German retention supply contracts integrate civilian security and defence industries as Germany bolsters its armed forces

In a bid to strengthen its armed forces, the German government is using retention supply contracts to integrate the civilian security and defence industries. These contracts can efficiently integrate civilian companies into the defence plan, and carry both legal and commercial implications for the companies involved.

The main features of these contracts are outlined in the following article:

Retention supply contracts: background and application

Retention supply contracts are nothing new for the security and defence industry, having been used in the past in areas such as infrastructure, health care and energy supply. These contracts enable civilian companies to be involved in the fulfillment of the state's tasks by ensuring that key infrastructure and supply services are provided for at a high level.

Main performance obligations

Retention supply contracts contain two main performance obligations: the assurance that the company will keep certain capacities and services available for the duration of the contract and the commitment to deliver the provided capacities at a contractually fixed time or sufficiently specific event.

Retention supply contracts: before and after the call-off

Retention supply contracts have two contractual phases. In the first contractual phase prior to the call-off, the contractor must ensure the functionality and proper callability of the retained services and carry out functional tests and rectifications. The second contractual phase after the call-off is initiated by the call-off and obliges the contractor to deliver the retained products or services free of defects.

Legal nature of the retention supply contract

Due to the main contractual performance obligations, retention supply contracts are likely to be regarded as a sui generis type of contract or as mixed-type contracts. In the defence sector, tendering procedures should apply to retention supply contracts.

Remuneration

In addition to the remuneration for the provision of goods or services, in the past providers paid almost all other holding costs, regardless of whether the call-off occurred. In view of the complexity of the products and services, remuneration will be regulated in detail. Fixed remuneration components may be employed, such as a standard remuneration for the "pure" reservation, a call-off remuneration in the event of a call-off and individual special conditions for individual services.

Liability provisions

A key part of a retention supply contract that should be regulated is liability provisions that are in line with the interests of the parties. A distinction must be made between the two stages of provision and call-off of the product or service. Defective provision services prior to call-off are not in the interest of the client, but only represent abstract risks. Since the value of the damage would have to be determined based on a hypothetical subsequent procurement in the absence of a call-off, contractual penalty provisions are likely to be appropriate for most breaches of duty in this area.

If the provision product or service is defective after the call-off, a provision that fixes a claim for damages in the amount of the actual replacement procurement is appropriate. Limiting the amount of compensation to an appropriate or average amount or to the value of the compensation for the provision is, however, unlikely to be in the interests of the parties. This is because market conditions are likely to change significantly at the actual time of the call, particularly in the event of an action by the NATO alliance.

International comparisons: US Defense Production Act

With the Defense Production Act (DPA), the US is pursuing a presidential approach. The DPA, as well as the instrument of the reserve contracts, is designed to ensure the country's defence capability through the supply of materials and services from domestic industry. Section 101(a) of the DPA authorises the US President to require, on a priority basis, the acceptance and performance of contracts deemed necessary or appropriate in furthering the nation’s defence.

Summary

Retention supply contracts are an important instrument for the integration of civilian companies into the defence plan of the German Republic. Through these contracts, companies can be involved in the fulfillment of the state's mandate to ensure that key infrastructure and supply services are maintained at a high level of efficiency. Importantly, remuneration and liability also must be regulated at a high level and in detail to protect the interests of both contracting parties. International comparisons, such as the US Defense Production Act, show that other countries are pursuing similar approaches to strengthen their defense capabilities.

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