Effects on contracts between businesses because of COVID-19

by | Mar 22, 2020

This article is the second in a series of informative articles that I am creating to help self-employed people in Austria who are affected by the COVID-19 pandemic understand their rights and possibilities

*Because this is an unofficial translation, provided purely to help people, please understand that the translation is not perfect.

This information has been primarily extracted from the Chamber of Labour’s (WKO) website on the Coronavirus.

OPERATIONAL RESTRICTIONS EPU (EINZELPERSONUNTERNEHMEN / SINGLE-PERSON BUSINESS)

What effect do the current special circumstances have on how contracts are processed between businesses?

In principle, contracts are still legally binding. However, the COVID-19 pandemic can result in certain situations in which it becomes impossible for the business partner to provide contractually agree- upon services for either legal reasons (e.g. official restrictions on business operations) or for similarly serious reasons (e.g. sufficient risk of infection).

If the contract partner is unable to fulfill the terms of the contract, the following procedure must be followed: First of all, the individual contracts need to be carefully examined. Have provisions been made in the contract(s) for such exceptional circumstances? If no such appropriate contractual provisions have been made, the contract parties are advised to seek a mutually acceptable, amicable solution. If no agreement can be reached, the parties must fall back on the statutory right to file for breach of contract.

Note: See this website for more information about Breach of contract in Austria. This website might also be helpful for gathering supplemental information.

Within the framework of the statutory right to file for breach of contract, a distinction must again be made: If there is a possibility that the terms of the contract can be fulfilled within a reasonable period of time in a reasonable manner, the regulations applying to default (Verzug, or failure to fulfill legal obligations) apply versus those applying to breach of contract (Leistungsstörung).

Note: See this website for the distinction between breach of contract and default.

However, if the business is required to observe a fixed deadline (e.g. rental of a stand at a large-scale event), then it will prove impossible for the contracting party to comply with the terms of the contract. The legal consequence of this is usually that the contract collapses, and (advance) payments that have already made must be refunded. In the case of divisible contractual performances and continuing obligations, the contract may not need to be canceled in its entirety but may continue to exist to the extent that it has already been fulfilled or can be fulfilled.

In the situations described above, claims for damages are generally not made. Rare exceptions can occur, for example, if one contracting party is accused of not having taken adequate precautionary measures that would allow them to fulfill their contractual obligations even in (foreseeable) times of crisis. Legally, it is particularly difficult to assess situations in which the service provider is committed and willing to fulfill his or her contractual obligations, but these are useless to the client due to the current exceptional situation (e.g. cleaning services provided for a hotel that is experiencing massive restrictions). Whether the client can contest or alter such a contract – for example, because the basis for the agreement no longer exists – can only be assessed on a case-by-case basis.

Let’s put this in simpler language

Who am I? I am self-employed, own a business, or am employed by a business.

Initial problem: I have signed a contract with a business partner. But due to the COVID-19 pandemic, I am not able to fulfill the terms of this contract (either entirely or in part) for either legal reasons (e.g. I cannot operate my business as I normally would due to official restrictions/measures) or for another serious reason (e.g. high risk of infection if I would provide the service(s)).

Subsequent problem: Because I cannot fulfill the terms of the contract, I am in danger of being in breach of the contract.

What should I do? First of all, carefully examine the contract. Does it contain any provisions for these kinds of exceptional circumstances? If not, contact your client and speak to him or her openly to try to seek a mutually acceptable, amicable solution. For example, might it be possible for you to fulfill the terms of the contract if you have some more time? If the contract covers services that are provided over a longer period of time or multiple services, it’s possible that the contract may not need to be entirely canceled; it may continue to exist to the extent that you’ve already been able to fulfill certain services or can fulfill certain services in the near future. Does your customer have a fixed deadline? If it’s not possible to reach an agreement with your customer, you will need to learn more about what will happen if the customer files for breach of contract.

Ok, what do I do next? If the contract collapses, and (advance) payments have already made related to the services, these must be refunded. Contact the WKO to make an appointment to speak to someone in the legal department for consultation, as well as learn about your options for financial support.

Anything else? Keep careful written records of all communication that occurs between yourself and the contracting party (this includes creating memos of telephone calls).

Additional Helpful Information

In a contract, there is a clause that allows either contracting party to cancel the contract (i.e. right of withdrawal) upon payment of a “cancellation fee” (Stornogebühr). Does such a cancellation fee also have to be paid if the services are not provided due to the COVID-19 pandemic?

Normally, the additional right of either party to withdraw from the contract is agreed upon and defined in ‘right of withdrawal’ and ‘cancellation’ clauses, which can be exercised without providing reasons. A cancellation fee is a payment that the withdrawing party must make if they exercise this right of withdrawal. Unless otherwise agreed upon in individual cases, however, this cancellation clause (or these clauses) shall not result in a restriction of the legal rights of withdrawal. This means that: If a contract can be legally contested, even without recourse to the contractual right of withdrawal clause, in principle, no cancellation fee must be paid.

Where did Sara get most of this info? On the website of the WKO.

sara crocket science translation

Can I be of help?

I am a native English speaker who has lived in Europe (Austria) since 2004. I have provided high-quality proofreading, copy editing and German to English translation services for clients in academic, industrial and the not-for-profit sectors since 2012.

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