CMS Expert Guide on rising raw material prices in Austria

Neither the Austrian Parliament nor the Federal Government have adopted specific legislative or regulatory provisions following the increase of raw material prices. 

On 31 March 2022, the Independent Arbitration Commission at the Ministry for Digital and Economic Affairs (Unabhängige Schiedskommssion beim BMDW, “Arbitration Commission”), which, according to Section 8 of the Federal Ministries Act 1986, is tasked inter alia with preparing expert opinions on general issues of price escalation in public contracts, has published a recommendation for public contracts (with effect from 1 March 2022 until 1 March 2023) regarding the rising prices in the construction sector. 

In December 2021, the Austrian Association for Construction Technology (Österreichische Bautechnik Vereinigung, “Construction Association”) published guidelines on “Changes in prices and shortage of supply” (“Guidelines”) with recommendations on how to deal with rising prices in construction contracts under the standard contracts B2111 or B2118 that have come about due to temporary supply-chain disruptions. However, its legal considerations may also be used for other unexpected, external reasons for cost increases and/or for all construction contracts.

The Federal Public Procurement Act 2018 (Bundesvergabegesetz 2018, – “BVergG 2018”) regulates in general the procedures for awarding public contracts. Amending contracts that have already been concluded is primarily a contractual matter and therefore subject to Austrian private law (mainly the Austrian Civil Code, Allgemeines Bürgerliches Gesetzbuch, ABGB) – Please see question 3. for further reference. 

However, irrespective of whether contract law allows for price adjustments in existing contracts, price adjustments must also be evaluated under public procurement law, as such amendments may constitute a substantial modification of the contract. Section 365 BVergG 2018 stipulates the circumstances under which a subsequent contract modification is permissible without launching a new procurement procedure. In general, only non-substantial modifications are permissible, provided the nature of the contract is not altered. The BVergG 2018 assumes that contract modifications amounting to a maximum of 10% of the contract value for delivery and service contracts and 15% for construction contracts are non-substantial modifications and thus permissible (de minimis limit). In addition, the threshold values must not be exceeded.

Modifications based on clauses specifically addressing future price developments are in general permissible. Such price adjustment clauses can for example refer to inflation indices or indices which reflect changes in the prices of materials (e.g. Consumer Price Index or specific Construction Cost Indices).

The BVergG 2018 also acknowledges that contract modifications regarding additional services may become necessary due to circumstances that a diligent contracting authority could not have foreseen. This amendment may be activated provided that any increase in value is not greater than 50% of the value of the original contract.

The Arbitration Commission recommended that, as of 1 March 2022, price adjustments caused by price increases of certain materials (e.g. steel, aluminium, copper, bitumen, cement, construction timber, chipboard, plastic products, insulation materials, and gravel) will be permissible in general (even if no corresponding price adjustment clause is included in the contract) if they cause an increase of the total price of supplies for construction works of more than 2%. For existing and future public contracts, it further recommends using certain indices if the value of the supply of certain raw materials (e.g. aluminium, copper, …) exceeds 1% of the total contract value and provided that a de minimis limit, as defined by the Arbitration Commission, is exceeded. 

In general, all public contracts are governed by Austrian Civil Law according to which parties to a contract have to stick to what they have agreed upon (pacta sunt servanda). The allocation of risks between contractual parties – including the risk of cost increases – follows the theory of the spheres of responsibility: The tasks and obligations as of concluding the contract determine who has to assume the risk of later changes. In construction contracts, risks that constitute events outside both party’s scope of influence and tasks (such as force majeure), have to be borne by the contractor. However, contractually agreed provisions on price increases (e.g. as to which party bears the risk for subsequent changes in costs and to what extent) prevail; this principle is only restricted by the limit of immorality (Sittenwidrigkeit) pursuant to Section 879 para. 1 Austrian Civil Code. The economic balance of a contract does not constitute a separate ground to adjust contracts.

There is only a limited number of tools for a unilateral adjustment of contracts (or an exit from them) due to external reasons arising after conclusion of the contract and which were unforeseen by both parties, namely force majeure (höhere Gewalt); the contractual performance becoming impossible (nachträgliche Unmöglichkeit), cessation of the contract basis (Wegfall der Geschäftsgrundlage). 
One of those exceptions is enshrined in Section 1447 Austrian Civil Code, stipulating that if the performance of a contract has (accidentally) become  impossible, the contract automatically becomes void and the parties must return any benefits already received. The Austrian Supreme Court also applies Section 1447 ABGB to cases in which the performance of the contractually owed service becomes “unaffordable” for the debtor due to a subsequent change in circumstances.

With respect to price increases, Section 1447 ABGB is only applicable if:

• the impossibility/unaffordability occurred due an event a prudent business manager could not reasonably have foreseen;
• the impossibility/unaffordability was neither caused by the debtor nor can it be held liable otherwise (e.g. because it could have taken appropriate precautions, but failed to do so); and
• the price increase is exorbitant; thus, it is not sufficient if the performance of the contact has merely become more burdensome or cost-intensive.  

Although the Supreme Court has not yet decided one way or the other, some commentators cautiously suggest an adjustment to the contract is permissible. However, if the adjustment would be a material amendment to the contract under procurement law, a termination by the awarding authority would be the only possible consequence.

As a second exception from the principle of pacta sunt servanda and contrary to settled case law, the prevailing doctrine in legal literature suggests that in cases of sudden (exorbitant) price increases, the clausula rebus sic stantibus should be applied instead of Section 1447 ABGB. The clausula rebus sic stantibus stands for the legal doctrine allowing for a contract or a treaty to become inapplicable (or to be changed) because of a fundamental change of circumstances. It follows that contracts may be revised whenever new circumstances arise that alter the conditions that existed when the obligations concerned came into force.

The conditions in which the clausula rebus sic stantibus or the lapse of the contract basis may be applied in case of price increases are very similar to those of Section 1447 ABGB: i.e. the change of circumstances (that led to the price increase) was neither foreseeable nor caused by the debtor and the price increase must be substantial. In its guidelines, the Construction Association suggests increasing fixed prices if the contractor’s costs rise by more than 8%. As regards legal consequences, invoking the clausula rebus sic stantibus leads to an adjustment of the contract in question (with the possibility of termination being subordinated). But as for cases of unaffordability, the restrictions of procurement law to amending contracts prevails.

If an existing contract already contains a price adjustment clause, a more significant adjustment may be possible if the difference between the agreed adjustment and another, more appropriate adjustment like an index would be significant. The Construction Association suggests a difference exceeding 8% as a reasonable materiality threshold.

As already mentioned in question 2., the BVergG 2018 primarily regulates the procedures for awarding public contracts, while the execution of contracts is governed by Austrian private law (mainly the Austrian Civil Code).

Further, neither the Arbitration Commission nor the Construction Association specifically refer to sanctions if the performance of a contract is delayed or has become impossible. The Guidelines state that any disruptions in the delay of contract performance shall be assessed in accordance with the contractual provisions. For construction contracts, a complete failure to perform the contract should be regarded as an event that cannot be reasonably averted by the contractor. Contracting authorities must jointly assess whether there is a complete failure to perform the contract. It is also noted that economic unaffordability is deemed equivalent to the impossibility of executing a contract. In any case, the contractor must mitigate the consequences of non-performance of the contract (on time).
The Construction Association’s guidelines propose a solution for delay because of supply-chain disruptions: If the contractor provides written evidence that

• its supplier is experiencing significant delays or a product’s market price has become unaffordable; and
• at least 3 to 5 alternative suppliers have refused to supply the contractor,

the product should be considered as unavailable and thus the failure to perform the contract should be treated as caused by an event outside the contractor’s liability. 

Both, the Arbitration Commission and the Construction Association reiterate that contracting authorities should take potential future price changes into account when preparing contracts in future.
In construction contracts, price changes are usually accounted for by agreeing variable prices, which is also recommended by the Arbitration Commission and the Construction Association. Both, the Arbitration Commission and the Construction Association strongly recommend using variable prices and including specific indices in construction contracts. 

As already mentioned under question 2., the Arbitration Commission recommends price adjustments for both existing and future contracts if the value of the supply of certain raw materials (e.g. aluminium, copper, …) exceeds 1% of the total contract value. In case of variable prices, the Arbitration Commission generally recommends that an appropriate index based on the Construction Cost Indices is selected, paying particular attention to appropriate weighting of cost components.
Furthermore, the Arbitration Commission lists – based on the current price trends – a number of indices that are considered an appropriate basis for the price adjustment of certain materials.

n/a because all public contracts are governed by private law.