The entire German law of obligations was fundamentally revised in the beginning of 2002. Some of the changes are substantial. Thus, extreme caution should be applied when using older standard contract forms, because parts of them may be incompatible with the new law. The reform also caused some uncertainties that will have to be clarified through the courts in the time to come. Those uncertainties have to be considered in drafting contracts.

Since the reform of the law of obligations the seller of goods and services has the right to attempt to remedy any occurring defects. Only if this attempt fails or does not occur within a set time limit, the buyer may rescind the contract, abate the price or claim damages.

Certain warranties cannot be excluded in a general business conditions. E.g., neither the right to rescission nor the seller's liability for a gross negligence can be generally excluded. Unless specifically prohibited by law, warranties and liabilities can and should be limited in general business conditions. The buyer can, for instance, be charged with a stricter obligation to examine the goods, liability for consequential damages can be limited and the buyers right to rescind can be excluded unless a certain number of attempts to remedy failed.

The statutory warranty period is now generally two years. A warranty period of five years applies if the goods or services are used in a construction of a structure. This also applies to movable goods that are incorporated into a structure, even if the seller was not aware of that fact. These warranty periods cannot be limited with regard to consumers. In general business conditions they can only be lowered to a maximum of one year, even if no consumer is concerned.

In contracts for services, which are focused on producing a certain result in contrast to merely providing the service (Werkvertrag), the compensation only becomes due once the buyer has accepted the result. This means that the seller accepts the result as what was owed under the contract. Minor defects, even though they have to be remedied, will be disregarded. In case of dispute this provision can lead to the result, that the compensation is not paid at all as long as the seller denies that the result complies with the contract. Thus, acceptance procedures and requirements should be defined clearly and precisely in the contract, especially in case of extensive projects.

Generally the same rules apply the construction contracts as to any other service contract. In Germany however, there is a special set of construction contract rules called the VOB (Official Contracting Terms for the Award of Construction Performance Contracts). The VOB is not a statute but a set of general business conditions, which has been drafted by a public commission.

The VOB will only apply, if the parties expressly stipulate so in their contract. However, in Germany there is a strong reliance on the VOB and it will usually be made applicable to construction contracts. This means, that foreign contractors will usually have no choice but to accept the incorporation of the VOB. If the VOB is made applicable, its special terms have to be considered when drafting the rest of the contract.

To the astonishment of some foreign contractors the VOB allows for a change in the contractors obligations without the contractors consent. According to the VOB the principal is entitled to change the construction plans. He can thereby also change the contractor’s obligations during the execution of the construction. If the VOB was not incorporated, a principal does not have such rights. However, the contractor might by obliged by the principles of good faith and fair dealing to include minor alterations.

If the changes or alterations caused the contractor additional work, he is entitled to additional compensation. However, if the contractor tries to claim this compensation after the fact, German law imposes a considerable burden of proof. The contractor will usual be forced to disclose his entire calculations for the original project to prove his calculations for the additional compensation. This does not only involve considerable efforts, but also goes against contractor’s interest in protecting his business secrets.

Thus the provisions of the construction contract should clearly define what rights a principal has to request changes and under which conditions additional compensation becomes due. If changes are requested on site, additional compensation should be agreed upon and put in writing before the changes are implemented. In any case, the contractor should meticulously record all additional work done and who ordered it.