages in the case of a terminated contract, the entrepreneur bears the burden of proof that he may legitimately keep the advance payments received. This also applies accordingly in the case of a guarantee.

The article was first published in issue 183 of the ImmobilienReport Metropolregion Rhein-Neckar.

By MELCHERS, Germany, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact germany@transatlanticlaw.com

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