Two kinds of termination — and why the difference decides the money
German construction law knows two entirely different terminations. The free termination (freie Kündigung, § 648 BGB) belongs to the principal alone — at any time, for any reason or none. The price is steep: the contractor keeps, in principle, the entire agreed remuneration, reduced only by the expenses he saves and by what he earns, or could earn, elsewhere. The statute even presumes at least 5 per cent of the remuneration attributable to the unperformed part in his favour.
Termination for cause (§ 648a BGB) works differently. Either party may use it — the contractor included — and no notice period applies. In exchange the settlement is harsh: the contractor is paid only for the part of the works performed up to the termination (§ 648a(5) BGB).
That is why court battles rarely turn on whether the contract “could” be terminated at all. The real stake is the settlement regime: full remuneration minus savings, or payment for the completed works only. On larger projects the difference runs into hundreds of thousands of euros — and that difference is what most post-termination lawsuits are about.
When does good cause exist (§ 648a(1) BGB)?
The statute defines good cause narrowly: it exists where the terminating party — taking into account all circumstances of the individual case and weighing the interests of both sides — cannot reasonably be expected to continue the contract until completion of the works. That is a high bar. A single delay, a quarrel over the quality of one trade or ordinary friction on site will normally not suffice. Courts look at the whole picture: the gravity of the breach, the history of the cooperation, the prospects of improvement and whether milder remedies were exhausted.
Typical grounds on the principal’s side (the principal terminates): the contractor abandons the site, works so slowly despite warnings that the deadlines become unrealistic, produces serious and mounting defects during execution despite demands to remedy them, or inflates measurements and invoices in a way that destroys trust.
Typical grounds on the contractor’s side (the contractor terminates): the principal fails to pay due interim invoices despite reminders, does not hand over the site, withholds designs or permits without which the works cannot proceed, or permanently obstructs proper execution. A separate route is the demand for security for the contractor’s remuneration (Bauhandwerkersicherung, § 650f BGB) — it has its own termination mechanism and is often the safer path for the contractor.
Insolvency of the other party. A petition for insolvency does not end the contract automatically, and how far it justifies a termination under § 648a BGB is debated — the limits are drawn by insolvency law. Under a VOB/B contract the principal has an express basis in § 8(2) VOB/B. The Federal Court of Justice upheld that clause where the contractor had itself filed for the opening of insolvency proceedings (judgment of 7 April 2016, VII ZR 56/15).
Before you terminate: a cure period or a formal warning
Where the good cause consists in a breach of a contractual duty — and it almost always does — termination is permitted only after a deadline set for curing the breach has expired without result, or after an unsuccessful formal warning (Abmahnung). This follows from § 314(2) BGB, applied mutatis mutandis via § 648a(3) BGB. Immediate termination remains possible in exceptional cases: where the other side seriously and finally refuses performance, or where special circumstances — trust destroyed in a way no deadline can repair — justify ending the contract at once.
In practice many terminations fail at precisely this stage. An effective notice names the specific breach, sets a realistic deadline and unambiguously announces termination should the deadline pass without result. A letter vaguely urging “better cooperation” does not prepare a termination — it merely postpones it.
Time works against the hesitant. The right must be exercised within a reasonable period after the terminating party learns of the cause (§ 314(3) BGB, applied mutatis mutandis). There is no fixed limit, but whoever lets the deadline pass and then carries on with the contract for weeks as if nothing had happened signals that continuing is acceptable — and may lose the right to terminate through self-contradictory conduct.
Form, reasons, partial termination
Written form only. The termination of a construction contract must be declared in written form (§ 650h BGB) — a document with a handwritten signature, delivered to the other party. A plain e-mail, a scanned signature or a messenger text does not satisfy the requirement. The VOB/B demands written form as well (§ 8(5), § 9(2) VOB/B). This is the most easily avoidable reason for an invalid termination — and a surprisingly frequent one.
Reasons. Stating the grounds in the termination letter is, as a rule, not a condition of validity. The case law does, however, only allow reliance on grounds that objectively existed at the moment of termination — circumstances that arose later cannot be added to rescue a defective termination. Sensible practice: describe the known grounds in the letter and note that the list is not exhaustive.
Partial termination. The contract may also be terminated for a part of the works, but only for a part that can be clearly delineated from the agreed scope (§ 648a(2) BGB) — one of several buildings, for instance, or a self-contained trade. A termination of a “part” that cannot be delineated is invalid.
A failed termination for cause — what happens then
Here the paths of the two parties diverge dramatically. A principal’s termination lacking good cause is generally upheld as a free termination under § 648 BGB: the contract ends, but the settlement follows the rules favourable to the contractor — full remuneration minus saved expenses. For the principal this is the most expensive scenario of all, because he also pays for works nobody will perform.
A contractor’s termination has no such safety net — the contractor has no right of free termination. Whoever leaves the site without a sound basis breaches the contract himself and usually hands the principal a good cause for termination, with the risk of liability for the costs of completion by a third company. The contractor must therefore be more certain of his ground than anyone else — and all the more careful with the warning stage.
A separate trap is the premature termination: declared before the cure period has expired. Such a termination can be invalid even where the underlying cause was real — patience until the deadline runs out is cheap, ignoring it is very expensive.
After the termination: state of the works, acceptance, money
Joint determination of the state of the works. After termination each party may demand that the other cooperate in a joint determination of the progress achieved (§ 648a(4) BGB). The sanction for refusing has teeth: whoever refuses to cooperate, or fails to attend an agreed or reasonably set appointment, bears the burden of proof for the state of the works at the time of termination. How much depends on that, we show in our article on the burden of proof for construction defects.
Acceptance is still needed. Termination does not replace acceptance. The remuneration for the completed part generally falls due only once that part has been accepted — so demand acceptance of the executed works right after the termination instead of letting the dispute freeze your money for years.
The settlement. The contractor is entitled to the remuneration attributable to the works performed up to the termination (§ 648a(5) BGB). In practice this requires an invoice that cleanly separates the performed from the unperformed — usually a final invoice. How to draw one up so that it stands in court, we explain in our article on the final invoice (Schlussrechnung). For defects in the completed works the contractor remains liable under the ordinary rules — the termination writes nothing off.
Damages. Termination does not exclude claims for damages (§ 648a(6) BGB). A principal who terminated because of the contractor’s breaches can claim, for example, the completion costs exceeding the agreed price. A contractor who terminated because of the principal’s breaches can pursue the lost profit on the unperformed part — but has to calculate and prove it concretely.
Terminating without stumbling — the right order of steps
Document the cause: letters, photographs, site diary, protocols. Send a written notice — the specific breach named, a realistic deadline, an unambiguous announcement of termination, delivery with proof. Once the deadline has passed without result, act instead of drifting back to business as usual. Declare the termination on paper with a handwritten signature and a description of the grounds. Demand a joint determination of the state of the works immediately and record the site in photographs. Then prepare a settlement that cleanly separates performed from unperformed works.
VOB/B: its own catalogue of grounds — and the defects-clause trap
Where the parties incorporated the VOB/B, terminations run first along § 8 (principal) and § 9 (contractor) VOB/B. The principal may terminate, among other cases, upon the contractor’s insolvency (§ 8(2) VOB/B) and — after a fruitless deadline combined with an announcement of termination — where the contractor fails to remedy defects already during execution (§ 4(7) VOB/B) or is in delay (§ 5(4) VOB/B). The consequences bite: the principal may have the works completed by a third party at the contractor’s expense and claim damages on top.
Around exactly this mechanism the Federal Court of Justice delivered one of the most consequential construction judgments of recent years. On 19 January 2023 (VII ZR 34/20) it held: where the VOB/B was not incorporated as a whole — and any modification, however small, opens the door to judicial review of its clauses — the principal-used clause permitting termination for defects before acceptance (§ 4(7) sentence 3 in conjunction with § 8(3) no. 1 sentence 1 VOB/B) is invalid. It unreasonably disadvantages the contractor, because by its wording even a minor defect would justify ending the entire contract. The principal is then left with § 648a BGB alone — with its high threshold of unreasonableness.
The practical lesson for a contractor served with a “VOB/B termination”: check who introduced the VOB/B into the contract and whether it applies unchanged. If the principal drafted the terms and departed from the VOB/B in even one point, the basis of the termination may be invalid — and an invalid termination for defects frequently ends up as a free termination, with the full settlement in the contractor’s favour. A contractor who raised his concerns about the specified method of execution in good time gains additional protection through the Bedenkenanmeldung, the notice of concerns.
Termination by the contractor (§ 9 VOB/B) is available in two situations: where the principal omits an act incumbent on him and thereby makes it impossible for the contractor to perform, or where he fails to pay a due amount or otherwise falls into debtor’s delay. Here too the sequence is mandatory: first a written deadline with the declaration that the contract will be terminated should it expire without result, then the written termination. The executed works are settled at the contract prices, and the contractor is additionally entitled to reasonable compensation (§ 642 BGB) — further claims remain possible.
What this means for your company
- Do not leave the site unprepared. An unfounded stop of the works is a gift to the principal — your termination turns into his good cause and a bill for the completion costs.
- Non-payment is a good cause, but only after the procedure. A written payment deadline with an announcement of termination, its fruitless expiry, then the written termination — in that order. Consider demanding security under § 650f BGB in parallel.
- Mind the form and the delivery. Paper, handwritten signature, proof of delivery. A termination by e-mail is an invalid termination.
- Count the money before you decide. After a termination under § 648a BGB you are paid for the executed works only. The lost profit on the rest is recoverable solely as damages — if you prove the principal’s breaches and the amount of the loss.
- The day of termination is the day of documentation. Demand the joint determination of the state of the works, photograph everything, secure the measurements. The entire settlement depends on the state of the works at that moment.
Frequently asked questions
Can I stop the works when the principal does not pay interim invoices?
Non-payment of due interim invoices is one of the most frequent good causes on the contractor’s side. Before you stop the works, set a written payment deadline with an announcement of termination and let it expire without result. Whoever leaves the site without these steps risks being the one who breaches the contract.
Is a termination by e-mail valid?
No. The termination of a construction contract requires written form (§ 650h BGB) — a document with a handwritten signature, delivered to the other party. An e-mail, a scanned signature or a messenger text does not satisfy the form. The VOB/B requires written form as well (§ 8(5), § 9(2) VOB/B).
The principal terminated without good cause — what about my remuneration?
Such a termination is generally treated as a free termination under § 648 BGB. The contract ends, but you keep, in principle, the entire agreed remuneration minus saved expenses — the statute presumes at least 5 per cent of the remuneration attributable to the unperformed part. Documenting the state of the works at the moment of termination is crucial.
How quickly must I terminate after learning of the cause?
The right must be exercised within a reasonable period after knowledge of the cause (§ 314(3) BGB, applied mutatis mutandis). There is no fixed limit, but consistency matters: whoever continues the cooperation for weeks as if nothing had happened signals that continuing is acceptable — and may lose the right.
Is an acceptance of the works still necessary after the termination?
As a rule, yes. The termination does not replace acceptance, and the remuneration for the completed part generally falls due only once that part has been accepted. Demand the joint determination of the state of the works right away and request acceptance of the executed part.
This overview draws, among others, on §§ 314, 648, 648a and 650h BGB, §§ 8 and 9 VOB/B and the judgments of the Federal Court of Justice of 7 April 2016 (VII ZR 56/15) and of 19 January 2023 (VII ZR 34/20). This article is for information purposes and does not replace legal advice in an individual case.