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Impact of the COVID-19 pandemic on contracts
Shortly after the outbreak of the COVID-19 pandemic in Austria, it became apparent that this crisis would have a massive impact on many contracts (purchase, supply, service contracts, etc.). A large number of contractual partners were suddenly unable to fulfill their performance obligations (on time). This article deals with the consequences of this, but also with new legal regulations that have an impact on contract performance.
“Force majeure”
The COVID-19 pandemic is – as far as can be assessed at this point in time – a case of so-called “force majeure.” This refers to all unexpected external circumstances that prevent a contracting party from fulfilling its contractual obligations and that were not caused by it. In such cases, a legal assessment must first be based on the contractual agreements. If there are no specific agreements, the following applies:
Subsequent impossibility
If the fulfillment of a party’s contractual obligation becomes impossible due to “force majeure,” the other party is not obligated to perform its own obligation. If performance is only temporarily impossible, the other party has the choice of either adhering to the contract or withdrawing from the contract after setting a grace period. Services already rendered (such as advance payments) must be returned in the event of withdrawal from the contract. If the performance has become permanently impossible, the contractual partner of the non-performing party may reclaim any services already rendered, because the performance obligations are cancelled and the contract is void. In such cases, there is generally no liability for damages, as there is no fault.
Impact on the contractor’s obligations
Contractors in particular are facing the problem of not being able to perform their services on time due to the crisis. If no other agreements have been made for cases of “force majeure” (e.g., through agreement with ÖNORM B2110), these are attributed to the contractor’s risk. In such cases, the contractor is not entitled to an extension of the performance period or an increase in the contract price (additional costs). The client cannot terminate a contract for work based on the COVID-19 crisis, unless there is a corresponding contractual agreement. However, they can cancel the work at any time, even without cause.
In this case, the contractor is entitled to the entire contract price, but must deduct any expenses that he has saved as a result of the failure to complete the work.
Default interest
Significant effects of the COVID-19 pandemic on contracts also arise from the Second COVID-19 Justice Accompanying Act (BGBl I 24/2020; www.ris.bka.gv.at/bgbl). According to this, for contracts concluded before April 1, 2020, default interest is limited to the statutory default interest rate under the Austrian Civil Code (ABGB) of 4% p.a. This restriction applies if the debtor fails to make a payment due between April 1, 2020, and June 30, 2020, in full or in part because their economic capacity has been significantly impaired as a result of the COVID-19 pandemic. In this case, any higher interest rates that may have been agreed are not payable, nor does the debtor have to reimburse the costs of extrajudicial collection or recovery measures. The limitation of default interest to 4% applies to all contractual relationships and therefore also applies to purely commercial transactions. The commercial interest rates otherwise customary for these contractual relationships therefore do not apply. The restriction applies until June 30, 2022. Out-of-court collection and/or enforcement measures taken by the creditor up to this date must therefore be financed by the creditor. However, it is possible to assert the claim for payment in court at any time.
Contractual penalties
In addition, the Second COVID-19 Justice Accompanying Act (BGBl I 24/2020; www.ris.bka.gv.at/bgbl) states that agreed contractual penalties are not due if the delay in performance results from an economic impairment caused by the COVID-19 crisis or if the performance is made impossible due to restrictions on economic activity caused by the COVID-19 crisis. This rule also applies to contractual penalties that are not based on fault. The provision applies to contracts concluded before April 1, 2020. The provision will also only expire on June 30, 2022, and is therefore applicable if the delay in performance occurs between April 1, 2020, and June 30, 2022. If a delay in performance is only partially attributable to the current COVID-19 crisis, only a proportionate exemption from the contractual penalty will apply.