You should prepay a contractor

Technical literature, comments and manuals Construction contract law according to BGB and VOB / B Part 2 VOB / B § 16 VOB / B Payment C. Advance payments (§ 16 Paragraph 2)

plant

Construction contract law according to BGB and VOB / B

editor

Mark von Wietersheim

I. Agreement on advance payments (Paragraph 2 No. 1)

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Advance payments can be agreed between the contractual partners when or after the conclusion of the contract. If the agreement is only made after the conclusion of the contract, sufficient security must be provided to the client upon request in accordance with Section 16 (2) No. 1 VOB / B. Furthermore, the advance payment is subject to interest at 3 percent above the base rate of § 247 BGB, unless otherwise agreed.

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According to Section 16 (2) No. 1 VOB / B, the contractor is not simply obliged to provide security, but only if the client expressly “requests” this. Prepayments can therefore be made without security regardless of whether the agreement was made at or after the conclusion of the contract (exception: contracts according to the broker and property developer ordinance). However, the client should be aware that if the contractor pays in advance without providing a security, he is running an incalculable financial risk, which can lead to total loss in the event of the contractor's insolvency.

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Example:

Clause for an agreement of advance payments upon conclusion of the contract

The contractor can request advance payments for his steel construction services against a security deposit in the form of a bank guarantee based on the client's sample. The security must include the advance payment, including interest, and the costs incurred as a result of the advance payment. In accordance with Section 16 (2) No. 1 VOB / B, advance payments are subject to interest at 3 percent above the base rate of Section 247 BGB; they are offset against the next payments due, provided that they are used to compensate for services for which they were granted.

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Suggested wording: Subsequent agreement of advance payments with security deposit

Supplementary agreement

to the contract of ...

about prepayments

between


- Client -

and


- Contractor -

§ 1

On ... the contracting parties concluded a contract for the construction of the steel bridge ... in ... Because raw material prices have risen sharply in the meantime, the contracting parties agree to make subsequent advance payments to ensure a smooth construction process.

§ 2

The contractor can request advance payments for his steel construction services against a security deposit in the form of a bank guarantee based on the client's sample. The security must include the advance payment, including interest, and the costs incurred as a result of the advance payment.

§ 3

In accordance with Section 16 (2) No. 1 VOB / B, advance payments are subject to interest at 3 percent above the base rate of Section 247 of the German Civil Code (BGB).

§ 4

The advance payments will be offset against the next payments due, insofar as they are used to compensate for services for which advance payments have been made.

§ 5

In addition, the contractual provisions of ...

Place and date

signature

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If the client demands security, it must include the advance payment granted, any interest incurred and any other costs that may arise from the advance payment.

Figure 4: Scope of the security deposit

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If a bank guarantee is provided, it should be noted that the amount shown in the guarantee must include the advance payment, interest and any costs incurred. A clause according to which the surety agrees to pay an amount equal to the advance payment “plus Interest and costs ”is ineffective.

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Unless otherwise agreed by the contracting parties, interest on the advance payment is 3 percent above the base rate of Section 247 of the German Civil Code (BGB). The current base rate is shown in

● 

Business section of daily newspapers or on the

● 

Internet site of the Deutsche Bundesbank (www.bundesbank.de) communicated, but can also with all others

● 

Banks and savings banks are asked.

Interest begins when the advance payment is received and ends when it is offset against the next payment due. If the contractor has provided his services, the security purpose no longer applies and the security must be returned to him.

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In practice, security is regularly provided in the form of a bank guarantee, whereby the regulations of Section 17 VOB / B must be observed.

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Suggested formulation for an advance payment guarantee:

Guarantee deed

Advance payment guarantee

the contractor

and the client

concluded a contract on ... [contract number].

According to the terms of this contract, the contractor must provide a guarantee as security for an advance payment until the advance payment has been settled by offsetting payments due.

The surety

assumes the absolute guarantee for the contractor according to German law and undertakes to pay any amount up to the total amount of

…, Amount in words …

to be paid to the client.

The defense of contestation, offsetting and advance action in accordance with §§ 770, 771 BGB is waived. The waiver of the objection of offsetting does not apply to undisputed and legally established counterclaims by the contractor.

The guarantee is unlimited; it expires with the return of this guarantee document. The guarantee claim does not expire before the secured main claim. Agreements made between the contractor and the client regarding the statute of limitations for the main claim made after the guarantee contract has been concluded are only binding on the surety with his written consent.

The place of jurisdiction is the seat of the body responsible for representing the client in proceedings.

Place and date
signature

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Suggested formulation for a claim against the surety:

[Sender]

[Address]

[Date]

Construction project ...

Dear Sirs and Madames,

As can be seen from the copy of the attached guarantee certificate (Annex 1), you have undertaken to pay us any amount for the advance payments made by us up to an amount of _ ... if the ... GmbH should not provide any services for which advance payments have been made.

The ... GmbH was repeatedly requested in writing (Annex 2) to carry out the services agreed with the construction contract dated ... [date] (Annex 3). The company has not fulfilled its contractual obligations and has since filed for insolvency proceedings (Annex 4).

The insolvency administrator did not respond to our last letter of ... (Annex 5), so that we have since terminated the building contract in accordance with Section 8 (1) No. 2 VOB / B (Annex 6) and we have reason to claim against you from the guarantee to take.

The amount of our claim amounts to ... We request you to transfer this amount to the following account by ... [date]: ...

With best regards

signature