This content is from: Local Insights

Substituting debt

Dr Jasna Zwitter-Tehovnik

Pursuant to section 1376 of the Austrian Civil Code, an amendment to an existing loan agreement constitutes a new debt obligation if either its object or legal basis has been altered. Apart from the contentious issue of determining which particular situations this covers and which it does not, section 1378 on its own creates more headaches. It stipulates that, by operation of law, each effected substitution of debt causes any kind of security (a guarantee, suretyship, or pledge of any sort) provided to collateralise the initial obligation to expire in full, save where the grantor has consented to the perpetuation of its contingent liability.

In a hypothetical case with a third-party guarantor refusing to do so, the creditor would face an unenviable dilemma. Should it, for the sake of retaining the collateral, keep maintaining the loan agreement intact in its essence that, however, ceased to be in its interest (for example, without a substantial change a borrower default is inevitable)? Or should it rather hope such an alteration thereof is suddenly possible that would render redundant any collateral? No middle way is provided for in the statute.

The Austrian Supreme Court, following the teachings of a part of the jurisprudence, held this to be essentially insufficient, reasoning that the law cannot impose upon the parties something as personal as the intent to substitute (animus novandi) rather than to merely amend their agreements. Consequently, through introducing a clause to the amendment stating that no substitution of the primary debt is intended, the creditor can nowadays – regardless of any particularities – be sure of being able to further enjoy the benefits of a secured claim.

This position does not lack fault lines either. As argued, it runs contrary to intentions of the legislator to protect any third parties from risks they could not have been aware of assuming as they granted security.

It has recently been proposed by some of the jurisprudence to limit such power gained by contracting parties by means of allowing for it solely in those cases where it can be construed as justified by any kind of factual or economic reasoning, without inducing deterioration or augmentation of risks faced by a third party. Yet the fairest, though somewhat more cumbersome way, would be to treat any third parties as de facto contracting parties, inevitably resulting in more nuanced solutions.

Dr Jasna Zwitter-Tehovnik

Instant access to all of our content. Membership Options | One Week Trial