Mon, Dec. 10, 2007

Liability for Related Contracts

CK - Washington.   The owner of a remotely sited house ordered from one company the installation of a power and heat plant, and from another company a heating system that draws on the plant. When the building is not properly heated, the owner refuses payment to the second company and rescinds its contract. The power and heat plant has a much lower output than the owner had been advised to order but had not ordered. In addition, the owner's low demand for electricity from the plant fails to make it generate enough heat even if he had ordered a plant with higher output.

That is the situation facing the German Supreme Court in the matter VII ZR 183/05 which it decided on November 8, 2007. The December 7, 2007-published opinion explains the relative responsibilies and liabilities under §633(2)(1) of the German civil code, Bürgerliches Gesetzbuch. The factual constellation is not particularly unusual. It occurs often when a contract depends on the performance of another and both contracts relate to different parties.

Here, the court remanded the dispute to the Munich court of appeals after defining the relative responsibilities. First, it notes that the contract is not substantially performed when the resulting work fails in the functionality the parties contracted for. Second, a default resulting from a failure in the performance of a related contract is excused when the obligations of examination and disclosure, such as by testing and warning of deficiencies, have been met. Third, the evidentiary burden lies with the party demanding payment for its performance. The court clarifies that the first rule applies also after the revisions to the law of obligations in the German civil code.

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