Switzerland: Disruption To Contracts Resulting From COVID-19 And Governmental Measures

The continued spread of COVID-19 and governmental measures to combat the pandemic will inevitably disrupt contracts. They will do so in different ways, and depending on the specific situation, various legal concepts may apply. Typically, parties in essence ask if they are exempt from performing as contracted, if they are exempted from damages, if they still need to perform, if it is still possible to perform but performance has become more onerous or whether the entire purpose of the contract is defeated. Furthermore, parties may look for ways to exit the contract, including a situation where the creditor anticipates the debtor will no longer be able to perform at the relevant point in time.

Overview

In cases where the COVID-19 pandemic or governmental measures disrupt contracts, it is necessary to analyse the situation carefully to determine the appropriate legal instrument to address it.

Depending on the situation and the priorities of each specific party, contractual arrangements such as force majeure clauses may provide an adequate answer. But this is not necessarily so. It may well be the case that general or specific termination rights or instruments of general contract law allowing for rescission due to mistake (Irrtumsanfechtung), adaptation of the contract due to changed circumstances (clausula rebus sic stantibus / hardship), termination for anticipatory breach of contract (antizipierte Vertragsverletzung), exit from the contract against payment of a penalty (Wandelpön) or that destroy or impair the legal validity of the contract due to impossibility will be able to provide the proper course of action.

Case Profiling

For a proper evaluation of the legal situation, parties should first set up a case profile. Preliminary questions that could provide guidance include:

Which of the parties is affected? Which party owes monetary performance, which party owes non-monetary performance? Is the contract a one-off contract, an instalment contract or a long-term contract with recurring performances? What is the nature and what are the processes behind each individual obligation under the contract? Which contractual obligations are affected? Is performance still possible, even if it has become significantly more onerous? Is counter-performance expected to remain possible? Does the pandemic itself impede performance, or is it a result of a governmental measure taken in response to the pandemic?

Following on from the case profile, parties should then define their priorities, which will, to a large extent, be driven by commercial / business considerations:

Exiting the contract (potentially irrespective of exit costs)? Release from performance? Exemption from damages? Adaptation of the contract (postponement, price adjustment etc.)? Recovering advance payments?

Legal Concepts Available

Applicable Law

In order to determine the legal concepts best suited to address the identified priorities, it is necessary first of all to determine the applicable law. Switzerland is party to the 1980 United Nations Convention on Contracts for the International Sale of Goods ("CISG").

The CISG applies to sales of existing goods, but also to contracts for the sale of goods to be manufactured, even if such contracts under the Swiss Code of Obligations ("CO") would qualify as work contracts (Werklieferungsverträge). It also applies to mixed contracts, unless service obligations under the contract make up for the preponderant part of the obligations of the supplier of the goods.

Courts have consistently held that choosing Swiss law without excluding the CISG or specifying that the CO should apply leads to the application of the CISG. In the present context, the available legal concepts and results differ materially between CISG and CO. A careful analysis of the applicable law is therefore imperative.

Force Majeure Clauses

Irrespective of whether the CISG or the CO applies, regard must first be had to the contents of the particular contract. Significant attention is currently devoted to force majeure clauses.

Parties need to check whether the particular clause exempts only from damages (as is frequently the case) or also releases from performance itself (e.g. in corporate transactions in the form of material adverse change clauses).

In either case, it is necessary to examine, whether the pandemic and / or any governmental measures are covered by the wording of the clause or, as the case may be, by any definition in the introductory part of or annex to the particular contract.

Parties then need to clarify, if any termination right triggered by a force majeure event is mutually available or available only to the respective counterparty

In addition, force majeure clauses may require that the party relying on force majeure notifies the counterparty. In as far as the clause itself, or the contract otherwise, sets forth requirements with respect to time, form and addressee of any such notification, they must be observed.

Further questions arise, if the particular force majeure clause requires (as is frequently, but not always the case) that the force majeure event must have been unforeseeable, unavoidable and could not have been overcome by the party now seeking relief under the clause.

Impossibility

Under the Swiss CO, impossibility subsequent to the conclusion of the contract releases both sides from their obligation to perform and leads to the unwinding of the contract under the rules of unjustified enrichment (Art. 119 CO, Art. 62 CO). An exception is typically made for long-term contracts, where unwinding of past performances would be unreasonably complicated.

Whether performance is actually impossible is a question of the circumstances of the particular case. If the contract contains a force majeure clause providing exemption only from damages, the interplay of such a clause, especially its definition of a force majeure event, with the notion of impossibility will have to be clarified.

Where one party has caused subsequent impossibility by negligence, the other party will have a claim for damages (Art. 97(1) CO).

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