Numerous (intact) business relationships are currently facing the problem that services can no longer be properly provided due to the coronavirus, which is now also spreading in Central Europe. Above all, the question arises as to which party must bear the economic consequences of this exceptional situation, especially since neither party is to blame and cooperation between the parties has often worked perfectly for years.
Below, you will find a brief overview of the consequences and instruments that the Austrian legal system provides for such cases, and what your company should pay most attention to when taking steps to mitigate the effects of the corona crisis.
1. What does “force majeure” mean?
In a first step, we need to know whether COVID-19 is a “force majeure-event” according to Austrian law.
In contrast to other European countries, the Austrian legal system does not have a legal definition of “force majeure”. Nevertheless, a generally accepted definition has been developed in doctrine and case law. According to this definition “force majeure is anelemental external event which could not have been prevented even by exercising the utmost diligence and is so exceptional that it cannot be considered a typical operational hazard.
It can be assumed that COVID-19 is covered by this definition, especially since the Austrian Supreme Court (“OGH”) classified SARS as “force majeure”, although it caused far fewer problems in Europe.
2. Contract first
The provisions on risk-bearing explained in this article are all of a dispositive nature and only apply if there is no provision in the contract regulating "force majeure". The statutory provisions discussed below may therefore be modified by the parties, which is quite common in practice.
Hence, when assessing the legal impacts of force majeure, it is of utmost importance to examine the contract first. Parties are free to agree on specific provisions regulating “force majeure” within the limits of morality, which must be decided on a case-by-case basis.
3. Types of Default
3.1 Debtor's Default (“Schuldnerverzug”)
The debtor is in default if he fails to fulfil his obligation under the contract at the right time, place and in the proper way.
Furthermore, Austrian law distinguishes between objective (the debtor is not at fault) and subjective (the debtor is at fault) debtor's default. If the debtor cannot be accused of default (objective default), the creditor may either adhere to the contract or withdraw from it by setting a grace period. For a subjective debtor’s default, the same consequences apply and the creditor is entitled to claim damage compensation.
An example of objective debtor’s default is when a company (the seller) is unable to deliver the ordered goods in time due to the corona crisis. In such a case, the buyer may grant the seller a reasonable grace period for the delivery of the goods and declare its withdrawal from the contract after expiry.
The seller should inform the buyer immediately about the default and the reasons for it to avoid violating the contractual duty of care. In addition, the seller should help the buyer to minimise any damage that may occur as a result of the default (if possible). Otherwise, the buyer may claim for damage compensation against the seller even in cases of objective default.
3.2 Creditor’s Default (“Gläubigerverzug”)
On the other hand, a creditor is in default if he does not accept the performance duly offered by the debtor.
Basically, there is no obligation under Austrian law for the creditor to accept the debtor’s performance. However, he commits a breach of duty (“Obliegenheitsverletzung”) when rejecting the debtor’s performance rendered as agreed. According to Section 1447 of the Austrian Civil Code (“ABGB”), breaching this duty has the consequence that the creditor carries the risk for the impairment or destruction of the goods by an event of force majeure.
It should be noted that in terms of payment, the creditor is in turn considered as the debtor. Take the following as an example: If company A sells a machine to company B, company B is the creditor regarding the delivery of the machine. However, regarding the payment of the purchase price, company B is a debtor at the same time.
In a nutshell, if a creditor is currently unable to accept the performance of his contractual partner, he is in creditor’s default (despite the absence of fault). Therefore, the debtor still may claim for payment and no longer bears the risk of the accidental destruction of the respective good.
4. Impossibility of Performance (“Unmöglichkeit”)
Due to COVID-19, many companies are currently faced with the question of which party bears the risk of the impossibility of performance after conclusion of the contract.
Section 1447 ABGB is applicable to all cases of the so-called “subsequent impossibility” (“nachträgliche Unmöglichkeit”) when the performance of the contract becomes impossible between the conclusion and the fulfilment of the contract. In this case, the contract is dissolved and the parties are released from their contractual obligations. If the debtor is not responsible for the impossibility, the debtor is also not liable to pay damage compensation to the creditor. However, if, say, the debtor has not taken appropriate precautionary measures for extraordinary situations, he may be accused of fault and so liable for the creditor’s damages.
To give an example, consider the organization of a sports event. If the event is cancelled due to government regulations such as those implemented to deal with COVID-19, it is likely a case of subsequent impossibility. This would have the consequence that the organizer would no longer be obliged to carry out the event. On the other hand, visitors would be released from their payment obligation or could claim the price for their tickets back. However, visitors may not claim for reimbursement for any other costs incurred (e.g. the price for transport tickets) as the organizer of the event is responsible for the event’s cancellation and may not be accused of fault.
5. Frustration of Contract (“Wegfall der Geschäftsgrundlage”)
Unforeseen situations like COVID-19 may lead to a “frustration of contract” in the sense of Section 901 ABGB. This covers cases when the performance of the contract becomes unreasonable for one of the parties. This is often concerned with circumstances that are usually expected at the time of the conclusion of the contract and whose sudden change could not be foreseen by the parties. However, the line between reasonable and unreasonable unforeseeable risks is hard to strike and always requires a case-by-case examination.
The main difference between Section 1447 (see above) and Section 901 ABGB is that for the latter, performance is still possible, but not reasonable under the changed circumstances.
In 2001 for example, the OGH decided that a war at the destination of a journey led to the frustration of contract because the event of war could not have been reasonably foreseen by travellers. Furthermore, due to the war, taking the journey would have been unreasonable for the traveller in this case. Hence, the travellers were entitled to withdraw from the contract and to reclaim the price.
6. Conclusion and Practical Advice
The current crisis revealed that in many cases the parties did not expect an almost complete shutdown of many businesses due to COVID-19 and therefore did not provide the necessary provisions in their contracts. Such provisions would often be the light in the dark for a way out of the various hassles caused by COVID-19.
Therefore, we recommend taking the current pandemic as an opportunity to review all contracts and add provisions regarding “force majeure” as required. In any case, we are happy to answer any questions and advise you on the various possibilities for tweaking your contracts to make your company “crisis proof”.