GER: BGH on Penalty Clauses in Unit-Price Contracts

Apr 5, 2024 Benn-Ibler Rechtsanwälte

The German Federal Court of Justice (Bundesgerichtshof, hereinafter BGH) has ruled that penalty clauses in construction contracts are generally permissible up to an amount of 5 percent. However, the amount must not be made in relationship to the order numbers agreed at the outset, as is done in standard unit-price contracts common in Germany. Doing so would risk overcompensating the contractor.

A local authority invited tenders for the extension of a fibre optic network. A unit price was agreed between the winning company and the municipality. The final amount of payment would therefore depend on the services actually delivered at the end of the project. After acceptance, this amounted to around EUR 6 million. However, a contractual penalty of around EUR 285,000 was withheld by the municipality for delay.

The contract between the parties contained the following clause: In the event of late completion of the work, a contractual penalty of 0.2 percent of the net order value was to be paid for each working day of delay, up to a maximum of 5 percent of the net order value stated in the order.

As a result, the BGH upheld the judgement of the regional court and granted the company’s claim for payment of the remaining remuneration to which it was entitled. The opposing party, the municipality, was not entitled to payment of the contractual penalty.

It is irrelevant whether the penalty clause was included in the contract at all. Even if it had been included in the contract, the clause would not stand up to scrutiny and would have to be considered unfair.

According to the court, penalty clauses in construction contracts are generally permissible up to 5 percent. The problem, however, is that the percentage is in relation to the net contract value, which is determined before the contract has been executed.

In the case of a unit price contract, this could mean that the penalty payable could be more than 5 percent of the claim if the order volume is eventually reduced.

The purpose of keeping the penalty within economically reasonable limits would therefore not be achieved.

BGH VII ZR 42/22 (15 February 2024)