Key finding
Within the defects liability period, the contractor remains fully liable to bear the costs of remedying defects. The fact that a defect becomes apparent only years after acceptance and that the structure was used without any discernible impairment up to that point does not justify any reduction of the defect remediation costs.
Background
The “betterment” deduction is a sub-category of benefit set-off. According to the principles developed from section 242 of the German Civil Code, which embodies good faith, the injured party should not be placed in a better economic position by the remedy of defects than it would have been in had the defect not existed. The case before the Federal Court of Justice concerned the previously unresolved question whether a “betterment” deduction might be appropriate at least where a hidden defect manifests itself only relatively late, the employer has suffered no loss of use up to that point, and the remediation extends the overall service life of the works.
The facts
In the underlying case, the claimant commissioned the defendant in August 2009 to construct a drive-over silo, which was completed in September 2010. Subsequently, the claimant complained of defects, in particular cracks and unevenness in the concrete surface.
The court of appeal reduced the advance payment claim by one third on the basis that a “betterment” deduction was to be applied. Proceeding on the assumption that the usual service life of the silo was approximately 16 years, the claimant had been able to use the structure for around five years without material impairment. This, in the court’s view, justified a deduction amounting to one third of the costs required to remedy the defects.
The decision of the Federal Court of Justice
The Federal Court of Justice has now made it clear that even in this constellation a benefit set-off in the form of a “betterment” deduction does not arise. First, the statutory rules governing defects under works contract law themselves preclude such a set-off. Those rules do not differentiate according to the point in time at which a defect is identified, notified, or remedied. The content and scope of defect remedies remain fundamentally the same, irrespective of whether a defect is asserted at acceptance, shortly thereafter, or only shortly before expiry of the limitation period. The statute does not provide for any time- or use-based reduction of the obligation to remedy defects.
Secondly, the court points to the legal nature of the right to cure. It is not a claim for damages but a modified performance claim. By remedying the defect, the contractor ultimately fulfils its original obligation to perform. The employer thereby receives, for the first time, the contractually owed defect-free works.
Exception: inevitable costs
The court continues to recognise a limitation for so-called “inevitable costs”. Costs that would have been incurred from the outset even if the works had been properly performed are not recoverable. To that extent, a claim for an advance payment or reimbursement of expenses may be reduced.
Practical significance
For construction practice, the decision provides substantial clarity. Even where defects emerge late or remain undiscovered for a long period, the contractor remains fully liable for the costs of remediation. A “betterment” deduction is, as a rule, excluded under works contract law, save for genuine inevitable costs.
Employers can rely on being able to claim the full costs of remedying defects within the defects liability period, regardless of when the defect arises.
Contractors must be prepared for the fact that arguments such as long-term use or an extended service life will not lead to any reduction.