BGH's about turn on the calculation of loss or damage in respect of contracts to produce a work

Following a judgement by the Federal High Court of Justice (BGH), loss or damage in respect of contracts to produce a work may no longer be calculated applying imputed repair costs 

In its decision of principle of 22 February 2018 – file no. VII ZR 46/17 – the Federal High Court of Justice (BGH) made a decisive change to its previous jurisprudence on the calculation of loss or damage in respect of contracts to produce a work. Until then, two kinds of damage calculation had been available to the orderer of a work: on the one hand, based on the value as reduced on account of the defect(s), and on the other hand, based on the costs occasioned by their rectification, regardless of whether the defect was actually rectified (calculation of actual damage) or not (calculation of imputed damage). 

The BGH has now put a stop to the calculation of imputed damage in cases where the orderer keeps the work and claims compensation in lieu of performance (so-called 'minor compensation'). In the opinion of the court, the orderer does not incur loss or damage until he actually goes ahead and has the defect rectified. The loss or damage, however, does not consist in repair costs that were not actually incurred, nor in the defect itself. The BGH ruled that in the calculation of imputed damage, there was frequently a threat of overcompensation in respect of contracts to produce a work, and that that was in contradiction with the principle of the impermissibility of enrichment otherwise applied in indemnity law.

The orderer continues to be entitled to compensation for defect rectification costs that were actually incurred, and equally entitled to calculate the loss or damage by applying the difference between the (hypothetical) value of the defect-free work and that of the defective work. If the orderer sells the defective work on without having it repaired, the purchase price is routinely applied in the calculation of the damage. The value of the defect-free work is to be estimated by the court (or determined by a surveyor), and the reduced yield reimbursed by the contractor. If the orderer is able to prove that the purchase price obtained exceeded the value of the thing, he can also request that this difference be reimbursed by the contractor. The entrepreneur ought, after all, not to benefit from the successful deal, over the conclusion of which he has no influence. On the other hand, he does have the right to provide evidence showing that the purchase price obtained fell short of the value of the thing, thus reducing his obligation to provide compensation.

This judgement brings with it some decisive changes in the calculation of damage. The orderer is not left without legal remedy, since he still has the calculation of actual damage and the right to claim the difference between the value of the defect-free work and that of the defective work as options. Having said that, the calculation of imputed damage is a popular resource which now no longer applies in the law in relation to contracts to produce a work. Thus the contractor is better off than he was in the old case law, which is a welcome development. It is now, as a matter of basic principle, not possible for the orderer to enrich himself. Heed should however be paid to the fact that the basic principles of the calculation of imputed damage still remain expressly applicable in the law on the sale of goods, particularly in the case of motor vehicles. Having said that, the judges competent for jurisprudence relating to the sale of goods have at all times referred to case law as it relates to contracts to produce a work, so it will be very interesting to see whether changes can be expected there too and, if so, to what extent.

[31 May 2018]