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Case:
BGH NJW 1982, 2494 VII. Civil Senate
Date:
08 July 1982
Note:
Translated German Cases and Materials under the direction of Professors P. Schlechtriem, B. Markesinis and S. Lorenz
Translated by:
Mrs Irene Snook
Copyright:
Professor B.S. Markesinis

On 10 February 1977 the defendant commissioned the claimant to carry out clinker brick-cladding work on 60 houses at a price of DM 70.80 per square meter. Work came up on further houses. The parties agreed that the VOB/B (1973) (General Conditions on Building Contracts) would apply. A formal approval on inspection did not take place. On 16 August 1978 the claimant submitted a final invoice of DM 692, 397.04, minus sums already paid totalling DM 544, 059.11. The defendant made deductions in respect of certain items, alleged higher interim payments than stated and deducted an agreed security figure of 5% = DM 31, 890. The defendant also retained the outstanding amount of DM 46, 474.77 on grounds of defective work on four houses (F,G, L, and B). He estimated the costs of correcting the defects at DM 32,742. In reply, the claimant alleged that these costs were sufficiently covered by the security sum retained for the five-year term of warranty. By court action the claimant now demands DM 148,337.93 residual payments for wages plus interest.

By partial judgment, the lower instance courts granted the claimant the mathematically undisputed outstanding amount of DM 46, 474.77 plus interest. The defendant's further appeal was admitted and resulted in the quashing of the judgment and a referral back to the Landgericht.

Reasons

I. The Appeal Court, like the Landgericht, holds that the retained security sum must be included when assessing the defendant's right to refuse performance of the contract because of proven claims for improvements.

There is no reason to grant the defendant further security. The security retained is also not to be divided into partial amounts attached to each house; the period of warranty commenced with the approval of the work as a whole, for which reason the calculation is to be based on the entire amount retained, i.e. DM 31,890. This sum covers the assessed costs for the removal of the defects found in houses F and G

in respect of which the claimant intends to retain at least DM 23,000. Insofar as the defendant, in appeal proceedings, for the first time bases his right to refuse payment amounting to a further DM 26,000 on defects in the houses stemming from damp, his counterclaims must be rejected for being belatedly submitted.

The further appeal successfully refutes these arguments.

1. According to the contract of 10 February 1977, in the final accounts '5% of the net building costs will be retained for the duration of the term of warranty, i.e. for five years from the date of approval'. Such an agreement on a security sum to be retained will basically not prevent the principal from refusing payments due because of defective workmanship. While the security is intended to ensure a contractually correct performance and the preservation of the warranty rights (para. 17 No.1 II VOB/B [1973]), the refusal to perform contractual duties under para. 320 BGB is intended, apart from safeguarding claims, to put pressure on the contractor to perform his duties immediately (Senat, NJW [1958] 706 No.4; [1981] 2801; BauR [1978] 398 [400] = ZfBR [1978] 25 [26]). The defence based on para. 320 BGB can thus not be averted by granting a security (para. 320 I 3 BGB). The retention after approval of residual wage payments already due aims to induce the contractor immediately to rectify the defects as set out in para. 13 No.5 VOB/B. As long as there is a right to claim removal of defects, and the parties are thus not obliged to make final settlements after the term of warranty has expired and the sums retained as security have become due, the defendant is in principle entitled, over and above his right to the security, to refuse payment for reasons of defective work. (Italics as per original)

2. Fixing a quite considerable sum as security may have an impact on the amount to which performance can justifiably be refused; but the principal is not solely restricted by that amount when he alleges faulty workmanship and the costs for repairs are covered by the security sum. Instead, he can retain a further considerable amount which he deems necessary to pressurize the contractor into a speedy correction of the defects. The latter may not plead that the principal can only exercise his right to refuse performance insofar as he has a claim to have defects repaired which in monetary terms exceed the security (BGH, NJW [1981] 2801). The amount of the sum which the principal may retain under para. 320 BGB depends on the actual circumstances and the principle of good faith. This Division of the Court has already pronounced that two or three times the sum of expected costs for repairs are adequate (BGH, NJW [1981] 2801 with further references).Thus the appeal court's reasoning can only be followed insofar that the security should be taken into consideration and must be included when calculating the amount up to which payments can be validly refused. Nonetheless, the fact that the expected costs for repair are or are not covered by the security cannot be decisive. The point is not 'to grant the defendant a further safeguard', as the appeal court holds. Refusal to perform the contractual duties is, rather, intended to put adequate pressure on the claimant speedily to repair the defects in the work done.

3. Although it cannot be right to allot the retained security schematically in equal amounts of DM 362 to each of the 88 houses, it nonetheless cannot be forgotten that the defendant exercises his right to refuse performance for reasons of defects which occurred in four houses and as early as during the first year of the warranty period. But the retained sums are meant to safeguard the claimant's rights in respect of all houses and for a period of up to five years. In the case of large-scale building projects such as this one further defects and damage resulting from such defects are to be expected. Moreover, the term of warranty has not expired. Thus the sums retained as security can only be included to a very limited degree in the calculation of the amount up to which performance of contractual duties may be refused.

According to the substantiated facts on which the further appeal is to be based, the right to refuse payments up to the sum of DM 23,000 for alleged costs for repair amounting to DM 15,114 for the houses F and G is an adequate remedy. The same is true in respect of a further and subsequently substantiated right to refuse payment up to the sum of DM 26,000 because of alleged costs for repairs totalling DM 17,628 for the houses L and B. In this respect, it is immaterial at which point the defendant became aware of the defects in these houses. The right to refuse performance as set out in para. 320 BGB does not depend on the opponent's knowledge but rather on whether the other party's performance was not carried out at all, or insufficiently or with defects, so that the debtor's default is partially or totally excluded (see: BGH, NJW [1966,]200; WM [1974] 369 [370]). Where the right to refuse performance is asserted during court proceedings, once acceptance of the work has taken place, this will not however lead to a (partial) dismissal of the claim but merely to a judgment ordering simultaneous performance, i.e. of payment and of repair of defects. (Para. 322 I BGB; see BGHZ 61, 42 [45] = NJW [1973] 1792 with further references; BGH BauR [1980] 357; see also BGHZ 73, 140 [144] = NJW [1979] 650).

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