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thus depriving it of much of its importance in consumer protection in practice. This approach restricts the application of the presumption in those cases in which it is most pressingly needed. Whether this approach will survive the scrutiny of the ECJ seems at least questionable, given the goals of the Directive.

One final point must be made in this section on the special rules applicable to consumer sales. Article 4 of the Directive concerns the dealer’s right of redress in relation to the supplier. The wording is quite vague (‘the final seller shall be entitled to pursue remedies against the person or persons liable in the contractual chain’) and the English legislator has (it seems rightly) adopted the view that no immediate action was required: the existing remedies of English law easily fulfil this function. The German legislator went a few steps further and expressly regulated the right of redress in §§ 478, 479 BGB. The details of these provisions cannot for reasons of space be discussed in full here. It suffices to make the following observations.

The rationale of these provisions seems sensible. If the dealer/seller is subjected to a mandatory regime of liability vis-à-vis the consumer/buyer, it seems fair that the law seeks to ensure that liability can in principle be passed on up the chain. This is achieved by avoiding so-called ‘redress traps’. If, for instance, the seller bought the thing long before the defect materialised in the hands of the consumer/buyer, it is quite likely that the rights as against the supplier have become time-barred. To avoid this, § 479 BGB extends the time limits for prescription accordingly and § 478 III BGB applies the presumption in § 476 BGB along the chain. Likewise, between merchants it does not seem appropriate to insist on enforced performance; therefore, the seller may instantly resort to secondary rights in relation to the supplier (§ 478 I BGB). However, the German legislator ascribed these provisions binding force. This means they cannot be departed from unless the seller is adequately protected by ‘other means’, § 478 IV BGB (the open-textured nature of the exception is likely to create uncertainty). This is a quite unique feature of these provisions, for hitherto the modern legislator has on the whole abstained from interfering with freedom of contract in such a sweeping fashion in the commercial sphere. The assumption seems to have been that the seller/dealer will often be the ‘weaker party’ in comparison with the supplier. Whether this factual assumption is correct is open to doubt, but in any event it would not warrant such a radical departure from the liberal contract law model. (See, for criticism Münchener Kommentar—Lorenz, § 478 Rn. 7 with references.)

3. CONTRACT FOR WORK

Hertel, ‘Werkvertrag und Bauträgervertrag nach der Schuldrechtsreform’ DNotZ 2002, 6; Pause, ‘Auswirkungen der Schuldrechtsmodernisierung auf den Bauträgervertrag’ NZBau 2002, 648; Peters, ‘Das Baurecht im modernisierten Schuldrecht’ NZBau 2002, 113; Teichmann, ‘Das neue Werkvertragsrecht’ JuS 2002, 417; Schudnagies, ‘Das Werkvertragsrecht nach der Schuldrechtsreform’ NJW 2002, 396.

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(a) Preliminary Observations

While the reform of the contract of sale was fundamental, the contract for work (Werkvertrag) has been affected only marginally by the new regime. The reason is that the general principles discussed in chapter 9 were already embodied in the sections on non-conforming performance of a Werkvertrag previous to the reform. Quite apart from the European input in the form of the consumer sales Directive discussed above, the traditional approach to non-conforming performance in the BGB—in the section on the contract for work—also served as a model for the contract of sale.

The special part of the BGB dealing with the contract for work (§§ 631 et seq BGB) does not reiterate the general principles discussed in the previous chapter. The focus of the qualifications made in the special part is on a particular type of irregularity of performance: non-conforming performance, which is regulated in §§ 633–9 BGB. This is a typical feature of the special part of the law of contract in the BGB and was also noted in relation to the contract of sale, above. (For other aspects of the contract for work, see chapter 3, p 155 ff.) It should be observed that, so far as construction contracts are concerned (for which see, eg, Peters, NZBau 2002, 113), the General Conditions for Building Works (Verdingungsordnung für Bauleistungen = VOB/B) are widely used in the building industry. They are on the whole to the same effect as the rules in the Code, but contain important variations meant to cater for the special position of construction works. In English building contracts, see the Joint Contract Tribunal (known as ‘JCT’) standard contracts, which are the most common form of contract used in the building industry (see further, Chappell,

Understanding JCT Standard Building Contracts (7th edn, 2003) for discussion and explanation). It should be noted further that contracts for the production of movable things are on the whole subject to the rules of the contract of sale (§ 651 BGB,

Werklieferungsvertrag).

Before we examine the remedies of the employer in respect of defective work in more detail, the central change of the recent reform should be mentioned. It concerns the approach to prescription periods for the remedies for non-conforming performance. Prior to the reform, two different regimes of prescription were applicable. The time limits were of different length and depended on whether the employer claimed damages for what was referred to as ‘near’ or ‘remote’ consequential loss. This distinction however was never convincingly drawn and therefore created significant uncertainty in the law. § 634a BGB now establishes a unitary approach to prescription of claims for defective work. (See Bundestags-Drucksache 14/6040, p 263.) The reform thus seeks to ensure that employers know in advance whether their claim is timebarred and reduces the incentive to rely on artificial reasoning so as to avoid the application of the shorter objective periods of the special part of the law of contract. Nevertheless, since the general period of limitation follows different rules (the point from which time starts to run being determined subjectively), the incentive to bring one’s claim within the scope of application of one or the other regime of rules out of tactical considerations is not completely eliminated. (For a fuller discussion of the rationale of the rules on prescription, see chapter 9, p 486.)

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(b) Application of General Contract Principles to Breach of a Contract for Work

The general principles examined in the previous chapter cover the area outside the scope of application of the special rules (contained in §§ 633 et seq BGB) for the rights of the employer in respect of non-conforming performance. However, the special rules as to bad performance are modelled on the general principles with only few qualifications (in particular, the approach to prescription is different).

As with the contract of sale, ‘meta’-rules are necessary in order to determine the scope of application of the special rules. Two criteria are applied in order to determine whether the special rules apply. First, the performance must be a non-conforming performance. This is defined in § 633 BGB. Secondly, the special rules are applied only once the employer has accepted the work as, on the whole, being in conformity with the contract requirements (§ 640 BGB, Abnahme, discussed at pp 156, 353, 411). Thus, the general principles will apply if, for instance, the contractor performs late or fails to perform altogether. Even if the performance is not in conformity with the contract in the sense of § 633 BGB, the general rules will be applied before the Abnahme has taken place. The remedies available to the employer on the basis of general principle have been discussed in detail in chapter 9. It will be recalled that enforced performance is available, the contract may be terminated (§ 323 BGB) or damages may be claimed (§§ 280–4, 311a III BGB), any surrogate may be claimed if the conditions of § 285 BGB are fulfilled. In cases of impossibility, the obligation of counterperformance may automatically be extinguished according to § 326 I 1 BGB, although note that the contract of work contains special rules in §§ 644, 645 BGB on the passing of risk (discussed generally in chapter 9, p 409). Also, if performance remains outstanding, the obligation to pay the price may also be suspended according to § 320 BGB, although normally the contractor must perform first (§ 641 BGB: generally speaking, the obligation to provide remuneration becomes due only after acceptance of the work).

Finally, the rights of the contractor are not specially regulated (except for a limited number of individual elements) and otherwise follow general principle. Therefore, they need not be explained in detail at this stage. For instance, if the employer is late in paying the remuneration (§ 641 BGB regulates the time when it is due), then the contractor may recover interest according to § 288 BGB or any excess loss under § 280 II BGB. It suffices here to refer to a few peculiarities of the contract for work. Noteworthy are first, those provisions that seek to strike a balance between the duty of the contractor to perform first and his interest in obtaining security. This is achieved by granting the contractor certain limited proprietary interests in the subject matter of the contract, but this security can also take other, different forms (§§ 647–8a BGB).

Another of the interesting features of the provisions on the contract for work is the right of the employer to terminate the contract for work by notice (Kündigung) before the work is completed: § 649 sentence 1 BGB. This is mentioned here in the context of the rights of the contractor because the avoidance of the contract is not analysed in German law as a repudiation that can be accepted or not. The employer is not in breach if he avoids the contract prematurely. However, in such a situation the contractor retains his right to claim the remuneration according to § 649 sentence 2 BGB, subject of course to a deduction of the amount saved as a result of the prema-

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ture termination of the contract or what he failed to earn as a result of a deliberate omission. The rationale of this approach is, on the one hand, that it would not be appropriate to impose on the employer the performance which he no longer wishes to obtain, but on the other hand, that the contractor should be entitled to make the profit he was entitled to expect from performing the contract. (US law is in accord with this position. Rockingham County v Luten Bridge Co 35 F 2d 301 (4th Cir 1929), is a famous illustration awarding the cost incurred up to the time of repudiation plus lost profit and not the contract price when plaintiff completed the construction of bridge after repudiation. Bomberger v McKelvey 35 Cal 2d 607, 220 P 2d 729 (1950) is a little known counter-example. McKelvey bought a lot from Bomberger and agreed to pay Bomberger $3500 to demolish a building on the lot. McKelvey planned to build a large drug store on several lots. McKelvey decided to delay construction of the store and ordered Bomberger not to proceed with demolition. Bomberger demolished the building anyway, claiming that he needed skylights salvaged from the building, which were worth around $540, to fulfil another construction contract. The demolished building was worth around $26,000 and was generating $300 monthly rent. The court held that Bomberger acted reasonably because to obtain substitute skylights might have delayed the completion of his other project by several months. The court made no effort to quantify or to balance the parties’ respective losses.)

This provision, § 649 BGB, would elegantly have solved the problem in White and Carter (Councils) Ltd v McGregor [1962] AC 413 (noted by Goodhart (1962) 78 LQR 263 and Nienaber [1962] CLJ 213). In this case, M’s agent contracted with White and Carter that the latter would display advertisements for M. On the same day, M asked White and Carter to cancel the contract. However, they refused to accept this cancellation and prepared the necessary plates for the display of the advertisements. In accordance with the term in the contract, that if an instalment remained unpaid for four weeks the whole sum due would be immediately payable, they also claimed the full amount due for performance of the whole contract. The claim was one for the debt—the contract price—and not for damages for breach. The House of Lords held that the repudiation of the contract by M did not bring it to an end but only entitled White and Carter to rescind it. White and Carter could affirm the contract, perform their part, and claim the contractual payment for doing so. In the words of Lord Reid, who gave the leading judgment for the majority, ‘If one party to a contract repudiates it in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the other party, the innocent party, has an option. He may accept the repudiation and sue for damages for breach of contract, whether or not the time for performance has come; or he may if he chooses disregard or refuse to accept it and then the contract remains in full effect’ (at 427). For obvious reasons, the plaintiffs preferred the contract price because in the instant case this was more profitable than a claim for damages, although it is questionable whether it is necessary to ascribe ‘full effect’ to the contract even after the employer has made it clear that he does not wish to obtain the performance. For discussion of this case, see Treitel, The Law of Contract, pp 1016–18; the key issue is to identify whether or not the injured party in such a situation has any ‘legitimate interest’ in completing performance of the contract (per Lord Reid, at 431)—if not, then the only remedy for breach will be in damages (see eg, Attica Sea Carriers [1976] 1 Lloyd’s Rep 250 (and see Kerr (1978) 41 MLR 1, at 20–1), which raises the question of whether the claimant has satisfied the

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requirement to mitigate his loss (on which see Lomnicka (1983) 99 LQR 495 and Bridge (1989) 105 LQR 398).

(c) Defining Conformity

§633 BGB is the provision that defines, in a seemingly objective fashion, the requirements of conformity of the performance of the contractor. As is also the case with the parallel provision of § 434 BGB, these rules do not lay down an objective standard but merely reflect what is deemed to be the typical intention of the parties. It is for the parties to define the requirements as to performance. In construction law, for instance, lengthy lists of specifications are regularly used (the so-called ‘Baubeschreibung’).

§633 BGB also serves the additional purpose of providing a starting point for the special rules laid down in the BGB for defective work (eg, the different regime of prescription).

The general rule is that the work is free from physical defects if it has the agreed composition: § 633 II 1 BGB. Insofar as the composition is not agreed, then according to § 633 II 2 BGB the work is free from physical defects when it is appropriate for the assumed use under the contract, or otherwise for the usual use and has a composition which is usual for works of the same kind and which the customer can expect according to the type of work. § 633 II 3 BGB stipulates that it is equivalent to a physical defect if the entrepreneur produces a different work from that ordered or produces the work in too small a quantity. The work is free from legal defects, according to § 633 III BGB, if third parties cannot claim any rights against the customer in respect of the work or only those accepted in the contract. If the employer accepts the work even though he knows of the defect, he must reserve his rights if he is not to be deprived of them, § 640 II BGB. (For details on the requirements as to conformity, see Oetker and Maultzsch, Vertragliche Schuldverhältnisse, p 462 et seq, and for the changes brought about by the recent reform, see, eg, Schudnagies, NJW 2002, 396.)

In the following discussion of the possible available remedies, it is assumed that the work is defective and that the special rules of the BGB in relation to non-conforming performance are applicable. Structurally, these rules correspond to the approach described in the previous section on the contract of sale. We may thus limit our observations to the characteristic features of the contract for work.

(d) Enforced Performance

First, the employer is entitled to demand conforming performance: §§ 634 Nr. 1 and 635 BGB. This is referred to, in analogy to the contract of sale, as ‘subsequent performance’ or Nacherfüllung, but it should be observed that the right to choose between different methods of subsequent performance is given to the contractor. He is in a better position to decide whether curing the defect or the production of a new work is the more appropriate option. In relation to the contract of sale, the choice is given to the buyer.

The right to subsequent performance is another instance of enforced performance. The reason for its special regulation in the BGB is that it is subjected to stricter limits than the right to the primary performance under general principles. In the general part of the law of obligations, the most important limitation on enforced performance is

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impossibility (discussed in detail in chapter 9, p 406 ff). Where the promised result cannot be achieved (ie the defect cannot be cured either way), the contractor is released from his obligation to render subsequent performance according to § 275 I BGB. The contractor is also released if the conditions of § 275 II and III BGB are met and the contractor rejects performance. § 275 II BGB however requires that the expenditure for effecting cure is grossly out of proportion to the performance interest of the promisee. This provision will hardly ever come into play, for § 635 III BGB reduces the threshold considerably. The contractor is entitled to refuse to cure the defect if this would involve disproportionate outlays. In laying down this rule, the legislator had in mind cases where the cost of this effort would outweigh the contractor’s interest in receiving conforming performance from the employer. Therefore, the BGB qualifies the demand for removal of defects by considerations of economic reasonableness. This applies of course with equal force to the claim for the production of a new work. The factors that are to be taken into account are primarily the nature of the defect and the interest of the promisee in receiving performance. (For illustrations of this principle, previously contained in the former § 633 II 2 BGB, see BGH NJW-RR 2002, 661; NJW-RR 1997, 1106; BGHZ 96, 111.)

In English law see Ruxley Electronics Ltd v Forsyth [1996] AC 344 (HL), discussed at p 507: the cost of reinstatement was an unreasonable claim in the circumstances. Typically, the measure of damages in such circumstances should be the diminution of value in the work; however, in Ruxley there was said to be no loss in value on the facts, although their Lordships did uphold the trial judge’s award of a sum to reflect the ‘amenity loss’ of the claimant. The US law in this area is complicated. The contractor is entitled to be paid the contract price less damages (usually the cost of repair) if he ‘substantially performs’. If he does not, then he has a claim in restitution for the value of performance. Plante v Jacobs 10 Wis 2d 567, 103 NW 2d 296 (1960), illustrates the interaction of the first rule and the rule measuring damages by loss in value when remedial cost is much greater. The builder, Plante, misplaced a living room wall by one foot on the narrow side. The court held that Jacobs had to pay the balance due on the contract for the work done (around $5000) and that they could not recover the price of moving the wall (around $4000) because narrowing the room did not lower their home’s market value. Whatever loss the Jacobs suffered from having a smaller living room was uncompensated. (See Chomsky, ‘Of Spoil Pits and Swimming Pools: Reconsidering the Measure of Damages for Construction Contracts’ (1991) 75 Minn L Rev 1445, at 1451–60, where many similar cases are reviewed, the author concluding that the primary focus is the avoidance of economic waste.)

Before the secondary rights of the employer are examined, the relationship between primary and secondary rights must be clarified. The approach adopted in relation to non-conforming performance in principle is the same as that adopted in relation to any other breach under the general rules. The gist of this approach is encapsulated in the Nachfrist-notion. This means that before secondary rights can be enforced, the promisee (here the contractor) must be given the opportunity to bring the performance into conformity with the contract. For this purpose, the employer must as a general rule set a period of time for subsequent performance (§ 635 BGB) before he can avail himself of the secondary rights: recovery of the cost of reinstatement (§ 637 BGB), termination of the contract (§ 323 BGB), reduction in the price (§ 638 BGB) and the recovery of damages instead of performance (§ 281 BGB). The usual

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exceptions to this requirement apply (eg, § 323 II BGB). To this, § 636 BGB adds another set of exceptions, which reflect the special nature of the right to subsequent fulfilment: if the contractor is entitled to refuse reinstatement as unreasonable (§ 635 III BGB), then the employer’s secondary rights obviously do not depend on setting a period of time for subsequent performance; likewise, if subsequent performance has failed or the employer cannot be expected to accept subsequent performance, the employer may instantly resort to his secondary rights.

(e) Recovery of Cost of Reinstatement

If the work is defective, the employer must generally set a period of time for subsequent performance. If performance is not forthcoming during this period, the employer may have the defect cured at his own expense and recover the cost of reinstatement from the contractor according to § 637 BGB. This right of the employer is analysed as a right to recover for expense (Aufwendungsersatz) and not as a right to claim damages. The conceptual difference is important, as since we are not dealing with a claim for damages, the right arises irrespective of whether the employer was answerable (§ 276 BGB) for the breach. The remedy is irrespective of fault. All costs that are objectively necessary prospectively can be recovered whether or not the cure was successful. Furthermore, § 635 III BGB entitles the employer to an advance on costs.

(f) Termination and Price Reduction

The right to terminate (Rücktritt) the contract for breach, if the breach consists of non-conforming performance, follows from § 634 Nr. 3 in conjunction with § 323 or § 326 V BGB respectively. If reinstatement is possible, the employer must first set a period of time for performance (§ 323 I BGB). The exceptions to this have been discussed above. The effects of termination have been discussed in chapter 9, p 432. (See also, Oetker and Maultzsch, Vertragliche Schuldverhältnisse, p 483.) If reinstatement is not possible, no such period of time must be set, § 326 V BGB. It should be recalled that the creditor is not automatically released from the obligation of counter-performance, § 326 I 2 BGB. If he seeks to extinguish his obligation to pay the remuneration, then he must terminate the contract or reduce the price.

Price reduction (Minderung) is governed by §§ 634 Nr. 3, 638 BGB and follows the same requirements as the right of termination, with the notable exception that the breach may be ‘minor’ (§ 638 I 2 BGB). Like the right to terminate the contract, the right to price reduction is a power to change the obligations of the parties to the contract by unilateral declaration. To the extent that the price is reduced, the buyer is released from his obligation to pay the remuneration and any amount already paid may be claimed back according to the rules of restitution, §§ 638 IV, 346 I BGB. The reduction is calculated in the same way as in relation to a contract of sale: § 638 III BGB (see section 2(f) p 510 for details and for an example of the required calculation).

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(g) Damages

Again, we only consider here the right to recover damages for any loss caused by defects in the work. This is because the right to recover damages for loss caused by a defect is subject to a special regime of prescription in § 634a BGB.

The employer is entitled to recover damages instead of performance according to §§ 634 Nr. 4, 281 I 1 BGB, provided that the contractor has not cured the defect within the period of time set for this purpose. The exceptions discussed above apply (note in particular § 636 BGB). The expectation interest covers cost of cure, but as already pointed out the employer may recover such cost under § 637 BGB independently of any fault of the contractor. By contrast, the right to recover damages depends on whether the contractor is answerable for the breach (§ 280 I 2 BGB), which normally requires fault (§ 276 BGB). If the breach of contract consists of failing to effect cure (presupposing that the contractor is not released from that obligation), fault will easily be established considering that financial difficulties do not serve as an excuse and that cure can be performed vicariously. If reinstatement is not possible, the right to recover damages instead of performance does not depend on setting a period of time for subsequent performance. The conditions vary depending on when the impediment to subsequent performance accrued. In the case of initial impossibility, the right follows from § 311a II BGB and turns on whether the contractor could have known of the impediment. In cases of subsequent impossibility, the right follows from § 283 BGB and depends on whether the contractor is answerable for the impediment, ie the fact that reinstatement is impossible. Alternatively, the employer may recover for wasted expenditure according to §§ 634 Nr. 4, 284 BGB.

If the contractor is late in rendering subsequent performance, he is liable for what are known as moratory damages (Verzögerungsschaden—ie damages specifically representing the delay in performance) if the contractor is in default (Verzug). This follows from §§ 634 Nr. 4, 280 II, 286 BGB. However, if due to the defect the employer could not make an intended use of the work (loss of production or in selling it on), this is not analysed as loss caused by delay but is recoverable as simple damages alongside performance (§§ 634 Nr. 4 and 280 I BGB). The opposite view subsumes this type of loss under § 280 II BGB but dispenses with the requirement that the contractor ought to be issued a special warning (Mahnung, as § 286 I BGB would in fact require). The different categorisation of the loss therefore does not make a difference in practice (see chapter 9, p 467, for a fuller discussion).

If the defect causes damage to the other rights of interests of the employer, this loss is recoverable as ‘simple’ damages under §§ 634 Nr. 4, 280 I BGB. When a latent defect materialises, it would not be appropriate to require the setting of a period of time for subsequent performance. Subsequent performance (§ 635 BGB, curing the defect) would not have extinguished the loss. These Integritätsschäden accrue independently of whether performance ultimately fails. Liability depends on whether the contractor is answerable for the breach, ie (typically) whether he was at fault in relation to the defect (§§ 280 I 2, 276 BGB, this is presumed). It suffices to make two further remarks at this stage (see also chapter 9, p 469 ff). The contractor is vicariously liable for any assistants whom he employs in performing the contract: § 278 BGB. Generally speaking, the main contractor is liable for any fault of his sub-contractor. The contractor however is not liable for any fault of the suppliers of materials used for the work. (See,