Building constructor’s security: claim to security deposit despite termination
- 10/12/2023
- Reading time 3 Minutes
Pursuant to Art. 650f (1) BGB (German Civil Code), contractors in construction projects may demand from their customers a security deposit for the remuneration not yet paid in the amount of ten percent of the claim for remuneration to be secured. But what happens to the claim for security if the customer fails to provide security and the contractor consequently terminates the contract? This question was recently addressed by the Munich Higher Regional Court on appeal.
Strengthening of contractors’ rights
The Munich Higher Regional Court’s (“OLG”) decision of June 19, 2023 – 28 U 1119/23 Bau clarified that, in addition to a claim to remuneration, contractors have a continuing claim for payment of a security deposit against the customer (Art. 650f (5) sentence 1 alt. 2 BGB), despite termination.
The OLG emphasized that Art. 650f BGB aimed to provide the contractor with early security with regard to claims for remuneration, also in the event of the purchaser’s insolvency. With this statutory provision, the legislator wanted to offer contractors in construction projects the possibility of obtaining a security deposit from purchasers as quickly and effectively as possible. A corresponding, enforceable claim under Art. 650f BGB would significantly strengthen the legal position of contractors.
Termination does not render the claim for security deposit invalid
The question of whether or not a claim for security deposit generally continued to exist after a notice of termination by the contractor was raised by the following case: in disputed construction proceedings before the Munich Higher Regional Court, a customer failed to pay the agreed remuneration or provide security in accordance with Art. 650f (1) BGB and the contractor consequently terminated the contract in accordance with Art. 650f (5) sentence 1 BGB.
According to the Senate, it would be contrary to the law’s purpose if a claim to security deposit pursuant to Art. 650f (1) BGB would lapse after a notice of termination by the contractor pursuant to Art. 650f (5) sentence 1 BGB. If the purchaser was allowed to refuse the security deposit until the contractor gave notice of termination, this would enable the purchaser to prevent the existing claim to security and to weaken the security claim’s purpose as well as the actual claim to security. This would enable the purchaser to entirely circumvent the obligation to provide security. This, according to the Senate, would contradict the law’s purpose; in any case, the statutory provisions did not provide for a corresponding lapse of the claim.
According to the Senate, termination pursuant to Art. 650f (5) sentence 1 BGB constituted a special case of termination for cause and (like Art. 648 BGB) generally resulted in a major termination fee. Thus, after termination, the contractor would undoubtedly continue to have a claim to remuneration for the services rendered. However, he would have to take into account saved expenses and any other or maliciously omitted acquisition against this claim.
Therefore, the claim to security associated with the remuneration continued to exist until full settlement of the claims covered by Art. 650f BGB. The amount of the security deposit had to be based on the remuneration for the work the contractor could demand after termination.
Due to the still outstanding claim for remuneration, the contractor can therefore, in addition to an action for payment of the remuneration, also file an action for security.
