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"Internationalisation" of the German engineering and construction market

"Traditional" German Engineering and Construction Usages

Like in some other continental-European countries, the German engineering and construction market has long been dominated by contract usages and standards which are rather different from international usages/standards:

In terms of "contract technique", German engineering and construction contracts often refer to and rely upon (expressly or tacitly) the provisions of the German Civil Code, rather than setting out the parties' respective rights, obligations and responsibilities expressly and comprehensively in the contract. Therefore, in order to really understand the contents and effects of a German-style engineering and construction contract, the parties need to know not only the provisions of the contract, but also the underlying concepts of German law and the provisions of the German Civil Code. This is challenging even for German parties, and it is obviously even more challenging for non German parties.

Further, the allocation of risks and responsibilities under typical German engineering and construction contracts and also under German law is, compared to international standards, rather contractor-friendly. For example, a contractor is as a rule more often entitled to compensation of additional cost under a German engineering and construction contract than he would be under a typical international contract. Likewise, it is as a rule much more difficult for an employer to hold a contractor accountable for a delay under a German contract and under German law than it would be by international standards.

For non-German parties, this means that drafting, negotiating and executing engineering and construction contracts in Germany is somewhat tricky and can involve unwanted and unforeseen risks and surprises.

Developments towards "internationalization"

Over the last few years, however, international contracts and standards have increasingly entered the German engineering and construction market. The reasons are manifold, for example: large employers are harmonizing their "German" engineering and construction contracts with their international standard contracts; large non-German contractors insist that their international contracts also be used for projects in Germany; German contractors and suppliers doing business internationally have long been faced with the necessity to deal with international contract standards anyway.

As a result of that, the German engineering and construction industry as a whole is increasingly getting used to, and to some extent also comfortable with, international engineering and construction contracts and standards. One tangible example for this development is the increasing use of FIDIC contracts in Germany and under German law. For example, most of the contracts for the design and construction of offshore wind farms in (or off) Germany are based on the FIDIC Yellow Book.

As a result of that development, it has generally become a little simpler for non-German parties to engage in engineering and construction projects in Germany.

Remaining Pitfalls

However, the growing spread of and familiarity with international engineering and construction contracts and standards in Germany does not remove the aforementioned pitfalls of engaging in German projects completely:

The overall concepts and many provisions usually contained in typical international engineering and construction contracts do not really fit in with German law (or the other way around). For example, extension of time-, force majeure-, entire agreement- and exclusive remedies-clauses are largely based on English contract law principles and notions, but they do not fit in with German contract law and usage. This friction is aggravated by the fact that German players may be increasingly familiar with international engineering and construction contracts and the typical provisions contained therein, but most of them are not familiar with the English concepts underlying these contracts and provisions. Consequently, they often misunderstand (usually without even noticing) what exactly these contracts/provisions actually do (or are supposed to be doing). As a result of that, "international" engineering and construction contracts in Germany and/or under German law are still very prone to misunderstandings and uncertainties.

Further and potentially more importantly, many typical provisions of international engineering and construction contracts are potentially unenforceable under German law. This is particularly so for contract provisions which are subject to the German law on the use of standard contract terms, the infamous "AGB-Recht". The AGB-Recht applies to all standard contract terms, including standard form contracts such as FIDIC, NEC etc. For example, in a FIDIC Yellow Book or Silver Book Contract, many provisions of the FIDIC General Conditions would potentially be void under the AGB-Recht. But even outside the scope of the AGB-Recht, German law can heavily impact on an international engineering and construction contract. For example, English or US employers might find themselves very surprised (or even shocked) by what can happen to their contracts if they are subjected to the equally infamous German principle of "good faith".

A practical example might clarify the potential implications: An EPC contract between an English employer and a German contractor provides for liquidated damages ("LDs") in case of delay. The contract also provides that the Contractor shall be entitled to extension of time ("EoT") in case of delays caused by changes in the legal requirements, by the authorities in the project country or by force majeure. During the project, the contractor's works are delayed by unforeseen ground conditions. The English employer would probably say: "The contract does not provide for EoT in case of unforeseen ground conditions, thus you are not entitled to EoT because of these unforeseen ground conditions, thus you are liable for delay LDs." The German contractor would probably say: "The contract may not provide for EoT in case of unforeseen ground conditions, but unforeseen ground conditions are clearly outside my responsibility and control, therefore I am not liable for delay LDs." Under English law, the employer would probably be right, but under German law the contractor might be right. Likewise, an English arbitrator would probably tend to agree with the employer, whereas a German arbitrator (and certainly a German court) would probably tend to agree with the contractor (all of course subject to the specific circumstances of the case).

Conclusion

The German engineering and construction market has started to adjust to international usages and standards, but applying international standards to projects and contracts in Germany still involves factual and legal obstacles and risks. To some extent, these obstacles and risks can of course be tackled, or at least their impact can be significantly softened. But to do that, one needs to be aware of them. This article is aimed at raising this awareness.