The Federal Court of Justice (BGH) gives precedence to protecting the creditor

In a further judgment, the Federal Court of Justice (BGH) has clarified the precedence in insolvency law of protecting the creditor. In its judgment of 19 October 2023, the Federal Court of Justice decided that when a set-off situation is created, invalidity under insolvency law only touches the detrimental effect to the creditor. The underlying transaction (the termination, in this case) is not affected. The validity of the termination does not stand in the way of contesting the creation of a set-off situation.

Background to the decision – Federal Court of Justice gives precedence to protecting the creditor

The contractor and the principal conclude a construction contract (contract 1) and another second contract (contract 2).

The contractor subsequently files to open insolvency proceedings. When the principal finds out, it terminates both contract 1 and contract 2 under Section 8(2) VOB/B (termination by principal) in each case. The principal accepts the work carried out up to the two terminations. The insolvency proceedings over the contractor’s assets are then opened, and an insolvency administrator is appointed. The insolvency administrator requests the outstanding remaining wages for contract 2 from the principal. The principal sets off the outstanding wages against claims for damages from contract 1 under Section 8(2) sentence 2 VOB/B.

The Federal Court of Justice decision giving precedence to protecting the creditor

The principal is to pay the wages from contract 2 in full. The principal’s setting them off against claims for damages from contract 1 is not permissible for reasons of insolvency law.

Only the creating of a set-off situation, which has a detrimental effect on the creditor, is included in this invalidity under insolvency law. The underlying transaction, i.e. the termination, is not affected by this.

If the set-off did affect it, the contractor’s claim to the remaining wages would no longer be available to the assets involved in the insolvency proceedings (in their full amount). Therefore, creating a set-off situation is detrimental to the creditor. This thereby meets the condition for contesting the insolvency proceedings. 

Impact of the judgment on the practice of construction law

Although a principal may terminate a construction contract for an important reason under Section 8(2) no.1 VOB/B, it may not set off the claims for damages arising from this against claims of the insolvent company’s or its insolvency administrator’s arising from another contract. According to this latest decision, even setting off within the same contract seems to be more difficult.

The principal’s possibility to rescue its still-existing claims for damages from loss to insolvency by creating a set-off situation has been further restricted. Owing to the restriction of the legal consequences at the expense of the party entitled to terminate, terminating under Section 8(2) VOB/B has lost its bite.

Those ordering construction work must be aware of the new legal situation and protect themselves in advance against their contracting partner becoming insolvent with the potential of securities (such as guarantees and retaining compensation). Termination as laid down in the VOB/B precisely in case of insolvency is no longer the safest option.

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