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5 April 2020
What are the rules under Swiss law if contracts can no longer be performed or contractual services or deliveries become useless due to the corona situation? Is COVID-19 force majeure? Can I amend my contracts now?
Here are the answers to the nine most important questions about the impact of the coronavirus on contracts under Swiss law:
The contract lapses.
Many businesses such as retail shops, restaurants, tour operators and most companies in the Canton of Ticino are directly affected by the Federal COVID-19 shut down and are no longer allowed to provide their services. It is impossible for them to perform their contracts during the lockdown.
In case of impossibility, under Swiss law, a party is no longer required to perform its contract nor is it liable for damages. However, the counterparty is entitled to reimbursement if it has already performed its part of the contract. Thus, any advance payments must be refunded.
The performance of a contract is only impossible if, by its nature, it must be performed during the lockdown. If performance is still possible after the shut down's end, the default rules apply (see below).
Impossible are only those services or deliveries that are directly prohibited during the pandemic (for instance, making equipment available in a fitness center) or that can no longer be provided due to the ban (e.g. instruction of users on the equipment). Yet, even if a shop is closed, it is still possible to receive most deliveries and services from suppliers (for instance, delivery of goods for the shop in the fitness center). If performance is still possible, but of no use to the recipient, the contract remains valid, but it might still be possible to modify the contract (see below).
The contracts remain valid.
Even without an official ban, a party may be prevented from performing a contract; for example, if, due to the corona epidemic, necessary parts are not available from suppliers or employees are absent. However, under Swiss law these circumstances are not sufficient to render contract performance impossible, because, technically, contractual performance is still possible. However, this situation can still be the basis for modifying the contract (see below) or for claiming an extension of the delivery periods (see below). Also, such a contracting party does not become liable for damages if the delay in performance occurred without its fault.
It depends on the contract, but there is no liability for delay in the absence of fault.
Generally, a party is liable for the damages caused by a delay in performance unless it can show that it is not at fault. For many delays in performance caused by coronavirus, the relevant party may be able to show that it was not at fault and, thus, avoid claims for damages. Whether or not the difficulties to perform are due to the fault of the relevant party will depend heavily on the individual case. Difficulties are only considered as not caused by the relevant party if there was no way to avoid them, for instance, by taking timely precautions such as the early involvement of alternative suppliers.
Irrespective of whether or not the counterparty has a claim for compensation, it has to be determined whether or not performance is still due despite the delay. In this regard, the regular default rules apply and it has to be determined in each individual case what the contract provides in case of a delay in performance.
Depending on the case, the contract may be modified.
Under Swiss law, contracts must be performed as agreed (principle of pacta sunt servanda), regardless of whether the contract has become useless or burdensome for one of the parties. Exceptionally, though, a contract may be modified if the circumstances have changed fundamentally (doctrine of clausula rebus sic stantibus). The change must have occurred after the conclusion of the contract, must not have been foreseeable or avoidable by the parties and must result in an obvious imbalance.
For many contracts, the corona epidemic is likely to have created the conditions for a modification. In particular, companies that are no longer allowed to provide their services due to an official COVID-19 ban have a good basis to request contract modifications from their counterparties.
Whether and how the contracts are to be modified depends on the individual case. The modification should balance both parties' economic interests considering all circumstances. The contract cannot be modified unilaterally, the modification must be negotiated with the counterparty or, absent an agreement, adjudicated by a court.
Force majeure is a not a statutory legal term under Swiss law. However, many Swiss law governed contracts expressly define force majeure. Whether they include epidemics or pandemics depends on the actual wording in the individual contract. The rights of the parties in the event of force majeure (e.g. standstill of contractual obligations or right to terminate without notice) also differ from contract to contract. Thus, whether or not the coronavirus is force majeure, and what impact the epidemic or pandemic has on contractual obligations, will depend on the actual circumstances and the interpretation of the respective contract.
There is no general right of termination without notice in case of force majeure.
Only in the case of impossibility does the obligation to perform lapse (see above). Further, the parties may have agreed on a right of termination without notice (see above). Finally, a permanent contract can be terminated for good cause if, for example, its continuation has become unreasonable for one party.
The corona epidemic may qualify as a good cause under certain circumstances. In many cases, however, the corona situation is likely to be viewed as a short episode considering the full contract period, which does not render the contract's continuation unreasonable. Absent a right to terminate, a party may still be entitled to a contract modification for the time of the lockdown (see above).
Already published VISCHER blog posts proved basic information on: employment contracts and COVID-19, reduced working hours, school closures and mass dismissals.
You can find information about the effects of COVID-19 on lease and rental contracts (only German) in our blog post on that topic.
Our blog post discussing cancellations of events (only German) is a vivid example of the interaction between impossibility and contract modification after official COVID-19 bans.
How to proceed with contracts in the wake of the coronavirus situation has to be assessed on a case-by-case basis. For questions or in-depth advice, please do not hesitate to contact your normal VISCHER contact person or the VISCHER corporate and commercial law team.
Category: Corporate and Commercial
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