The Complex Commercial Litigation Law Review: Switzerland
Switzerland has a civil law system. The Swiss Code of Obligations (CO) regulates the contractual relationships between legal subjects and is structured in five main chapters. The first chapter contains general provisions (Articles 1 to 183) that are valid for all types of contracts, while the second chapter regulates the different types of contractual relationships (Articles 184 to 551). Chapters three to five regulate companies and cooperatives, the commercial register, business names, commercial accounting and negotiable securities.
The Swiss Civil Procedure Code (CPC) regulates civil proceedings. It dates from 1 January 2011 and contains a set of rules that regulates civil proceedings comprehensively from filing the claim until the appeal in first cantonal instance. Switzerland has specialised commercial courts, as well as a long and well-established tradition in commercial litigation and arbitration. As a result, Switzerland offers an effective and highly specialised judiciary and alternative dispute resolution system for commercial disputes, which is the reason why many foreign parties subject their contractual relationship to Swiss law and the jurisdiction of Swiss courts.
The CO is based on the principle of contractual freedom. Part of the freedom of content is also freedom of types. Freedom of types means that the parties are not bound to the contract types regulated in the special part of the CO (Articles 184 to 530) but have the freedom to deviate from them and to mix them or to invent completely new contract types (innominate contracts). Most provisions of the CO are not mandatory, and the parties are free to agree on the contents of their agreement (e.g., exclusion or limitation of warranty). As a rule, there are also no specific form requirements that need to be observed.
The conclusion of a contract requires a mutual expression of intent by the parties. The expression of intent may be express or implied. According to the chronological sequence of the declarations, the first is referred to as the offer, the second as acceptance. The offer is a declaration of intent, which must be received by the other party. The conclusion of a contract depends on a simple agreement of the receiving party.2 The offer must be sufficiently determined or at least determinable with regard to the type of contract to be concluded, the essential elements of the contract (essentialia negotii) and the contracting parties.3
As a rule, contract negotiations precede the conclusion of a contract. The parties are generally not bound by the contract at this phase of their relationship; however, pre-contractual duties arise during this period. If the pre-contractual duties are violated, this may lead to liability for culpa in contrahendo. The liability for breach of pre-contractual duties (culpa in contrahendo) is not regulated in the CO but originates from case law.4
The law chosen by the parties governs the contract (Article 116, Paragraph 1 of the Code on International Private Law). The choice of law must be express or clearly result from the contract or the circumstances. A choice of law may also be tacitly agreed upon.5
The law chosen is, in principle, relevant to all substantive and formal questions relating to the contract (principle of the uniform contract statute). In particular, the lex causae determines the existence, content and effect of the main contract.6
If it is certain that a contract has been concluded between the parties, the parties may nevertheless have different understandings of the relevant contractual content. In this case, the court must seek to determine the actual and mutual intentions of the parties (Article 18, Paragraph 1 of the CO).
The wording of the contract and the context in which it is used is the starting point of any interpretation and plays a predominant role in the process of contractual interpretation.7 Additional factors may be considered to determine whether the meaning of the wording is consistent with the extrinsic evidence regarding the intentions of the parties. Such additional factors are, for example, the purpose of the contract and the parties' interest in its performance, the parties' conduct before and after the execution of the contract, and relevant trade customs in the parties' specific industry or field of commerce. The party claiming that there is a discrepancy between the wording and the real intent of the parties bears the burden of proof to show that the mutual real intent of the parties was different from the actual wording of the contract.8
If the actual and mutual intentions of the parties cannot be established, the court resorts to an objective interpretation of the contract based on the principle of reliance.9 The test for objectivity is how a reasonable party, considering all circumstances, could and should have understood a specific contract clause in good faith.
The starting point of the objective interpretation and the predominant factor is, again, the contractual wording.10 In addition to the wording of the contract and the additional interpretative factors described above, there are a number of well-established principles governing the objective interpretation of contracts, such as interpretation in accordance with good faith, interpretation ex tunc, and interpretation of the contract as a whole.
The parties may lay down their own rules of interpretation in the contract, such as definitions of terms.
The CPC regulates territorial jurisdiction and the procedure at the federal level, while the cantons (states) regulate material and functional jurisdiction and the organisation of courts and conciliatory authorities. In international disputes, territorial jurisdiction is not governed by the CPC but by the International Private Law Act.
International treaties have priority over the International Private Law Act. One example is the Lugano Convention.11 The Convention has established a comprehensive jurisdiction system regarding contractual and commercial disputes within the EU and EFTA states that have ratified this Convention. It serves to extend the jurisdiction and recognition regime of the Brussels Regulation to EFTA Member States, including Switzerland.
The competence of the Swiss courts depends on the amount in dispute and the nature of the dispute. The cantons (states) may designate a specialised court for commercial disputes and disputes relating to intellectual property rights and unfair competition. The judges at those courts have special expertise in certain fields of commerce or finance. There are currently four such specialised commercial courts in Switzerland in Zurich, St. Gallen, Bern and Aargau. A dispute is deemed to be a commercial dispute if the business activities of at least one party are involved, the amount in dispute is at least 30,000 Swiss francs, and the parties are entered in the Swiss Commercial Register or in a comparable foreign register.
In most cantons (states), pecuniary claims up to a value of 30,000 Swiss francs are heard by a single judge, and claims of 30,001 Swiss francs or more are heard and decided by a court composed of three judges. The parties may establish the jurisdiction of a court either by an agreement on jurisdiction or by appearance.
ii Conciliatory procedure
In Switzerland, a conciliatory procedure usually precedes the court proceedings. The task of the conciliation authority is to try to reconcile the parties and to settle the dispute amicably. If a settlement cannot be reached, the conciliation authority issues the plaintiff a permission to bring an action.
Apart from actions that have to be filed with a commercial court, the conciliation procedure that precedes the court proceedings is generally mandatory. Under certain conditions, it is permissible for one or both parties to waive the conciliation procedure, namely if the respondent is domiciled abroad or the amount in dispute is more than 100,000 Swiss francs.
iii Court procedure
Civil proceedings begin either with the submission of a request for conciliation or with the direct filing of an action with the court. In both cases, the filing of the submission has the effect of meeting the deadline for legal action and establishes the lis pendens.
There are different types of proceedings depending on the type of dispute, namely the ordinary procedure, the simplified procedure and the summary procedure. In addition to the nature of the dispute, the amount in dispute is relevant for determining which type of proceedings is applicable. Amounts in dispute over 30,000 Swiss francs are dealt with in ordinary proceedings. The ordinary procedure is the basic type of judicial procedure at first instance and the most common for commercial disputes.
The proceedings are mainly in writing. After the first exchange of written submissions, the courts sometimes summon the parties to a settlement hearing. Such settlement hearings are a common practice before the commercial courts.
In the settlement hearing, the court gives a preliminary non-binding legal assessment of the dispute on the basis of the file before it, and it actively tries to facilitate a settlement. If no settlement can be reached, the parties submit the written reply, which is then followed by the written rejoinder. The pleading phase is followed by the evidence taking phase, in which the court may order disclosure, hear witnesses and examine the parties or appoint and instruct an independent expert.
In contrast to common law jurisdictions, cross-examination is not common in Switzerland. Consequently, documents are the most important evidence before the court. The commercial courts often decide a case based on the files submitted (i.e., without hearing any witnesses).
iv Court fees and party indemnity
Plaintiffs must pay an advance on court costs, which is usually dependent on the amount in dispute. In addition, and upon the defendant's request, foreign plaintiffs are required to provide security for the defendant's legal cost if the plaintiff is domiciled in a country that is not a signatory to the relevant Hague conventions.
The costs are determined in the court's decision, and the losing party must usually pay the costs and compensate the winning party (costs follow the event). If no party is entirely successful, the costs are allocated in proportion to the outcome of the case.
v Alternative dispute resolution (arbitration and mediation)
Switzerland offers excellent conditions for international arbitration proceedings. Swiss arbitration law combines the autonomy of the parties in the organisation of proceedings with the guarantee of a judicially secured framework.
Arbitration is widespread, especially for disputes between associations and their members (association arbitration, especially in sports law) and in international commercial contracts (international commercial arbitration). The third part of the CPC (Article 353 et seq.) regulates domestic arbitration, while international arbitration falls within the scope of Chapter 12 of the International Private Law Act (Article 176 et seq.).
The parties may agree to conduct mediation at any time in judicial proceedings. Mediation is a matter of private law both among the parties and between them and the mediator. Neither the conciliation authority nor the court are responsible for the organisation and conduct of the mediation. Mediation is completely independent of conciliation and judicial proceedings.12
Breach of contract claims
Swiss contract law follows the principle that contracts must be honoured (pacta sunt servanda). If one party fails to perform the contract, the other party has certain remedies.
The CO distinguishes between the following forms of default: non-performance (impossibility), delay in performance (default) and defective performance (breach of contract).13
i Non-performance (impossibility)
Non-performance occurs when the performance to be rendered by the debtor can no longer be rendered because it has become impossible. In those situations, pursuant to Article 97, Paragraph 1 of the CO, the debtor must compensate the other party for the damage arising from the non-performance, unless the debtor proves that no fault is attributable to him or her.
To the extent that a debtor's performance has become impossible because of circumstances for which he or she is not responsible, the obligation is deemed to be extinguished (Article 119 of the CO).
ii Delay in performance (default)
Default on the part of the debtor applies if he or she does not fulfil his or her obligation to perform on time. The prerequisites for debtor's default are non-performance despite the possibility of performance, maturity and, as a rule, a formal reminder from the creditor.14
The debtor is liable for damages if he or she does not prove that he or she is not responsible for the delay. Damage compensation means compensation for the damage caused by the delay, (i.e., the financial loss caused by the delay).15 The debtor in default is also liable for accidental damage.
If the debtor is in default with a payment, he or she shall generally pay default interest. This legal consequence occurs irrespective of whether the debtor is responsible for the default and whether the creditor has suffered a loss as a result of the late payment.16
Pursuant to Article 107, Paragraph 1 of the CO, the creditor may set the debtor a reasonable time limit for subsequent performance. This grace period is necessary if the creditor wishes to exercise a remedy that differs from specific performance.17 Article 107, Paragraph 2 of the CO provides that if the debtor fails to perform within the grace period set, the creditor may:
- continue requesting performance of the contract and compensation for the damage caused by the delay;
- waive performance and claim expectation damages for non-performance; or
- withdraw from the contract and claim restitution damages.
iii Defective performance and warranties
If the performance provided does not correspond to the performance the parties contractually agreed upon, the creditor may claim damages. Whether he or she is also entitled to repair or replacement or other remedies depends on the type of contract and the parties' specific agreement. The laws on sales and contracts for work and services stipulate warranty claims. The purchaser or customer can report defects and have them remedied within a certain time.
The legal consequences of defective performance are often regulated specifically for the individual contract type. In addition, Article 97, Paragraph 1 of the CO deals with defective performance in general terms and provides for damages as the general remedy. In some cases, the creditor may also withdraw from the contract.
In an action for damages, the creditor must prove the damage, the breach of contract and the causal link between the breach and the damage incurred. The debtor's fault is presumed.18
Defences to enforcement
Swiss law recognises several defences to enforcement of a claim; some are directed against the existence of the claim as such and are to be considered by the court ex officio (e.g., impossibility). Other defences only prevent the enforceability of the claim and are, thus, only considered by the court if they are raised by the opposing party (e.g., objection of limitation). Some common examples of defences to enforcement of a claim are discussed below:
i Illegality and immorality
Freedom of content of contracts exists only within the limits of the law. A contract is unlawful and, therefore, not enforceable if it violates mandatory private or public law provisions of Swiss law. The unlawfulness may result from the object of the contract, the content agreed upon or the indirect contractual purpose.19 Further limits with regard to freedom of content are good morals and personal freedom (i.e., no one may deprive himself or herself of his or her freedom or restrict his or her use to an extent that violates the law or morality). The illegality and unenforceability may also concern only parts of the contract or certain provisions.
If the parties provide for the application of a foreign law in the contract, the provisions of that foreign law will not be applied and enforced by a Swiss court if it would lead to a result that is incompatible with Swiss public policy; however, the threshold of public policy is high, and it is rare for a Swiss court to refuse to apply foreign law on that basis.
The doctrine of impossibility applies if the debtor is unable or is no longer able to perform his or her obligations. According to Article 20, Paragraph 1 of the CO, a contract that has impossible content is null and void and is, therefore, not enforceable; however, this only includes the initial, objective and permanent impossibility, meaning an impossibility that already existed at the time the contract was concluded (initial) and that is comprehensive in the sense that nobody would be able to perform (objective). All other cases of impossibility are cases of non-performance (see above).20
iii Limitation of liability
In accordance with the principle of contractual freedom, the debtor can exclude or limit his or her liability. Such limitation of liability, however, requires in any case a contractual agreement.21 According to Article 100, Paragraph 1 of the CO, the exclusion of liability for intent and gross negligence is inadmissible. An agreement according to which liability for wilful intent or gross negligence is excluded or limited is null and void and not enforceable.
On the other hand, according to Article 101, Paragraph 2 of the CO, the parties to an agreement may limit or completely exclude their liability for auxiliary persons, such as employees.
iv Limitation and forfeiture
Claims that are time-barred cannot be enforced if the debtor raises an objection of limitation.
The regular limitation period is 10 years. It applies to all claims for which the law does not expressly provide otherwise. Article 128 of the CO establishes a five-year limitation period for certain claims that are regularly quickly settled, namely rental, lease, capital interest as well as other periodic payments.
Actions for breach of a seller's warranty become time-barred two years after delivery of the object to the buyer, even if the buyer does not discover the defects until later, unless the seller has assumed liability under warranty for a longer period.
Forfeiture is to be distinguished from the statute of limitations. Forfeiture does not have to be asserted by the opposing party but is to be considered by the court ex officio. Claims can be forfeited, for example, if a contracting party (buyer) does not comply with certain duties, such as to inspect the purchased goods after delivery and to give immediate notice of any defects discovered.
Fraud, misrepresentation and other claims
Failure of intent regarding contracts can be distinguished into two major groups: cases in which the declaration does not correspond to the (correctly) formed will (error of explanation); and cases in which the intent to make a certain declaration was formed incorrectly, whether as a result of error (error of motive or fundamental error) or as a result of the other contracting party or a third party (fraud or duress). A party acting under error, fraud or duress is entitled to annul the contract and seek restitution. This must be done within one year of the time that the error or the fraud was discovered or from the time that the duress ended.
An error is a misconception of the facts.22 There is no error in the actual sense if the party that makes a declaration had no notion of the facts. The error is always unconscious. If there are doubts about the correctness of one's own notion, an error is excluded.23 An error is fundamental if, according to the circumstances, it can be assumed that the person acting under error would not have made the declaration or would not have made it with this content if he or she had known the true facts.24
Fraudulent behaviour comprises the pretence of false facts, or the non-disclosure of existing facts if there was a duty to disclose.25 The fraud must cause or perpetuate an error on the part of the person deceived. This in turn must have been a cause for the deceived party's declaration of intent. This is not the case if the person deceived has recognised the true facts of the case or if he or she would have made the declaration of intent even if he or she had known the true facts.26
Fraud, misrepresentation, deception and other unlawful interference may also give rise to claims in tort and damages. If the trust of the other party is abused in the course of contract negotiations, this may lead to liability for culpa in contrahendo and may also give rise to claims for damages.
If a contract has been breached, the entitled party has, as a rule, the possibility to either demand specific performance or to sue for damages. Depending on the type of contract and breach, the party may also have the right to terminate or rescind the contract, to enforce warranty rights (e.g., repair or subsequent delivery) or to seek injunctive or other relief.
The most frequent consequence of breach of contract is damages. As a basic principal under Swiss law, damage is understood to be every involuntarily, and therefore unintentional, loss that consists in either a decrease of assets, an increase of liabilities or a loss of profit. The purpose of damages is compensatory rather than punitive.
The aggrieved party, as a rule, has a claim for damages in an amount that equals the difference between its actual economic situation and the hypothetical economic situation it would have been in had the contract been fully and properly performed (expectation damages). Considering this, the aggrieved party is entitled to recover any actual financial loss, including any indirect and consequential damage, such as loss of profit. The burden of proof, however, lies with the aggrieved party, which must establish that the profit would in all likelihood have been realised in the ordinary course of business.
When determining the lost profits, a court will have regard to the ordinary course of events and assume that the claimant would not have missed reasonable business opportunities available under the specific circumstances, and that those ordinary profits would not have been diminished by unexpected adverse circumstances. The remedy of expectation damages is usually available in cases of non-performance or defective performance (see above).
On the other hand, restitution damages are usually owed if a party's trust in the validity of a contract is disappointed, for example, in cases of liability for culpa in contrahendo or if the contract is rescinded because of error, fraud or duress. If restitution damages are due, the aggrieved party must be placed in the position he or she had would have been in had he or she never been involved in the negotiations and the transaction. In particular, all useless expenses incurred in connection with the contract are reimbursable. In exceptional circumstances, lost profit may also be eligible for compensation.27
Swiss contract and commercial law has a long tradition and usually gives the parties great freedom to design their contractual relations. Its basic legal principles have not changed in years, and no major changes are planned for the foreseeable future. This contributes to legal certainty and predictability for the parties.
The civil and commercial courts in Switzerland are usually specialised and endeavour to settle disputes in a competent, pragmatic and efficient manner. In addition, international commercial arbitration is very widespread and efficient in Switzerland. Owing to Switzerland's independence and stability of the legal system as well as its high level of contractual freedom, international parties often choose Swiss law as the applicable law of their contracts, and they provide for jurisdiction in Switzerland.
1 Patrick Rohn is a partner at Thouvenin Rechtsanwälte KLG. The author would like to acknowledge the assistance of colleague Victoria Kannewischer in the preparation of this chapter, as well as the assistance of former colleague Carolina Keller Jupitz in the preparation of an earlier version of this chapter.
2 Ingeborg Schwenzer, Schweizerisches Obligationenrecht: Allgemeiner Teil, 7th edn., Bern, Stämpfli Verlag, 2016, Paragraph 28.05.
3 Corinne Zellweger-Gutknecht and Eugen Bucher in Honsell Heinrich, Nedim P Vogt and Wolfgang Wiegand (eds.), Obligationenrecht I: Art. 1-529 OR (Basler Kommentar), 6th edn., Basel, Basel Helbing Lichtenhahn Verlag, 2015, preface, Article 1, Paragraph 15 f.
4 BGE 140 III 200 consid. 5.2; BGE 124 III 363 consid. II.5.b; BGE 116 II 695 consid. 2 et seq.
5 Marc Amstutz and Markus Wang, Internationales Privatrecht (Basler Kommentar), 3rd edn., Basel, Basel Helbing Lichtenhahn, 2013, Article 116, Paragraph 39; BGE 131 III 511, 516.
6 Amstutz and Wang, Internationales Privatrecht, Article 116, Paragraph 52.
7 BGE 128 III 265, 267 consid. 3a.
8 BGE 121 III 118, consid. 4 b/aa.
9 BGE 129 III 118, 122 consid. 2.5.
10 BGE 128 III 265, 267 consid. 3a.
11 Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
12 Samuel Baumgartner, Annette Dolge, Alexander R Markus and Karl Spühler, Schweizerisches Zivilprozessrecht: mit Grundzügen des internationalen Zivilprozessrechts, 10th edn., Bern, Stämpfli Verlag, 2018, Section 48 Paragraph 24 et seq.
13 Schwenzer, Schweizerisches Obligationenrecht, Paragraph 60.02; Heinrich, Vogt and Wiegand (eds.), Obligationenrecht I, preface, Article 97-109, Paragraph 1.
14 Heinrich, Vogt and Wiegand (eds.), Obligationenrecht I, Article 97, Paragraph 3 et seq.
15 BGer 4C.11/2003 (19.5.2003) consid. 5.2.; BGE 123 III 241 consid. 4b.
16 BGE 130 III 159 consid. 3.
17 Schwenzer, Schweizerisches Obligationenrecht, Paragraph 66.15 et seq.; Heinrich, Vogt and Wiegand (eds.), Obligationenrecht I, Article 107, Paragraph 6 et seq.
18 BGer 4A_472/2010 (26.11.19) consid. 3.2.
19 BGE 134 III 438 consid. 2.2; BGE 119 II 222, 224.
20 Schwenzer, Schweizerisches Obligationenrecht, Paragraph 64.01 et seq.
21 BGE 111 II 471, 480.
22 Schwenzer, Schweizerisches Obligationenrecht, Paragraph 36.01 et seq.
23 BGE 95 II 407 consid. 1.
24 BGE 103 II 129.
25 BGE 136 III 528 consid. 3.4.2; BGE 132 II 161 consid. 4.1.
26 BGer 4C.226/2001 (21.11.2001) consid. 6; BGer 4C.225/2004 (11.1.2005) consid. 3.2.
27 Schwenzer, Schweizerisches Obligationenrecht, Paragraph 14.31.