Austrian Law Blog:

Can a supplier terminate a contract due to an unforeseen increase of his costs?

Under certain circumstances, a contracting party may be released from its obligation to perform if the performance of the service has become unaffordable and unreasonable in an unforeseeable manner.

Generally, fixed-term contractual relationships may be terminated with immediate effect for good cause, such as impossibility of performance, before the expiry of the agreed period without application of the otherwise applicable termination dates and notice periods.

An unforeseeable cost increase in the provision of services as a result of e.g. elementary events (e.g. pandemic, war) and worldwide supply bottlenecks is per se not yet a good cause that would entitle a contracting party to terminate the contract prematurely.

According to the case law of the Austrian Supreme Court, however, in individual cases the unaffordability of performance can be equated with the impossibility of performance and may release a contracting party from its obligation to perform. The prerequisite for this is the existence of such an impossibility of performance through no fault of one’s own, which was not foreseeable (OGH 7 Ob 255/06k).

Furthermore, the decisive factor in determining unaffordability is whether the costs for the party’s own performance are out of all proportion to the agreed contract price it would receive. It must be noted, however, that mere losses as an inherent risk in every business transaction do not entitle to a premature termination of the contract. The party obligated to perform would at least have to prove that it is threatened with a considerable deterioration of its existence due to the cost increase (OGH in 7 Ob 152/18f). The question of unreasonableness must always be considered on a case-by-case basis, taking into account the terms of the contract. Thereby the principle pacta sunt servanda, already known from Roman law, must be taken into account. It states that the purpose of a contract is to bind a party to it, even if it wishes to withdraw from it or adapt the contract.

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