EMS service – what is it really in legal terms?
“Electronics Manufacturing Services” or ‘EMS’ for short refers to an outsourcing strategy in which companies outsource part of the production process to external EMS service providers. In German-speaking countries, the term “contract manufacturing” is also often used for this form of outsourcing. One component of such production processes is the assembly of printed circuit boards (PCBs) or the assembly of electronic components and devices.
EMS is based on the idea, originating in US law, that the EMS service provider limits its services to providing assembly services according to the client’s specifications as a “service”. This also includes the procurement of the components specified by the client in accordance with the parts list provided by the client. This bill of materials is known in the industry as a “Bill of Material” or “BoM” for short. Since the 2020s, the market for international procurement of electronic components has increasingly developed into a pure Wild West market.
Binding delivery dates and prices, and therefore the conclusion of reliable procurement contracts, are simply no longer possible. As a result, EMS service providers are either trying to avoid certain procurement risks by obtaining so-called “procurement approvals” from the client or to get rid of these procurement tasks completely. The latter means leaving the procurement to the client, who has to provide the EMS service provider with the components for assembly/installation.
Which contract types of the German Civil Code are applicable to EMS services?
The type of contract applicable to the contractual relationship between the EMS service provider as contractor and the client depends on the specific structure of the business relationship. Roughly speaking, the differences arise from whether the contracting parties agree on a price per manufactured and delivered customized product, whether the service only consists of the assembly of the components or whether the EMS service provider is also paid for planning or design services.
Contract for work and delivery (Section 650 of the German Civil Code)
Does the EMS service provider receive a price per printed circuit board manufactured and delivered (product price), which is assembled and manufactured according to the client’s specifications? Then, as a rule, there is a contract for work and materials in accordance with Section 650 of the German Civil Code for non-fungible, customized goods. This applies regardless of whether the client procures and provides the necessary electronic components or the EMS service provider procures the components on behalf of the client.
The classification as a contract for work and delivery according to § 650 means that the law governing purchase contracts applies, with a few elements from the law governing contracts for work and services, for the creation and delivery of products. The following consequences arise for the contracting parties:
- Warranty for each assembled printed circuit board supplied. The warranty period is 2 years from the respective delivery of the printed circuit board.
- No liability of the EMS provider for the components provided by the client. This results from § 645 of the German Civil Code.
- The Client may terminate (cancel) the contract at any time with the consequence that the EMS Provider may nevertheless demand the agreed remuneration less the expenses saved (Section 648 of the German Civil Code).
- The client must carry out the incoming goods inspection in accordance with Section 377 HGB as an obligation. In practice, this provision often leads to the loss of the client’s warranty claims.
- If the EMS service provider procures the components, it is liable for them under the aforementioned warranty. Caution: For this reason, contractual regulations on deviating risk distribution through procurement releases are necessary and recommended in practice. Especially as there are no statutory regulations in this respect under German law.
Contract for work (Section 631 of the German Civil Code) or contract for services (Section 611 of the German Civil Code) due to assembly
If the EMS service provider is only paid for the assembly or installation of the components provided by the client, this regularly constitutes a contract for work and services. Billing is based on a flat rate or a cost price, not a product price. Only if the contract is negotiated individually could a service contract also exist in exceptional cases. There are different consequences depending on the type of contract.
Legal consequences of the contract for work and services pursuant to Section 631 of the German Civil Code:
- The client must accept the work performance.
- Warranty of the EMS service provider for assembly or installation. The warranty period is 2 years and begins with the respective acceptance (Section 634a (1) No. 1 of the German Civil Code).
- The EMS Provider shall not be liable for the components provided by the Client (Section 645 of the German Civil Code).
- The client may terminate (cancel) the contract at any time. As a result, the EMS Service Provider may nevertheless demand the agreed remuneration less the expenses saved (Section 648 of the German Civil Code).
- The Client shall not be responsible for inspecting incoming goods in accordance with Section 377 of the German Commercial Code (HGB).
Legal consequences of the service contract pursuant to Section 611 of the German Civil Code: Although the EMS service provider does not assume any warranty per product, it must carry out the assembly carefully and is liable for its poor performance, if culpable, for at least 3 years from the client’s knowledge of the damage, and up to a maximum of 10 years from the provision of the service. § Section 377 of the German Commercial Code (HGB) does not apply to service contracts, as it does to contracts for work.
Contract for work (§ 631 of the German Civil Code) due to planning or design services
If the EMS service provider also provides significant planning or design services for the client in addition to the pure sale of goods (product sale), this generally constitutes a contract for work and services. This applies regardless of whether the planning services are priced and invoiced separately or whether the EMS service provider includes them in the unit price of the product. This results in the following legal consequences:
- The client must accept the work performance.
- A warranty applies for design and assembly. The warranty period is 2 years and begins with acceptance.
- The EMS provider is not liable for the components provided by the client (Section 645 of the German Civil Code).
- The Client may terminate (cancel) the contract at any time with the consequence that the EMS Provider may nevertheless demand the agreed remuneration less the expenses saved (Section 648 of the German Civil Code).
- The Client shall not be responsible for the inspection of incoming goods in accordance with § 377 HGB.
Conclusion
Even though one often reads that EMS service providers provide services in connection with the manufacture of electronic products, this is generally incorrect under German law. From the EMS provider’s point of view, this would not be legally advantageous at all – in contrast to common perceptions of service contract law. On the contrary, it would actually be very disadvantageous: the EMS service provider would miss out on extremely important practical protection under Section 377 of the German Commercial Code (HGB) and expose itself to extremely long-lasting liability risks.
Arno Lohmanns | Rechtsanwalt (Lawyer), Department Head of IT-Law at BISG e.V.
Mr. Arno Lohmanns is your point of contact for all questions of international contract design, IT and technology law. With 20 years of professional experience in law firms operating internationally and in industrial companies, he will find tailor-made contractual solutions, in German and in English, not only based on German law, but also on the basis of numerous other national legal systems. Arno Lohmanns understands your business model and the commercial context, accompanies you in your business activities in other legal systems, and is at your disposal as a competent negotiating partner, especially in any cross-border situations.
