Posts in "Commercial Law"

Swiss Commercial Contracts – Distribution Agreements

A company may promote its products in a variety of ways. While some manufacturers choose to offer their products directly to customers via their retail stores and websites, most opt to work with intermediaries through so-called distribution agreements.

The following are the most popular forms of distribution agreements in Switzerland:

Agency agreement: The agent acts as the manufacturer’s extended arm. The agent facilitates sales of products or enters into sales contracts on behalf of and for the account of the manufacturer.

In a nutshell, a distribution agreement states that the distributor is an independent dealer. The distributor buys the items from the producer and resells them under its name and account. The distributor is responsible for the sales risk.

Franchise agreement: The franchisee is also an independent dealer, but they distribute products and services by the franchisor’s standard distribution and marketing philosophy.

The parties are allowed to negotiate the conditions within the bounds of the law. Competition law establishes important boundaries. While an agency agreement must conform with numerous statutory aspects of contract law, the parties to the other two kinds have significant leeway in drafting their contracts.

Agency Agreements

The agent gets compensated depending on performance. It is entitled to the agreed-upon commission on all transactions aided or closed throughout the agency relationship. Unless otherwise agreed in writing, the agent is likewise entitled to a commission on transactions closed by the principal without the agent’s active participation, provided that the agent sought the respective client for such transactions. Suppose an agent is assigned an exclusive territory or client group. In that case, the agent is entitled to a commission on any transactions finished with customers from that territory or customer group, even if the agent did not contribute to completing the corresponding transaction. Because disagreements often develop at the end of a partnership, it is especially important to agree on clear and easy norms for the commissions that the principal owes at and after termination.

If the following requirements are satisfied, an agent may be legally entitled to fair remuneration for customers upon the termination of the agency agreement: The agent’s activities significantly increased the principal’s clientele; the principal benefits significantly from the business relationship with the clientele after the agreement is terminated; the award of such compensation is not inequitable, and the agreement was not terminated for a reason attributable to the agent. The maximum compensation amount is equal to the agent’s net yearly profits from the agency connection computed as the average over the previous five years or, if shorter, the average throughout the life of the agreement.

A Narrow Interpretation of Distribution Agreements

There are no special requirements in Swiss contract law that relate to distribution agreements in a broad sense. However, by analogy, rules designed for other agreements may apply to the individual distribution agreement. This may be especially true for agency law rules. The remuneration for clientele is the most prominent example of such an analog application. The Federal Supreme Court specified the grounds for a distributor’s entitlement to clientele reimbursement. In a nutshell, it demands that the distributor’s condition be comparable to that of an agent. The Federal Supreme Court considered the amount of autonomy of the distributor: the more restricted the distributor’s autonomy and the greater its integration into the seller’s sales team, the more likely the distributor would be entitled to compensation. This determination must be made on a case-by-case basis, considering the specific circumstances.

Franchise Agreements

Franchise agreements may be subject to rules created for other sorts of agreements. Aside from sales agent legislation (e.g., the claim for clientele compensation), individual labor law rules may apply by analogy to safeguard franchisees, especially under a subordination franchise agreement where the franchisee lacks control over its business choices (similar to an employee). The more the franchisee’s lack of autonomy, the greater the possibility for labor law to be relevant by analogy.

This risk may be reduced by not placing limits and requirements on franchisees normally placed on employees. It is also critical to mention explicitly in the agreement that the franchisee will continue to be a legally independent entrepreneur with the flexibility to make its own business choices. On the other hand, a judge may reach a different decision after reviewing the whole agreement and how it was executed. The implementation of labor law rules may have far-reaching implications for the franchisor. The franchisor, for example, may be held liable for the franchisee’s social security payments.

Swiss Commercial Contracts: Contracts for Supply

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.

General Swiss Contract Law in 2022: The Swiss Code of Obligations (CO)

For commercial contracts governed by substantive Swiss law, the CO is the primary source of law. The CO includes broad laws on contract law and regulations on specific forms of contracts, such as purchase contracts, leases, and contracts for work or services. These rules also apply (by analogy) to contract kinds not expressly covered by the CO (so-called innominate contracts).

Commercial Contract Formation and Validity

The contractual parties’ exchange of an offer and corresponding acceptance is the primary requirement for contract formation. The contract’s essential terms (essentialia negotii) must be included in both the offer and the acceptance. Contracts can generally be concluded without any formal criteria. Assignments, suretyships (guarantees), and property sale contracts are the principal exceptions to this norm. In practice, the parties frequently include explicit conditions in their contractual relationship to establish the content of their agreement.

Additionally, the fundamental notion of contractual freedom underpins Swiss contract law. It offers the parties the ability, within the bounds of mandatory legislation, to conclude or not conclude a contract, select their contractual partner, determine the contract’s content, and terminate or change a contract. Swiss contract law comprises few mandatory elements; further restrictions may be imposed by laws other than contract law, such as competition law, unfair competition law, criminal law, or tax law. A contract (or any part of it) is void if its conditions are impractical, illegal, or immoral.

Moreover, where there is a clear disparity between performance and counter-performance under a contract (due to one party’s exploitation, inexperience, or thoughtlessness), the injured party may declare within one year that it will not honor the contract and demand restitution for any performance already made. Furthermore, a party who enters into a contract due to (fundamental) error, fraud, or coercion may normally declare to the other party within one year that it does not intend to honor the contract; nonetheless, such party may become liable for damages.

Adoption and Use of Standard Terms

In B2B relationships, the rules governing general terms and conditions are nearly identical to those governing individual contracts, particularly the concept of offer and acceptance. According to the Federal Supreme Court, judicial authority over standard terms in business-to-business partnerships is limited to their incorporation. It does not include substantive control over their content (except for the application of mandatory law). Nonetheless, the inclusion of standard terms is a tool for controlling the substance of such terms, particularly under the general rule that odd standard phrases are not incorporated into the contract. Furthermore, if the structure of a specific provision allows for two distinct interpretations, the drafting party must bear the risk of ambiguity.

Contract Breach and Remedies

The type of breach determines the set of remedies accessible to the aggrieved party under Swiss law: impossibility, defective performance (including delivery of non-conforming products), or delay. If execution of an obligation is impossible for objective reasons before or at contract completion, the contract is void. Under the idea of culpa in contrahendo, the party who breaches the contract may be accountable for damages. In contrast, if the execution of an obligation becomes impossible after the contract’s conclusion due to the fault of one of the parties, the contract remains legal. In general, the offended party may seek restitution.

In the event of a party’s failure to perform properly, the other party may, as a general rule, seek either particular performance or damages. In practice, the common remedy is monetary damages (positive interest). In the event of purchase contracts and labor contracts, further remedies for non-conformity of the goods (or works) apply.

If a party fails to perform on time, it must pay damages for the delay. Subject to certain conditions, the aggrieved party may also (i) waive performance and seek compensation for damages incurred as a result of non-performance (positive interest), or (ii) withdraw from the contract and seek compensation for damages incurred as a result of non-performance (negative interest). Unless the parties agree differently, a debtor in default on paying a financial debt must pay default interest of at least 5% per annum.

Under Swiss law, both liquidated damages (meant to compensate for expected damage) and contractual penalties (meant to punish) are regularly utilized. However, at his discretion, a court may lower the number of liquidated damages or a contractual penalty if he believes it is excessive.

Liability and Liability Limitation

In general, the obligor is accountable for any fault attributable to it. The obligor carries the burden of establishing that it was not at fault for the contract’s incorrect or non-performance.

Swiss law allows for the limitation (and exclusion) of liability, such as for specific types of damages or financial limits. Any arrangement reached in advance that purports to limit liability for any unlawful purpose or gross negligence, on the other hand, is null and void. Furthermore, suppose the limitation of responsibility occurs in connection with state-licensed commercial activity (e.g., banks). In that case, the advance limitation of liability for mild negligence may be void as well, at the discretion of the court. Furthermore, under specified sections of the CO (e.g., governing purchase contracts or contracts for work) or specific laws such as the Product Liability Act, limitation of liability is not authorized for death or personal harm.

Termination and Term

In general, a contract can be entered into for a set period or unlimited time. A fixed-term contract expires with no warning. A contract with an indefinite term, on the other hand, maybe terminated by either party by giving notice of termination by the termination provisions agreed between the parties or, if a contract lacks any termination provisions or if mandatory termination provisions apply (such as lease or services), according to the statutory provisions of the CO.

In addition, in the case of continuous obligations, either party may cancel a Contract with immediate effect for valid reasons at any moment. Valid reasons are circumstances that make the contract’s continuation unacceptable to the terminating party. Such termination must be declared as soon as possible.

A Swiss Legal Perspective on Liability Limitations in Commercial Contracts

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.