Legal Bits - COVID-19 as force majeure according to Austrian law?

The COVID-19-pandemic as force majeure event and the implications on contracts

As a result of the COVID-19-pandemic a large number of companies worldwide have closed their offices and factories and this global shutdown has serious consequences on international trade. The restrictions and interruptions of supply chains, transport routes, seaports and airports lead to the question whether enterprises as business partners depending on the proper operation of their supply chain can claim to be exempted from their contractual obligations due to force majeure.

The application of the principle of force majeure may result in the right to cancel the contractual obligations but the Austrian Civil Code does not contain a force majeure regime. However, according to case law, a force majeure event shall be defined as being an elementary external event outside of reasonable control and typical operational risks. The force majeure events are non-foreseeable and unavoidable. Therefore, these events are beyond the control of the participants of a commercial transaction and could not have been avoided with adequate, reasonable means.

Examples of force majeure are wars, civil wars, revolutions, earthquakes, hurricanes and epidemics. However, whether an event constitutes force majeure is to be examined in each individual case. In relation to epidemics or pandemics, the Austrian Supreme Court has ruled that the outbreak of SARS CoV in 2003 shall be qualified as force majeure (see OGH 15 June 2005, 4 Ob 103/05 h).

In general, force majeure is a contractual defense that allows a party of a contract to suspend or discontinue performance of its contractual obligations, as long as the force majeure event continues. The liability of the party in relation to the contract may also be limited in such cases but the parties shall still be obliged to take all reasonable steps to avoid or mitigate the consequences of the force majeure event.

In this context, in a first step, it shall be analyzed whether the performance of the party under the contract is impracticable or impossible because of the direct or indirect consequence of the force majeure event (i.e. COVID-19, coronavirus) and not for a different reason. Only if this question is answered affirmatively, the next step shall be the legal analysis of the force majeure clause in the contract, as the case may be.

If the agreement contains such a clause it shall be assessed whether COVID-19 and the laws and regulations promulgated on the basis of the pandemic constitute force majeure within the meaning of the respective contractual provision and, if so, which legal consequences, duties and deadlines the contracting parties have stipulated for such an event. The business partners shall adhere to these contractual duties and other conditions of the agreement.

In case that the contract does not contain a force majeure provision or if an epidemic or pandemic is not covered by the respective clause, the legal consequences of COVID-19 are subject to the applicable law.

According to Austrian law, in absence of a force majeure regime, such cases of non-performance are assessed on a case-by-case basis according to the rules on default, impossibility or frustration of contract.

In any case of default the burden of proof regarding the absence of fault is with the party which is not able to perform its contractual obligations. In case of a default caused by the debtor, in general, the creditor as the other party can either demand fulfilment of the contract or withdraw from the contract. In addition, the creditor may claim damages from the debtor.

However, due to COVID-19 precautions, respective orders of the governments and shutdowns of productions sites, suppliers may not be granted with access to the premises of their contract partners and may not be able to deliver the ordered goods. The suppliers shall then only be liable for gross negligence and are entitled to deposit the goods. In this case, the creditors bear the price risk but shall not be liable for damages. According to legal academia, as a general rule, the contractual obligations shall be suspended.

If the performance of the contract is conclusively impossible, the debtor is not at fault. In case of impossibility, neither the debtor nor the creditor has to fulfill the respective obligations under the contract.

In such cases, in addition, the legal concept of frustration of contract may be presented by the parties but the jurisdiction is quite reluctant to accept this argument which shall be the last legal instrument to dissolve a contract. Due to frustration of contract, the business partner may have the right to adjust, amend and/or terminate the contractual obligations.

Due to the multitude of possible constellations and varying circumstances, a general statement or analysis is difficult and a concluding assessment will be adjudicated by the Austrian courts. If COVID-19 is the demonstrable reason for the non-performance of the contract, the business partner may be released from the contractual obligations and on a case-by-case basis from liability.

However, the Austrian COVID-19 legislation stipulates that in relation to contracts, which have been concluded before 1 April 2020, the clauses regarding payments of contractual penalties are not applicable if the default is caused by the COVID-19-pandemic.

LEGAL BITS [English Edition] Stefan Gurmann - Legal News Bit by Bit

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This information is provided as a public service to highlight matters of interest and does not imply an attorney-client relationship. All liability for damages arising from the information provided is explicitly excluded. For more legal information please contact me under [email protected].