Contractual parties from different countries (for instance, a seller in Germany and UK customer) may consciously pick Swiss law as the appropriate law for their commercial transaction.
Such a choice of law arises very commonly in international business transactions for many reasons. With contractual restrictions on damages being key in commercial contracts, enabling parties to identify better and handle business risks stemming from a commercial transaction. We discuss contractual limitations on damages under Swiss law, i.e., obligations cannot be excluded or reduced.
For what reasons do commercial contracts include restrictions on the extent of a party’s liability?
Every business transaction entails risks for which the parties may be accountable, for instance, project delays or non-conformity of the supplied items. In the absence of an effective limitation of liability provision, there is no financial maximum on the damages that might be collected except for legal restrictions under statute law. It is, therefore, vital to ensure that business contracts have some restrictions and that these limits are practical.
Limitation of liability provisions may take a variety of forms. Some provisions aim to eliminate culpability completely. Others set a restriction on responsibility, for example, by limiting the amount due in damages, excluding particular categories of damages such as consequential or indirect loss, restricting warranties and specified remedies, or placing limited time limitations on claims.
Which limits of responsibility are allowed under Swiss Law?
Swiss contract law is primarily founded on the idea of freedom of contract, and there is extensive opportunity for contractual restriction (including exclusion) of liability. However, limitations of liability are not permissible without constraint.
Taking the example of the limitation of responsibility in terms of maximum amounts (financial caps), the following legislative constraints apply from a Swiss law perspective:
any agreement formed in advance and pretending to restrict responsibility for illegal intent or gross negligence is invalid (although, it would be possible to conclude such an agreement retrospectively);
if the restriction of liability occurs in connection with business operations that are legally regulated by the state (e.g., banks), the preceding limitation of responsibility for mild negligence may, at the court’s discretion, also be invalid;
in theory, limitation of responsibility is not recognized for death or personal harm;
Additionally, limitation of responsibility is not possible under some parts of the Swiss Code of Obligations (e.g., relating purchase contracts, employment contracts, and service contracts) or certain specific regulations such as the Swiss Product Liability Act.
Restrictions on consumer contracts or general terms and conditions are more limited than those on commercial contracts.
What are the effects of restrictions of liability beyond the statutory limits?
Contractual restrictions on damages that exceed the statutory limits are not valid. From a Swiss legal viewpoint, provisions exceeding the statutory limitations may be reduced to allowable. The clause in issue affects a portion of the contract that is not important to the entire contract (so-called partial ineffectiveness of severability). However, intending to prevent incentives for parties to add excessive restriction provisions, more and more voices call for complete ineffectiveness, particularly involving consumers and general terms and conditions.
What else must be taken into consideration while establishing limits of liability?
Limitations of liability are seldom one-size-fits-all. Each agreement is highly reliant on the facts of the parties’ connection (the parties’ roles, industry, the value of the deal, significance of the deal, etc.), the risks connected with the transaction (scope, probability, expenses, etc.) as well as the other provisions in the agreement. Limitations of liability typically intersect with other critical terms (e.g., warranties, indemnity, etc.) and cannot be understood or negotiated in isolation.
A party wanting to incorporate a limitation clause in a contract should thus carefully assess the transaction at hand, study the entire contract and verify the statutory limitations and destiny of provisions exceeding the statutory limits under the relevant legislation.