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Sector overview
Trends, developments and prospects
What is the general state of the construction sector in your jurisdiction, including current trends, notable recent transactions/developments and future prospects?
Austria ranks among the world’s richest countries with a nominal gross domestic product per capita of €43,660 in 2018. Attractive interest rates for investors and continued immigration have led to a construction boom for residential and commercial properties in the past 10 years, especially in Vienna, where large-scale urban development has taken place. National, but also foreign investors, particularly from Germany, continue to pump money into the market, including through forward purchase transactions before the completion of projects.
Legal framework
Legislation
What primary and secondary legislation governs the construction sector in your jurisdiction?
Austria is a federal state with legislative powers at the federal and regional levels. Legislation for contractual relationships such as purchase agreements, (general) contractor agreements or leases is federal and mainly governed by:
- the Civil Code;
- the Commercial Code; and
- the Consumer Protection Act.
Public law regulations and limitations can be both federal and regional depending on the question at hand: construction and zoning on the one hand is a regional matter and different in each of Austria’s nine regions. Trade Law, on the other hand, is a federal matter. In addition, the Austrian Standards Institute provides technical and legal standards for the construction sector, which must be agreed on in a contract. From a legal perspective, the most important standard is Standard B 2110 on the contractual rights and obligations for construction contracts.
Authorities
Which authorities regulate the construction sector and enforce construction law, and what is the extent of their powers?
As Austria is a federal state, the answer depends on the specific matter. Federal courts decide on disputes between parties arising in relation to agreements. Local municipalities (in many cases mayors) are responsible for decisions on zoning, construction and permits. District authorities make decisions regarding Trade Law. Appeals to higher courts and administrative bodies are also possible.
Licensing
Project licensing
What licensing requirements and procedures apply to construction projects in your jurisdiction (eg, planning consents)?
A building permit for the construction, modification, maintenance or demolition of buildings is required under all regional construction laws. Additional approvals may be required, in particular for monument protection, environmental protection (including environmental impact assessments) and the protection of natural resources and water. The acquisition of real estate by non-EU citizens and the acquisition of land for agriculture or forestry may be subject to approval by regional authorities. Owners cannot formally apply for a different zoning of their properties (there are no rezoning rights).
Professional licensing and qualification
What licensing requirements and procedures apply to construction professionals, including any required qualifications?
According to the Trade Act, professionals such as general contractors must obtain a trade licence for carrying out commercial activities in Austria. European companies offering cross-border services for only a limited period of time are generally exempt from licensing. Architects and civil engineers do not fall within the scope of the Trade Act, but are regulated by their own self-governing body: the Chamber for Civil Engineers, Architects and Engineers. Before carrying out a commercial activity, professionals must prove a certain minimum standard of professional training and experience, irrespective of which laws apply to them.
Do any special rules and restrictions apply to foreign construction professionals?
Freedom of services and freedom of establishment allow professionals from other EU member states access to the Austrian market. Foreign professionals must prove equivalent professional training and experience before carrying out business activities in Austria. Cross-border services may be exempt from these limitations. Construction professionals (individuals) from outside the European Union need a combined work and residence permit.
Project structures and relationships
Project structures
What corporate/formal structures are available for construction projects in your jurisdiction? What are the advantages and disadvantages of each? Are any structures explicitly prohibited?
The corporate/formal structure depends on the project and is generally tax driven. Investors favour a limited partnership for tax and corporate reasons with a limited liability company as an unlimited partner. However, some investors choose the private limited liability company as a vehicle. Construction companies participating in procurement proceedings or offering services for specific projects often group together as an ARGE, a loose partnership without legal personality. This type of group is mostly used for large-scale construction projects that are too big for just one company (ie, motorways, bridges and office buildings).
Relationship management Are there any special considerations for managing relationships with:
(a) Joint venture partners (where applicable)?
Joint venture partners usually agree on the terms of their cooperation in a partnership agreement and set up their preferred corporate structure – the most common types are:
- ARGEs;
- limited/unlimited private partnerships; and
- limited liability companies.
The articles of association may contain all or only certain rules for cooperation. Tax and liability questions ultimately decide which corporate structure the parties choose.
(b) Contracting government entities in public-private partnerships (or other construction projects with a public element)?
There are no additional regulations for public-private partnerships (PPP) that carry out PPP projects in the strictest sense; however, they are uncommon in Austria. Public entities usually carry out public procurement procedures if they require construction services (eg, roads, schools, universities). Where the federal state or regions participate in a PPP project, the government entity acts as a private contractor with no additional rights. There is no immunity in court.
(c) Subcontractors?
Subcontracts are not defined under Austrian law and no specific rules apply to them, only the general rules under Austrian civil and commercial law. The Supreme Court defines ‘subcontractors’ as independent entrepreneurs to whom the general contractor delegates certain obligations. From a legal perspective, the distinction between general contractor and subcontractor is vital, as only the former has obligations towards the employer.
(d) Architects, designers, engineers and any other related professionals?
There are no specific provisions for agreements with architects, designers, engineers or other related professionals, but the general rules under civil law apply. If professionals are regulated by an independent body (eg, architects or engineers), such body may impose restrictions. For instance, there are recommendations for the calculation of consideration for architects and engineers.
(e) Any other relevant parties typically involved in construction projects?
The answer depends on the size of the project. In most cases a developer employs a general contractor which carries out the construction work (either directly or with subcontractors) and an architect to plan and supervise or other professionals such as structural engineers or contractors for heating, ventilation, and air conditioning. In court, the parties’ obligation to cooperate and the obligation to inspect and provide regular updates can give rise to disputes. It is vital that the construction process and any incidents are clearly and fully documented in preparation for potential claims.
Contracts and performance
Standard contract forms
What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?
The Civil Code and the Commercial Code provide general rules with specific provisions for service and contractor agreements. Parties are mostly free to decide how to set up their relationship. As construction projects often give rise to similar questions, the Austrian Standards Institute issued voluntary Standard B 2110 for general contractor agreements and voluntary Standard B 2118 for general contractor agreements for large-scale projects in the public sector, containing essential clauses for the contracts. Both standards are considered general terms of contract and must be included in contracts by mutual agreement of the parties. While the institute recommends including or excluding Standards B 2110 or B 2118 in full, it is possible to only agree on certain parts. Under the Federal Procurement Act, the use of Standard B 2110 is mandatory for construction projects and parties wishing to deviate need to justify such alterations.
Definition of ‘construction work’
How is ‘construction work’ legally defined?
There is no definition of ‘construction work’ in the Civil Code or the Commercial Code. Voluntary Standard B 2110 defines ‘construction work’ as follows:
construction, modification, maintenance, dismantling or demolition of buildings and building components, landscaping and other construction work of any kind within a service contract, the required preparation and ancillary works as well as construction and dismantling or demolition of ancillary buildings and building services.
Governing law
Are there any rules or restrictions on the governing law of construction contracts?
Where a contract concerns the jurisdiction of two or more countries, the parties can agree on the governing law with the exception of ordre public rules. The right to choose applies only to the law of contracts but not to public law restrictions or requirements or in rem rights (eg, the Austrian land register always follows Austrian law). International standards such as the International Federation of Consulting Engineers are known in Austria, but rarely agreed on between the parties in domestic contracts.
Formalities
Are construction contracts subject to any formal requirements?
There are no formal requirements for construction contracts. They can be executed orally or in writing in any language. This can give rise to problems in court as disputes on the exact contents of contracts can arise, especially because non-German language documents must be provided in the form of a legalised translation (with or without apostille). It may be more sensible to choose an arbitral court where this obligation does not generally apply.
Mandatory/prohibited provisions
Are there any mandatory or prohibited provisions in relation to construction contracts?
There are no specific mandatory or prohibited provisions concerning construction contracts. However, in recent years, the Association for Consumer Information and the Federal Chamber of Labour have initiated proceedings against construction companies allegedly using unfair contract clauses (in agreements with consumers). There is a need to regularly review and update construction contracts based on Supreme Court case law.
Implied terms
Can any terms be implied in construction contracts?
Apart from mandatory provisions under Austrian law, the parties can agree freely on any issue in a construction contract. If questions arise which are not covered by any of the specific terms in the construction contract, the courts will assess whether the absence of the clause was intended. In the latter case, the courts will apply general contract law to fill the void.
Risk allocation
How are risks typically allocated between parties to construction contracts?
Parties can agree on risk allocation freely unless it is deemed unfair, which is assessed based on a case-by-case analysis (risk taken versus consideration paid). According to general contract law, the ground risk (ie, the risk that the ground contains contamination, archaeological remains or is unfit for construction) is vested with the owner, but may be transferred to the contractor by agreement. In any event, contractors must examine and warn employers if the ground is unsuitable, provided that the contractor either knew or should have known. The risk of fulfilment of the contract (ie, the completion of the building) is vested with the contractor until handover. Voluntary Standard B 2110 limits the producer’s liability in the case of force majeure. In concrete terms, the purchaser bears the risk for force majeure even before takeover of the work if the producer took all protective measures to avoid damage.
Limitation of liability
How and to what extent can parties to construction projects contractually limit or exclude their liability?
Liability and warranty claims may be excluded in contracts for construction projects. In business-to-business contracts, the parties can agree on waivers for light negligence and minor forms of gross negligence, but not for severe gross negligence or intent. Parties may also waive warranty claims. The situation is different in business-to-consumer contracts, where a waiver of liability for injuries is not permitted and waivers for light negligence may be deemed unfair in general contract terms. Consumers cannot waive warranty claims before such claims arise. Voluntary Standard B 2110, if applicable, limits liability (not warranty) to certain caps which, from an employer’s point of view, could make it wise to not include the specific limitation.
Liquidated damages
How are liquidated damages typically calculated and to which liabilities are they usually applied?
Parties can agree on liquidated damages pursuant to Section 1336 of the Civil Code for non-performance or delayed performance. It is customary to agree on liquidated damages of up to 10% of consideration, some of which are due for each week of delay or specific non-performances. Courts can reduce the amount of liquidated damages. Voluntary Standard B 2110 allows parties to claim liquidated damages of up to 5% of consideration.
Force majeure
How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?
Sections 1311 and 1168a of the Civil Code deal with force majeure events and attribute their risk according to scope. Prior to handover, the contractor bears the risk of force majeure and remains under obligation to fulfil the contract in case of full or partial destruction. An employer may rescind a contract. After handover, an employer bears the risk of force majeure. Voluntary Standard B 2110 deviates from general contract law insofar as the contractor may have a right to claim payment of consideration in certain cases of force majeure. Parties usually include rules for non-performance and force majeure in their contracts.
General performance obligations
What are the general performance obligations of contractors and employers?
Contractors must fulfil the contract according to the technical specification and contractual timeline. Implied terms may stipulate further obligations – in particular, in relation to the quality of the work (ie, it must be of the quality usually expected). The employer must effect payment as set out in the agreement in regular instalments after provision of the respective invoices. In the case of full or partial non-fulfilment, parties may have the right to rescind the contract and claim damages.
Project delays
How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?
Parties can agree on the rules and procedures for delays, in particular on liquidated damages and measures to accelerate performance. In addition, parties have the right to rescind the contract according to general contract law.
Contract variations
To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?
Under general contract law, neither of the parties has the right to unilaterally alter the contract unless otherwise agreed. Voluntary Standard B 2110, if applicable, grants employers the right to make alterations to the contract or request additional services according to the prices already agreed on in the construction contract if certain conditions are satisfied. The parties can agree on variations. Public procurements laws may restrict unilateral or mutual changes.
Termination
What are acceptable grounds for the termination of a contract?
General contract law allows either party to rescind the contract in case of non-performance or delay. Voluntary Standard B 2110, if applicable, sets out in more detail what may be accepted as grounds for termination, including:
- delay;
- impossibility of fulfilment;
- cancellation;
- insolvency;
- excessive costs; and
- loss of trust.
Remedies for breach
What remedies are available for the breach of construction contracts?
Prior to handover, employers can request fulfilment or rescind a contract and, in both cases, request the payment of damages for non-performance. After handover, employers can request fulfilment or fully/partially rescind the contract and claim damages. Contractors have the right to claim fulfilment (usually payment) and damages.
Financing
Types of financing
What types of financing are used for construction projects in your jurisdiction? Which are the most common? Are there any restrictions on available financing methods?
Under a facility agreement, the credit becomes due either in full or in instalments pursuant to the progress of the construction work (usually confirmed by a certified engineer). If a developer also owns the real estate, they may grant a mortgage as security. In addition, the parent company may grant share pledges or a corporate guarantee. Austrian corporate law has very strict capital maintenance rules and thus parent companies cannot execute facility agreements and property companies cannot provide security. Cross-collateralisation may also pose difficulties. As nullity is the consequence, parties are strongly recommended to check any financing structure prior to implementation.
Security
What forms of security are used in construction project financing?
Borrowers and lenders can agree on the forms of security in place. The most common kinds are:
- mortgages (which may be registered in the electronic land register);
- share pledges;
- company guarantees; and
- assignments of claims regarding third parties.
Lenders may request a right to step into a construction contract if the borrower defaults.
Payment
Methods and timing
What are the typical methods and timing of payment for construction work? Are there any restrictions on ‘pay when paid’ and ‘pay if paid’ provisions? Do any other rules, restrictions or procedures apply?
Pursuant to Section 1170 of the Civil Code, employers must effect payment after completion and handover of construction work, but parties can agree on the contrary. Parties regularly agree on instalments pursuant to the progress of the construction work (confirmed by a certified engineer). While contractors may request security of up to 20% (or 40% in certain cases) of the unpaid consideration pursuant to Section 1170b of the Civil Code, employers sometimes request a performance guarantee (bank guarantee). Pay-when-paid and pay-if-paid clauses are not uncommon for subcontractors, but may be deemed unfair and excessive.
Non-payment
How can the contractor secure itself against non-payment by the employer? Under what circumstances can the contractor suspend work for non-payment?
Contractors have the right to request security as a percentage of the agreed consideration pursuant to Section 1170b of the Civil Code. This provision is mandatory and cannot be waived. Contractors can request security after execution of the contract of up to 20% of the unpaid consideration whereas for contracts with terms of less than three months, the contractor may request 40%. If an employer does not provide the security within reasonable time, the contractor is entitled to refuse the provision of services and ultimately to rescind the contract. The employer can choose between a security in the form of cash, deposit, security account, bank guarantee or insurance (in practice, the bank guarantee is the only viable option). The contractor must bear the costs for the security up to 2% of consideration.
How can subcontractors secure themselves against non-payment by the contractor? Under what circumstances can subcontractors suspend work for non-payment?
Subcontractors can request security pursuant to Section 1170b of the Civil Code. Thus, the same regime applies between contractors and subcontractors as applies between employers and contractors.
On what grounds can payments be withheld?
Contractors must effect payment according to the contract (eg, after completion of specific construction phases and the provision of respective invoices) or, in the absence of an agreement, after completion and handover of the construction work. Employers have the right to withhold payments if the conditions for payment are not fulfilled – in particular, if specific construction phases have not been completed.
Insolvency
Contractor insolvency
What recourse is available to employers in the event of the contractor’s insolvency?
A company has the right to and must request the initiation of insolvency proceedings if it is illiquid (ie, unable to pay invoices due) or over-indebted. Creditors must notify the appointed administrator about their claims and the administrator then either acknowledges or refuses the claim (in case of refusal, the creditor has the right to submit an action for a declaratory judgment). As contractors are regularly also late, employers usually rescind the contract for default and request payment of damages (paid as a quota in the insolvency proceedings). Where the parties agreed on a performance guarantee (bank guarantee), the employer can draw the guarantee.
Insurance
Coverage
What mandatory insurance coverage applies to parties involved in construction projects? Is any additional coverage recommended?
If contractors are subject to Section 94/5 of the Trade Act (ie, if they are constructors as defined in the Trade Act), they must take out liability insurance for personal, material and financial damages. The minimum cover is €1 million or €5 million depending on the contractor’s annual turnover. Employers may request a higher cover with or without excess depending on the size, type and potential risk of the construction project.
Tax issues
Liability
What tax liabilities arise in relation to construction projects?
The acquisition of real estate is subject to transfer tax of 3.5% of the purchase price and the registration of a purchase agreement in the electronic land register triggers a registration fee of 1.1%. Payments under contractor agreements are subject to 20% value added tax in Austria. The turnover of limited liability companies and joint-stock companies is subject to corporation tax, while the turnover of limited or unlimited partnerships is not directly taxed, but the partners are subject to income or corporation tax. Special tax provisions for EU and third-country companies apply.
Incentives
Are there any tax incentive schemes to promote construction and development in certain areas?
There are no special tax incentive schemes for certain areas in Austria. However, the federal and regional legislatures and administrative bodies may grant public subsidies for development.
Environmental issues
Environmental protection
What environmental protection legislation and regulations apply to construction projects in your jurisdiction?
There is no single law on environmental protection in Austria, but the issue is covered by federal and the regional legislatures from different perspectives. While the Trade Law or regulations for water or environmental assessment are federal, additional laws exist at the regional level. Contractors and owners/operators must comply with all laws independent of their nature.
Authorisation/certification
What environmental authorisations and certifications are required for construction projects and how are they obtained?
Austria subscribed to the Declaration of the United Nations Conference on the Human Environment in Stockholm in 1972 and thus made the protection of the environment an important goal for the country and, indirectly, for companies and people to achieve. Construction projects may be subject to an environmental impact assessment pursuant to the Environmental Impact Assessment Act. In addition, administrative bodies must examine environmental issues when issuing building permits, trade licences and operation permits.
‘Green’ regulations and incentives
Are there any regulations or incentive schemes in place to promote the construction of energy-efficient and low-carbon buildings?
Under Austrian law, sellers and landlords must provide up-to-date energy performance certificates when selling or leasing real estate, thus putting indirect pressure on owners to improve energy performance as it has become more transparent. Incentives for the construction of energy-efficient buildings are in place at the federal and regional levels.
Employment issues
Employment and labour law
What employment and labour legislation applies to construction projects in your jurisdiction? What rights and protections are provided to construction workers?
Austria provides a high level of protection for employees and workers with the minimum wage set out in collective bargaining agreements for specific industries. On 1 January 2017 Austria also introduced a new law against the undercutting of wages. Employers may be liable for the difference between wages paid and wages set out by law, regulation or collective bargaining agreement where they knew or should have known of the underpayment. Section 9 of the new law is specifically aimed at underpayment in the construction sector and Section 10 at general contractor agreements.
Occupational health and safety
What occupational health and safety regulations apply to construction projects?
The Austrian regulation for the protection of construction workers protects workers from health and safety risks on construction sites. According to general rules and regulations, employers may be liable if their employees suffer injuries.
Employment contracts
What types of employment contract are typically used for constructions work? Are there any mandatory or prohibited provisions in relation to employment contracts?
Employment contracts are executed for a limited or unlimited term. Austria provides a high level of worker and employee protection depending on many factors, such as the industry in which the worker is engaged, their age or whether they are pregnant. Employment laws are relatively mandatory (ie, it is possible to enhance but not limit protection).
Foreign workers
What rules, restrictions and considerations apply to the hiring of foreign workers?
EU citizens have the right to free movement and work in Austria. Workers from third countries need a work permit for Austria, although this is easier for specifically needed workers. Austria has attracted many new EU/foreign citizens in the past 10 years as the construction sector has had a shortage of skilled workers.
Anti-corruption rules
Applicable rules
What regulations and procedures are in place to combat corruption, bribery, fraud, collusion and other dishonest practices in the construction sector in your jurisdiction?
Austria ranks fourteenth in Transparency International’s Corruption Perceptions Index 2018. Corruption, fraud, collusion or other dishonest practices may fall within the scope of the Criminal Code, with potentially more serious penalties for public officials. Agreements may be voidable if they are the result of corruption, bribery, fraud, collusion or other dishonest practices.
Best practices
What best practices are advised to ensure compliance with the relevant anti-corruption rules?
Companies are advised to implement a risk assessment scheme, including anti-corruption measures, in order to mitigate and ideally eliminate criminal behaviour. Criminal courts can sentence employees and companies for illicit behaviour, particularly if no scheme was in place.
Dispute resolution
Courts
What courts are empowered to hear construction disputes in your jurisdiction? Are there any specialist construction courts?
There are no specialist courts for construction matters in Austria, but construction cases are heard before civil or commercial courts depending on the parties involved and the place of litigation. At the parties’ request, courts in construction disputes regularly consult experts on technical questions who provide written expert opinions. The parties have the right to ask additional questions or request amendments to an expert opinion and may agree on arbitral proceedings – in particular, for larger projects and if a cross-border element is involved.
Common disputes
What issues are commonly the subject of construction disputes?
Employers and contractors regularly disagree on the extent of contractual obligations (in particular, in relation to technical specifications) regarding:
- whether the contract was fulfilled correctly or completely;
- the consideration due for additional services; and
- whether the employers has the right to request payment of (liquidated) damages.
Statute of limitations
What is the statute of limitations for filing construction-related claims?
Employers have the right to request payment of damages for a period of three years after the employers know or should have known of the damage and the facts. Warranty claims are time-barred for three years after handover.
Mediation
Is pre-litigation mediation required or advised for construction disputes?
There is no mandatory pre-litigation mediation unless otherwise agreed. In certain cases it is more efficient and less time-consuming to consult a mediator. Parties often agree on a technical expert to provide an expert opinion on technical issues where legal questions are of secondary importance.
Arbitration
How often is arbitration used to resolve construction disputes? What arbitration forms and institutions are typically used?
While arbitration may be the preferred way of resolving construction disputes at the international level, national cases are found in both national courts and arbitral tribunals. Typically, arbitral proceedings are conducted under the supervision and administration of an arbitral institution and not as ad hoc arbitration. Construction agreements often refer to the Vienna International Arbitral Centre’s Vienna Rules, which now also administer purely domestic cases in addition to the international cases that have been handled so far.
