Towards the end of 1968 the plaintiff ordered a steel shed from the defendant for use as a grain store. The defendant confirmed this order in a printed document containing his terms of supply, delivery and installation VLMB). The defendant experienced some delay in obtaining the steel girders, and then further difficulties caused him to abandon the contract. The plaintiff brought suit for performance on the basis that this withdrawal was unjustified, and the court ordered the defendant to deliver the shed Zug-um-Zug against payment of the agreed price. The defendant started building on 24 August 1971 and completed the erection of the shed by the end of the year.

In this suit the plaintiff claims damages for the delay, and the defendant relies on its VLMB terms as excluding such a claim.

In a partial judgment the Landgericht rejected the plaintiff's claim for damages for loss suffered after 1 August 1969, and the Oberlandesgericht substantially rejected the plaintiff's appeal. The plaintiff's further appeal is now allowed:

Reasons

The Court of Appeal was of opinion that the plaintiff's claim for damages for profits lost through the delay in constructing the shed was excluded by the terms of the contract, in particular by para. 6 no. 5 para. 2 VOB/B (1952), a term incorporated into the contract by means of a reference in the VLMB terms. It was true that in a case where the debtor had acted intentionally or with gross negligence, such a restriction of liability might be ineffectual under paras 276 para. 2, 242 BGB, but the Court of Appeal found it unnecessary to decide this as it was not clear that the defendant's original delay was either intentional or grossly negligent. Admittedly the defendant's refusal to perform was objectively unjustified (indeed, both lower courts found it unnecessary to take proof before holding the defendant bound to perform), and the defendant was fully aware of all the facts that rendered its refusal to perform unjustified, but the plaintiff had failed to show that the defendant was consciously acting contrary to the law.

This opinion of the Court of Appeal is in error, for the reasons given by the appellant.

1. Let it be assumed that the defendant's VLMB terms were incorporated in the contract. These general terms of business do not rule out all claims for damages by the customer in respect of delay in performance by the contractor, as the Court of Appeal rightly held. The VLMB terms did purport to incorporate by reference the VOB/B (1952) terms, but we need not decide whether this incorporation was effective because

2. the clause in the VOB/B (1952) terms which limits liability to direct loss not including lost profits does not apply when, as here, there is a deliberate and conclusive refusal to perform. For this simple reason the judgment under appeal must be reversed.

(a) The VOB/B terms do not regulate all instances of disturbance of contractual performance (Leistungsstörung). For example, para. 8 does not apply if the contractor's obligation becomes permanently incapable of performance (BGH NJW 1958, 217; other references omitted). Furthermore, the customer whose contractor commits a positive breach of contract by deliberately and conclusively refusing to perform immediately after the formation of the contract and before performance is due can sue for damages for non-performance notwithstanding para. 8 no. 3 para. 2 sent. 2, and does not need to show that he no longer has any interest in actual performance (BGH 20 Jan. 1969, LM BGB para. 326 (G) no. 1). In considering whether para. 8 no. 3 applied to cases of positive breach of contract, the court was principally concerned with the relationship between cancellation (withdrawal of the order) and the withdrawal from the contract (Rücktritt) provided for in the BGB (see BGH NJW 1974, 1080, 1081 with further references). That is not in point here.

(b) Nor do the VOB/B terms regulate all cases of delay in performance. For example, this court has held that para. 6 no. 5 para. 1 VOB/B (1952), which allows a contractor to make a premature set-off for executed works in a case where the building is interrupted, does not apply to a contractor who unjustifiably refuses to proceed (reference omitted). It is true that the limitation of liability contained in para. 6 no. 5 para. 2 VOB/B (1952), whereby the party responsible for 'obstacles to performance' need only compensate the other party for the direct harm he suffers and not for lost profits is not restricted to cases falling under para. 1. The term 'obstacles to performance' is to be widely construed, as including delay by the debtor (BGHZ 48, 78, 81). Thus the limitation of liability does apply in cases falling under para. 5 no. 4 VOB/B (1952), that is, when the contractor is late in beginning the works or is in default in finishing them, and even when the order is withdrawn under para. 8 no. 3 para. 1 (BGHZ 48, 78, 80f.; 62, 90, 92).

But for delays due to a defect which has come to light in the execution of the works and for which he is responsible, the contractor is liable in full under para. 4 no. 7 sent. 2 (BGHZ 48, 78, 79; 50, 160, 164f.; BGH NJW 1975, 1701, 1703 ...). The same may exceptionally be true under para. 8 no. 3 para. 2 sent. 2 if the order has been withdrawn and the customer, for that very reason, has no further interest in the completion of the work (BGHZ 50, 160, 168; 62, 90, 92). Finally, if the contractor gets into financial difficulties and can no longer perform, the customer's claim for damages for the work remaining undone is not limited by para. 8 no. 2 sent. 3 VOB/B (1952) (general view).

(c) It follows from this that, given its meaning and purpose, the limitation of liability in para. 6 no. 5 para. 2 VOB/B (1952) has only a limited area of application. It is designed to reduce the risk borne by a contractor who is able and ready to perform, but who is beset with organisational problems - not always precisely predictable - such as procurement of labour and materials or of timing of the work. Should he nevertheless be liable, his liability for damage due to delay, provided it is not attributable to incompetence in the building, is in principle limited in extent, that is, he is not liable for lost profits, the extent of which is often very hard to foretell.

This seems fair enough on the customer. He need not put up with losing profits forever, since he can always withdraw his order under para. 5 no. 4 or para. 8 no. 3 after giving the contractor a proper period within which to perform (see also para. 6 no. 6 VOB/B (1952)). This well-balanced rule does adequate justice to the interests of both sides.

(d) But it is another matter if the contractor deliberately and conclusively refuses to perform the contract at all when performance is due. This is not a case of delaying the beginning of the works, but of trying to frustrate them. He is trying to avoid finishing the work late by not starting it at all. This is not one of the cases covered by para. 5 no. 4 VOB/B (1952). A contractor who behaves in this way does not merit any alleviation such as the limitation of liability in para. 6 no. 5 para. 2 VOB/B (1952). There can be no reason for putting him in the same position as a contractor who does his best to perform the contract as soon as he can. To treat him identically would be to pervert the purpose envisaged by the limitation of liability, for instead of just reducing the unpredictable risks which a contractor faces in performing the contract, it would encourage him to abandon the contract when it ceases to interest him. This would be unfair on the customer. Just as the customer should not be induced to use mere delay on the part of the contractor as a ground for terminating the contract (see BGHZ 62, 90, 92), so the contractor should not be encouraged to free himself from the contract in advance.

A contractor who is in default by reason of a deliberate and conclusive refusal to perform (see BGHZ 2, 310, 312) is thus to be treated in the same way as the contractor who commits a positive breach of contract by refusing to perform the contract immediately after its formation and before performance is due (see BGH 20 Jan. 1969, LM BGB para. 326 (G) no. 1). This is true even when the customer affirms the contract and, instead of claiming damages for non-performance, successfully requires the contractor to perform. The customer's claim for damages under para. 286 para. 1 BGB covers all damage due to the delay, including lost profits (reference omitted).

3. According to the findings of the Court of Appeal, the defendant's refusal to carry out the commissioned work was unjustified. The defendant should have set about procuring the steel girders as soon as the contract was concluded, or at least when it learnt from the plaintiff that the foundations were ready. It did not do so. When the plaintiff set a time limit for the erection of the shed and threatened to sue for damages, the defendant first said that delivery should be possible by the end of July 1969, and then, in mid-July, withdrew from the contract on the pretext that performance had become impossible. It maintained this deliberate and conclusive refusal to perform until the prior trial, when it was ordered to deliver the shed.

Under these circumstances, as explained above, the defendant cannot rely on the limitation of liability contained in para. 6 no. 5 para. 2 VOB/B (1952). The other observations of the Court of Appeal need not detain us.

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