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27 September 2023 The essentials of Swiss contract law: Default (no. 8)

This blog series gives a short and compact overview on the essential elements of Swiss contract law.

In Swiss contract law, there is a clear distinction between defective performance and default on performance. While defective performance leads to contractual liability, default refers to the failure to fulfill obligations within the agreed timeframe. With regard to the legal consequences in the context of a defective performance, reference is made to our previous (TBC) blog on the liability for a breach of contract. This article sheds light on the concept of default under Swiss law, exploring its prerequisites and legal consequences.

Prerequisites of default under Swiss law

A debtor defaults if it does not fulfill its obligations within the specified time although performance is still possible (Art. 102(1) CO). This is different from defective performance, where the obligation is performed on time, but does not meet the contractually agreed quality requirements. The prerequisites for a debtor to be in default under Swiss law are as follows:

  1. The debtor refuses to perform its obligation despite being capable of doing so. This is always the case, for example, if the debtor does not pay a monetary claim.
  2. The concerned obligation is due. The obligation's due date is usually determined by the contract.
  3. If the parties have not agreed on a specific due date, the creditor must formally remind the debtor of its obligation. The formal reminder is an explicit request of the creditor to the debtor to perform the contractual obligation. In theory, the reminder does not require any formalities and, for example, does not need to be in writing. However, in a dispute, the creditor has to prove the service of the formal reminder. Therefore, it is advisable to issue the reminder in a form that allows proof of receipt (e.g. dispatch by registered letter).
  4. There are no grounds that would exclude the default. The creditor cannot, for example, require the debtor to perform without having already performed (or at least having duly offered to perform) itself if it is contractually obliged to perform in advance.

Legal consequences

If the aforementioned requirements are met, the debtor is in default. There are, in essence, three immediate consequences of a default under Swiss law (Art. 103 et seq. CO):

  1. Interest on default (Art. 104-105 CO): In the case of a monetary obligation, the creditor may demand payment of at least 5% interest on default (Art. 104(1) CO). This consequence does not require fault on the part of the debtor or proof of damage of the creditor.
  2. Damages (art. 103 CO): The creditor can claim compensation for any damage resulting from the default. The aim is to place the creditor in the same position as if performance had been made on time.
  3. Liability for accident (art. 103 CO): The debtor in default is liable for accidental loss or damage (Art. 103(1) CO). In other words, the debtor is responsible for any event that is beyond the parties' control. If performance becomes impossible due to such an event, the debtor is liable for any damage this causes to the creditor.

Creditor's options with regard to further (non-)performance

With regard to the further performance of the contract, the creditor has several options on how to proceed in the event of default.

As a first step, the creditor must set a reasonable deadline for the debtor in default to perform (Art. 107 (1) CO). The time limit is reasonable if the debtor has sufficient time to fulfil its obligations within the time limit set. In practice, the creditor regularly sets the time limit in its formal reminder (as a condition of default, see above). This approach (combining the necessary reminder with a reasonable time limit) is permissible and sensible in practice.

In exceptional cases, there is no need to set a final time limit for the debtor to perform. This is the case, for example, if the debtor's behavior shows that setting a time limit would be pointless (e.g., if it has already stated unequivocally that it will not perform), or if a late performance would be useless to the creditor (Art. 108 CO).

If the debtor fails to perform after the final time limit or if setting a time limit is not necessary, the creditor has two options:

  1. Adherence: The creditor can chose to adhere to the performance, sue for specific performance and claim compensation for any damage caused by the delay. The creditor also has the option of setting a further time limit. In this case, they retain the option of adhering to, or waiving, performance.
  2. Waiver: The creditor may waive the debtor's performance. In this case, the creditor must immediately notify the debtor of its waiver. Thereafter, the creditor can either sue for damages due to non-performance (requiring fault on the debtor's part) or withdraw from the contract and claim damages (without the debtor's fault being required). For continuing obligations, the right to withdraw is substituted by a right to terminate, which affects only future performances.

Determining whether to adhere to the contract, claim damages, or withdraw from the contract requires careful consideration of the specific circumstances and all the interests at stake.

In each case, an understanding of the concept of default under Swiss contract law is essential for both obligors and creditors. By grasping the prerequisites and legal consequences, parties can navigate defaults effectively and protect their rights and interests within the framework of Swiss contract law.

If you have any questions in connection with a delayed performance of a contract and any potential consequences thereof, our Disputes Resolutions Team will be happy to assist you at any time.

We have also published a podcast episode on this topic, in which we briefly explain the concept of default under Swiss law, exploring its prerequisites and legal consequences.

Other articles in the series:

Authors: Christian Oetiker, Pascal Burgunder, Selim Keller

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