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Contract Law

By Roberto Dallafior and Simone Stebler

The article on contract law describes the formation of a contract under Swiss law, elaborates on enforcement and breach of contracts as well as on transfer and assignments of contractual claims and describes the most important special types of contracts, such as sales contracts, lease contracts, suretyships and guarantees, work contracts, service contracts, joint venture and license agreements. Where necessary to the understanding of the common law trained reader, differences between the common law and the civil law system in use in Switzerland are identified and described.

The article starts by identifying the main legal source of Swiss contract law, which is the Swiss Code of Obligations. The Swiss Code of Obligations is divided into a General Part and a Special Part. The former is applicable to all contracts and the latter contains rules about specific types of contracts, such as sales of goods or loans. It bears note, however, that not all contracts are specifically governed by the Code of Obligations and that according to the principle of freedom of contract the parties are free to enter into contracts of whatever content.

In terms of formation of contract, the article points out that under Swiss law a contract is formed by and based on the mutual assent of the contracting parties. This mutual assent is reached and evidenced by an offer of one party and its acceptance by the other party. Unlike the mirror-image rule in common law, Swiss contract law requires a mere assent to the essential elements of the contract. Only few formal requirements exist under Swiss contract law. Only contracts for the sale of real estate, executor contracts of donation and certain others need to be in writing and possibly need additional form requirements. A contract can be entered into through an agent or representative, if the duly authorized agent did act in the name of the represented party.

The article stresses that contracts are interpreted not only on the basis of their wording but also by taking into account the conduct of the parties, all the circumstances and the purpose of the transaction. According to the principle of reliance the conduct of the parties has to be interpreted from the point of view of a correct and reasonable business partner acting in good faith.

Under Swiss law a contracting party may avoid the contract when it made a mistake in declaring its intent or when it entered into the contract based on a mistake as to the basis of the contract. Swiss law also recognizes the voidability of a contract based on duress and fraud.

Once a contract formed, Swiss contract law sets forth rules for the performance and enforcement of contractual claims as well as for breach of contract, rescission and damage, which are elaborated in depth in the article.

It is worth mentioning that Swiss law not only permits enforcement of contracts without consideration but also permits the obligee to seek for specific performance. However, when certain conditions are met the obligee is free to substitute his claim for specific performance with a claim for damages.

The article on contract law pursues by describing the breach of contract, which is presumed as soon as the obligor fails to perform a principal contractual obligation, and the available remedies, such as a claim for specific performance and damages. Also addressed are the calculation of damages and the applicable standard of proof for damages and it is emphasized that Swiss contract law under certain limits permits contractual rules that limit the remedies for default and/or breach of contract.

Under Swiss law, contractual claims are time barred. The Swiss Code of Obligations recognizes a time limit of five years for certain contracts, such as contracts for rent or hire, and one of ten years for all other claims. In both cases, the time limit begins to run when the claim becomes due and under certain conditions both time bars can be interrupted or suspended.

As set out in the article, Swiss law allows the offset of claims if two persons owe each other a sum of money and if some other conditions are met. The Swiss Code of Obligations also provides rules for the transfer and assignment of contractual claims, which are explained more deeply in the article.

The article resumes by describing some important special types of contracts regulated by the Swiss Code of Obligations. First, the article addresses the sales contracts, which can be categorized into domestic and international sales contracts. Domestic contracts for the sale of goods are regulated in Articles 184 to 215 of the Swiss Code of Obligations. International sales contracts between parties whose places of business are in different countries are governed by the United Nations Convention on Contracts for the International Sale of Goods of 1980, but only with regard to the formation of the contract and the rights and obligations of each party.

The second contract type addressed is the lease contract governed by Articles 251 to 274g of the Swiss Code of Obligations. A lease contract is a contract in which the lessor consents to transfer movable or immovable goods for use, and the lessee agrees to pay the rent. Not specifically regulated by the Swiss Code of Obligations are leasing contracts. However, courts and legal scholars have developed legal principles which govern this type of contract.

Third, the article elaborates on work contracts, which are specifically regulated in Articles 363 to 379 of the Code of Obligations. In these contracts, the contractor agrees to produce a work against remuneration.  The term work is construed in a broad sense and includes work of physical, intellectual, artistic or scientific nature.

The fourth type of contract addressed in the article is the mandate or service contract, which is as well regulated in the Code of Obligations. The main characteristic of these contracts is the agreement of the service provider, such as a lawyer or physician, to carry out the contractually agreed services. A compensation is only payable if agreed or customary and a service contract can be terminated by each party at any time.

Fifth, the article proceeds with an overview over the two means of securing the performance of a third party which are the suretyship and guarantee. The article describes the strict form and other requirements for a suretyship to be valid and explains the various types of suretyships, which are governed in Articles 495 to 498 of the Code of Obligations. In contrast to suretyship, no form requirement must be met for a guarantee to be valid. The article addresses the often occurring difficulties in deciding whether a security is to be construed as a guarantee or as a suretyship and points out that the construction primarily depends on the intent of the parties and the purpose of the contract.

The sixth type of contracts addressed is the contractual joint venture governed by Articles 530 to 551 of the Code of Obligations. Under Swiss law, contractual joint venture exists, if at least two persons pursue a common purpose with common efforts or means, provided that no other form of organization regulated by the Code of Obligations applies. In order to establish a contractual joint venture no formal procedure needs to be followed and there are no legal requirements as to the minimum capital or management structure. The rights and obligations of the parties to the joint venture are described in detail in the article.

Finally, the article concludes with a short overview over the license agreement, which is not specifically governed by the Code of Obligations and by which the licensor concedes to the licensee the use and utilization of an intellectual property right or technical or commercial trade secrets.