1) CONCEPT OF UNFORSEEN CIRCUMSTANCES
Under Austrian law, unforeseen and unforeseeable circumstances which are so substantial, that they tilt the balance between the parties of the economic risk of a (long term) contract, give a claim to adjustment or resiliation, depending on the magnitude of the impact. Hence pacta sunt servanda no longer applies in such circumstances. It is irrelevant whether the change comes out of the sphere of one of the parties or from outside the sphere of the parties.
2) NO MORE DUTY TO DELIVER FIRST WHERE THERE IS UNFORSEEN INCREASE OF RISK OF PAYMENT
Furthermore, if in a contract one party has agreed to deliver its contractually agreed service first and the other is agreed to pay in arrears, if between signing of the contract and agreed point in time of performance of the service risk of payment has substantially increased, the party that undertook to deliver beforehand may hold back and demand (sufficient) security for payment, if no such security is provided, it may then resiliate the contract. It has been argued that under this concept unused credit lines may be terminated by the bank under the prevailing circumstances for it is not only the security situation as it is today that matters, but also as it foreseeably will be in the future (when under the credit line the re-payment obligation of the borrower shall become due).
3) TERMINATION OF LOAN AGREEMENTS AND EXCUSE FROM REPAYMENT OBLIGATION
Loan agreements may be terminated by the bank if there is an event of default or if covenants, and in particular financial covenants are not kept,details follow, essentially, what has been contractually agreed. The concept is at present not used by banks, to call the loan due under the circumstances, will in most cases not allow them to collect and it will trigger adverse publicity. Much rather banks seem to be negotiating for state subsidies to bridge non-performing loans.
On the other side of the loan agreement, borrower shall be excused from fulfilling his repayment obligations under a loan (capital and interest), where the situation is described as force majeure; many scholars advocate that the present situation is force majeure at least for those borrowers, whose business has been shut down not in effect (as are most) but formally by public decree (as are for example restaurants).
4) LEASE AGREEMENTS
Under a specific provision of the civil code (§ 1104 ABGB), tenants can reduce or stop entirely payment of the rent (including also utilities and VAT on the rent) if due to unforeseen circumstances, such as a pandemia, business can no longer be operated partially or fully in the rented premises. Some limitations on the right to stop rent payment apply, such as where arguably the business could still be operated at least partially out of the rented premises (eg catering services for restaurants). The provision of the civil code can be opted out and waived in the lease agreement by individual agreement, however such waiver agreement needs to be specific to be enforceable. So, a blank reference to waiving section 1104 of the civil code in the agreement will not do, a reference to pandemias certainly will, a reference to other force majeure events may need to be interpreted as to whether the waiver applies to a pandemia as well. It is expected that courts will interpret waiver clauses rather restrictively, but we will not know any time soon, for all court houses are closed and there are no court hearings in the foreseeable future.
5) SUBSIDIES
The EpidemieG, the federal law on pandemias, which was enacted in 1913, foresaw an obligation of the government to reimburse businesses for all and any loss incurred (including lost profits) due to a pandemia. There was no limit/cap on such reimbursement obligation of the government, the only „trap“ were rather short filing deadlines. The law had never been applied ever since its enactment.
On March 18th, 2020 the federal Austrian government announced an initial 38 bio EUR „subsidies program for Austrian businesses“ (meaning most likely, if European Community standards still apply): any -at least EU- business operating in Austria). The federal chancellor stated that „we will support business to support and keep up the workforce, whatever it may cost.“
What they did not publicly announce was the fact that the EpidemieG, which had in fact contained an unlimited reimbursement obligation of the government had been quietly repealed.
We are in for more surprises to come. Austrians have a long tradition of dealing with crisis, the old Austrian saying still applies:
“The situation is grave, but we do not take it seriously. “
Stay healthy!
Peter Polak