Austrian Supreme Court clarifies contractual penalties for terminations by insolvency administrators

Quick read

In a recent decision the Austrian Supreme Court clarified whether contractual penalties agreed upon in case of the termination of a contract, would be triggered by the insolvency administrator terminating the contract by exercising the special right of termination granted by the Insolvency Code.

Background

An Austrian construction company had been tasked with constructing several infrastructure projects. A term of the contract with its customer was a lump-sum contractual penalty of 10% of the agreed remuneration if the contract is terminated.

After insolvency proceedings were opened against the Austrian company, the insolvency administrator terminated the contract.

Decision

The Austrian Supreme Court held:

Pursuant to the Austrian Insolvency Code any agreement that makes it more difficult for the insolvency administrator to exercise (inter alia) the special termination right granted by the Austrian Insolvency Code is void.
Consequently, the lump-sum contractual penalty agreed upon for the termination of the contract could not be triggered by the insolvency administrator exercising the special termination right.
As a result, the contractual partner of the debtor is (only) entitled to compensation for the damage actually caused by the termination of the contract (which may be filed as an unsecured claim in the insolvency but not to a lump-sum contractual penalty.