25.03.2020
“Force majeure”, “loss of the basis of the transaction”, “impossibility” – an explanation of terms on the occasion of the Covid 19 pandemic
The Covid-19 pandemic (or corona crisis) is currently having a dramatic impact on daily life in large parts of the globe. The virus and the measures taken against it also raise practical legal questions in business life, such as the legal consequences if the provision of contractually owed services is delayed or even becomes completely impossible.
Such cases occur in many different forms: a concert event for which tickets have already been sold can no longer be held (e.g. due to official orders or new regulations), certain pieces of furniture that have already been ordered can no longer be manufactured due to a company closure, travel to a booked apartment is no longer possible, etc.
There are many legal terms in circulation in connection with legal solutions to these problems, which are briefly explained below.
I. “Subsequent impossibility”
I.1. Contracts are – as a rule – concluded under the assumption that fulfilment will actually be possible. For example, someone who orders a custom-made table from a carpenter expects that this table can be manufactured (just as the carpenter himself assumes this).
However, it may happen that the fulfillment of a contract is actually impossible or becomes impossible after the conclusion of the contract.
I.2. The most practically relevant case of impossibility (also in connection with the Covid-19 pandemic) is that of subsequent impossibility: the provision of services is after Conclusion of contract permanently impossible.[1]
A case of subsequent impossibility would arise, for example, if a certain, unique antique (such as the table on which Beethoven wrote one of his symphonies, or the Porsche in which a southern Austrian governor liked to be photographed) were to burn after the conclusion of the purchase contract but before it was handed over to the buyer. The purchase contract can then permanently can no longer be fulfilled – the irreplaceable item that the seller should have handed over to the buyer in fulfillment of the contract was destroyed.
I.3. Mere delays in the performance of the contract, even over several months, do not usually lead to the impossibility of performance. temporary By the way, there is no such thing as impossibility - impossibility only exists if there is a permanent (almost final) obstacle to the provision of the service and it can be assumed with almost absolute certainty that the service cannot be provided in the future either.[2]
If a carpenter cannot complete an ordered table on time because his business has been temporarily closed due to an official order, this is not a case of impossibility - it can generally be assumed that the table will be able to be manufactured again later. Rather, it is only a so-called Debtor default – the carpenter owes a service which he cannot provide at the agreed time (more on this shortly).
I.4. The situation would be different if it was a absolute Fixed deal is, i.e. when the time of performance of the contract is so important that the creditor has no interest in later performance. In a absolute fixed transaction Impossibility already exists if performance cannot be carried out at the agreed time.
In principle, it can generally be assumed that the customer is still interested in fulfilling the contract, even if the carpenter is late in delivering the table, even if it takes place at a later date. The situation is different, for example, in the case of a contract for a wedding band to perform - if the band does not play at the scheduled celebration, the wedding couple is no longer interested in a later fulfillment as they have already happily docked in the harbor of marriage; the same applies if the caterer does not provide his food and staff in time for a birthday party.
Whether a specific contract is a fixed-term transaction can result from the nature of the transaction (appearance at a wedding) or from the (express) contractual agreement.
I.5. If impossibility exists (either due to a permanent obstacle or an absolutely fixed transaction), it must be clarified whether this impossibility arose accidentally or is attributable to one of the contracting parties (i.e. was caused by it).
Because the Covid-19 pandemic cannot be attributed to any contracting party (although cases may arise in which the debtor could have taken certain necessary measures to ensure that he could have provided his performance despite the pandemic and the impossibility is therefore attributable to him), the accidental subsequent impossibility a role. If the performance of the service becomes impossible by chance, the solution is simple: the contract is considered to be cancelled, the performance obligations of both parties cease to apply: the band no longer has to perform, the bride and groom no longer have to pay the band. Services already provided (such as a deposit) must be deferred.
Whether a declaration of withdrawal is necessary for the termination of the contract or whether the contract is terminated without such declarations is controversial in legal theory,[3] It is therefore advisable to communicate with the contractual partner as soon as it becomes clear that it is impossible to provide the service.
II. Delay
Other cases in which performance is not carried out within the agreed time (i.e. if it is not impossible due to permanent obstacles) shall be considered as delay.
II.1. If a debtor is in default with his performance (even if this was not the debtor’s fault), the creditor can always insist on performance of the contract or withdraw from the contract after setting a (reasonable!) grace period and refuse to provide consideration as long as the debtor is in default.
If the debtor is at fault for the delay, the creditor is also entitled to compensation for the damage caused by the delay (or non-performance).
II.2. If the debtor is not at fault for the delay (for example, because the delay is due to an official order issued in response to the Covid-19 crisis), the creditor is generally entitled to performance of the contract and the option to withdraw from the contract after setting a grace period. Whether the non-performance (or failure to perform properly) is due to intent, culpable negligence, chance or force majeure (more on this shortly) is therefore irrelevant for the possibility of withdrawing from the contract.[4]
II.3. In connection with Corona, however, there may also be a delay in acceptance: this happens when the debtor is ready to perform (e.g. the carpenter wants to deliver his table on time), but the creditor does not accept this service or cannot accept it (e.g. because the business in which the table was supposed to be installed by the carpenter according to the contract is closed).
In such a case, the debtor has no enforceable right to accept the service, nor does he have a claim for damages - however, the risk is transferred to the creditor. This means that if the item is accidentally lost or damaged, the creditor must still provide the consideration: If a table that has been ordered were accidentally damaged during storage, the creditor would still have to pay the full price.
II.4. Since the creditor can declare withdrawal (with a reasonable grace period) and refuse to perform even in the event of an (objective) debtor default through no fault of his own, the general rules on default will be sufficient in many of the cases currently arising. As a rule, the contractual partner with whom a contract cannot be fulfilled due to Corona can withdraw from the contract - in this case, advance payments would have to be repaid.
Of course, in the event of a contract being rescinded due to the debtor's default, the question of how long the debtor's grace period should be set remains an uncertainty. Here, the interests of both the creditor and the debtor must be taken into account. If we look carefully, and taking the current situation into account, a comparatively long grace period will have to be set.
III. Force majeure
The term “force majeure" or "Force Majeure“ plays a role in several legal contexts. There is no generally valid legal definition in Austrian law – this legal concept is mainly formed by case law.
III.1. According to case law, “force majeure“An event that occurs externally (i.e. not within the sphere of influence of a contracting party) that is unavoidable and extraordinary.[5] According to this diction, the Covid 19 pandemic is without a doubt a case of force majeure.
The key question is that of the respective legal consequences: Some legal provisions waive liability for damages in the event of force majeure that caused the damage (Section 26 para. 4 WRG[6]) or standardize specific liability provisions (see, for example, Section 9 EKHG for a “unavoidable eventArticle 79 of the UN Convention on Contracts for the International Sale of Goods also contains a specific regulation.
III.2. For the currently most practical case of non-performance or delay in the performance of contracts, the following can be said in very simplified terms: if certain claims (damages due to delay, non-performance) are asserted, the party against whom the claim is made can, if the Covid-19 crisis was the causal factor for the delay or non-performance, rely on "Force majeure“ – this may lead to a waiver of the obligation to pay damages.
III.3. The term “force majeure“ is occasionally confused with that of “Loss of the basis of the transaction“, or these terms are linked in case law to the extent that it is recognised that a case of force majeure (such as the outbreak of an infectious disease) can lead to a loss of the basis of the transaction and to the cancellation or adjustment of a contract[7] (more on that shortly).
III.4. If contractual provisions for cases of force majeure (or “Force Majeure“), these are generally significant; there is a great deal of freedom between entrepreneurs; especially in cross-border contracts, clauses are often included as standard which stipulate contractual obligations in cases of “Force Majeure' (at least temporarily). It is important to check exactly which cases are covered by such contractual provisions.
IV. Cancellation (or subsequent change[8]) of the business basis
As a last resort – when the other civil law provisions do not apply or do not offer a reasonable solution and no relevant contractual arrangement exists – the legal concept of “Loss of the basis of the transaction" developed.
IV.1. When concluding contracts, the contracting parties regularly assume certain circumstances which they assume will remain unchanged – even if these circumstances are not included in the contract. If such circumstances change in an unforeseeable way without this being attributable to one of the contracting parties, and if this makes it unreasonable to adhere to the contract unchanged, an appeal to the loss of the basis of the transaction is conceivable in order to adapt the contract or to eliminate it entirely. The Supreme Court assumed that the basis of the transaction had ceased to exist, for example, in the case of a supply contract for roasted coffee, when the contracting parties had assumed that a third party would be opening a private clinic when estimating the amount of coffee required. The private clinic project failed – therefore there was no need for such large quantities of roasted coffee, and the failure of the private clinic project was not attributable to either of the contracting parties.[9]
IV.2. However, there is only isolated case law from the highest courts on the loss of the basis of the transaction, and it is based on the respective individual case (and therefore can only be generalized to a limited extent).[10] In connection with the Covid-19 pandemic, some authors currently argue (correctly) that Corona can cause a loss of the basis of business,[11] Of course, this will always have to be examined on a case-by-case basis – in particular, it will be necessary to examine whether certain pandemic-related obstacles actually make it unreasonable to adhere to the specific contract.
IV.3. However, an appeal to the loss of the basis of the transaction will not usually lead to a complete cancellation of the contract - the mere adjustment of the contract usually takes precedence because this better corresponds to the general principle of contractual loyalty. The appeal to the loss of the basis of the transaction should always only be a last resort.[12] – express contractual provisions (which are contained in many contracts) and other legal provisions, not least the supplementary interpretation of the contract, take precedence.
V. In summary
Overall, (Austrian) civil law offers different approaches if the Covid-19 pandemic makes the fulfillment of contracts difficult or impossible. In many cases, the provisions on debtor default and subsequent impossibility will suffice. In that case, the following applies (as a rule): after setting a reasonable grace period, the contract can be withdrawn. An appeal to the "loss of the basis of the transaction" should always only be a last resort if other civil law instruments do not apply. A mutually agreed contract adjustment by the contracting parties will generally be preferable to lengthy legal disputes - after examining which contractual arrangements were actually made in concreto.
[1] Cases of initial impossibility are comparatively less relevant in practice: if something “virtually impossible” (e.g. a trip to another star (perhaps even far away)) is agreed upon, no contract is concluded at all.
[2] Heidinger in Schwimann/Kodek (ed.), ABGB Practical Commentary4 (2016) to Section 1447 ABGB Rz 3.
[3] Griss/Bydlinski in Koziol/Bydlinski/Bollenberger (eds.), Short Commentary on the ABGB5 (2017) to Section 1447 ABGB Rz 8 mwN.
[4] Reidinger in Schwimann/Kodek (ed.), ABGB Practical Commentary4 (2014) to § 918 ABGB Rz 27.
[5] Supreme Court 06.07.1949, 2 Ob 270/49.
[6] See OGH 27.05.2019, 1 Ob 66/19s.
[7] OGH 14.06.2005, 4 Ob 103/05h.
[8] See Chandler, Loss of the basis of the transaction – an internal comparison within the framework of German law, JBl 2015, 273.
[9] Supreme Court 11.05.2000, 7 Ob 211/99a.
[10] The comments by Fair, Notes on common error and the basis of the transaction, JBl 1981, 1.
[11] Kletecka/Müller, Corona: With the construction sites, contractual obligations are suspended, Die Presse – Law 2020/90.
[12] OGH 15.05.2018, 5 Ob 58/18t; OGH 13.07.2007, 6 Ob 148/07v.