Supply-side contracts are often structured as a purchase contract, contract for work, service contract, or a mix thereof, depending on the type of materials, goods, or services procured. A purchase contract is distinguished by exchanging an object of purchase (which may also include groups of assets, rights, and claims of various sorts, natural forces like electricity and water, or economic advantages such as goodwill and knowhow, to mention a few) for money.
Meanwhile, both labor contracts and service contracts are distinguished by a commitment to executing a certain work or service. The primary difference between these two types of contracts is the verifiability of success. In a work contract, the service provider agrees to execute labor to deliver a (tangible or intangible) work outcome that meets the agreed-upon (or implied) specifications. As a result, the service provider owes an objectively provable effect or result. Contracts in the construction, manufacturing, and maintenance industries are classic examples.
In contrast, the outcome of the service provider’s efforts cannot often be tested against objective criteria under a service contract. As a result, the service provider is not required to accomplish the anticipated result to fulfill the contract but is just required to perform the agreed-upon services diligently. Consultancy and management services are common services delivered under a service agreement.
Considerations for Drafting
The CO includes a special set of regulations for each of the above-mentioned categories of contract, which complement and, in the event of a disagreement, precede the requirements of the general part of the CO. However, because the vast majority of the CO’s provisions are non-mandatory, parties frequently choose to replace a larger portion of these provisions with their unique contractual agreement. In the case of contracts that mix different services and deliverables and do not clearly match one of the above-mentioned contracts, it is especially important to spell out the parties’ obligations and available remedies in more detail.
While the specification of deliverables and services and the accompanying remuneration are the focal point of any supply agreement, the following issues are frequently a source of contention. They should be addressed, particularly in mixed-type contracts:
Subcontractor involvement and liability: By default, the service provider under a work contract is free to designate subcontractors but remains entirely liable for the end outcome. In contrast, the service provider is more constrained in appointing subcontractors by default under a service agreement but has a limited obligation in circumstances where such restrictions do not apply.
Acceptance procedure, warranties, and remedies: The CO specifies a precise (albeit not identical) default acceptance procedure for purchase contracts and work contracts, as well as remedies in the event of non-conformity of goods or deliverables. These are regularly updated since they do not meet the parties’ needs, especially in the case of increasingly complicated projects.
Termination: By default, the CO provides several termination choices to the customer under a work contract, frequently amended or excluded. For service contracts, the CO states that either party may end the contract at any time (subject to liability for damages in case of untimely termination). The Federal Supreme Court has ruled on various occasions that this termination power is mandatory and that the parties are thus not bound by the contract duration or notice periods.