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1 November 2023

The essentials of Swiss contract law: Extra-contractual liability (no. 10)

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

Art. 41(1) CO states that whoever unlawfully causes damage to another, whether willfully or negligently, is liable for damages. Equally liable for damages is any person who willfully causes damage to another in violation of bonos mores (Art. 41(2) CO)

Art. 41 CO applies if there is (1) an unlawful act or a violation of bonos mores, (2) damage, (3) a causal connection between the unlawful act or the violation of bonos mores and the damage and (4) negligence (or unlawful intent) of the defaulting party.

Unlawful act or violation of bonos mores

An act is unlawful under Art. 41 CO (a) if it infringes an absolute right, such as the right to life, bodily integrity, property, or personality, or (b), with regard to mere financial damages, if the conduct of the damaging party violates a rule of conduct that, although not protecting an absolute right, requires or forbids a certain conduct (e.g., criminal or civil fraud).

According to the Swiss Federal Supreme Court, Art. 41(2) CO is to be applied only under restricted conditions. E.g., the Court has found that it is a violation of bonos mores if certain conduct of a party does not serve the exercise of such party's rights, but exclusively or primarily aims at harming others. Furthermore, there seems to be a tendency that damages are awarded under Art. 41(2) CO if there is a particular (mutual trust or fiduciary) relationship between the defaulting and the harmed party.

In the international context, it is important to stress that pursuant to the case law of the Swiss Federal Supreme Court, only violations of Swiss law constitute an unlawful act under Art. 41 CO. The violation of foreign law may, however, qualify as a violation of bonos mores.

Damage

Swiss law defines damage as the involuntary diminution of the net worth of one's assets, which may consist in a reduction of the assets or an increase of the liabilities. According to the prevailing difference theory, the actual status of assets and liabilities has to be compared to the status of assets and liabilities as it would have been without the harmful event. The difference between the actual status of assets and liabilities and the hypothetical status of assets and liabilities is the damage that occurred due to the unlawful act or the violation of bonos mores. This means that only financial loss may constitute damage in a legal sense in Switzerland. Under the difference theory, losses not incurred by the damaged party cannot be claimed: e.g., the mere abstract loss of the possibility to use an item or to occupy an employee (loss of opportunity) is not a loss in the sense of the law and damages can therefore not be claimed.

Causal Nexus

Liability for unlawful acts or violations of bonos mores under Swiss law subsists only if the unlawful act was causal to the damage occurred.

Firstly, there must be a causal connection between the harmful conduct and the damage occurred. Pursuant to the conditio sine qua non-formula, this is the case if the damage would not have occurred if the harmful conduct had not taken place (so called "natural causal connection" ["natürlicher Kausalzusammenhang"]).

Secondly, the causal connection must be adequate. According to the standing case law of the Swiss Federal Supreme Court, there is an adequate causal connection if, according to the normal course of events and general life experience, the cause is likely to induce the occurrence of the respective result or if the occurrence of such result seems at least favoured by such cause.

Fault 

In contrast to the general contractual liability for breach of contract pursuant to Art. 97 CO (see our previous blog on contractual liability), the fault of the party responsible the damage is not presumed under Art. 41 CO. This means that the claimant needs to prove the fault of the party causing the damage when making a claim (Art. 8 CC).

The notion of fault includes both intent and negligence. Hence, the claimant will usually need to show that the party causing the damage acted at least negligently. There is an exception if the unlawful acts consists of a criminal act that is not punishable if committed only negligently.

Remedies

The harmed party may claim compensation for the damage which has occurred because of the unlawful act or the violation of bonos mores. This includes a reduction of the assets of the harmed party (damnum emergens), any loss of profit (lucrum cessans) as well as direct and indirect damage.

Alternative agreement of the parties

The statutory rules on the general extra-contractual liability contained in Art. 41 CO are not mandatory. They may therefore be amended. This means that, e.g., a contractual agreement on the limitation of liability will usually also apply to a possible extra-contractual liability within the scope of the contractual relationship.

However, the freedom of the parties to limit or exclude liability is limited by Art. 100(1) CO, which sets out that an agreement entered into in advance, according to which liability for unlawful intent or gross negligence would be excluded, is null and void (see our previous blog on the limitation of liability). This rule applies to Art. 41 CO as well. E.g., if parties contractually agreed on a limitation of liability, this limitation also applies to claims based on extra-contractual liability.

CULPA IN CONTRAHENDO

Applicability

According to the concept of culpa in contrahendo ("c.i.c."), a person may be held liable if it violates its duties under the pre-contractual mutual trust (obligation to act in good faith). A claim based on c.i.c. may be granted in situations where the seller has a duty of disclosure towards the buyer. Under Swiss law, in general, no such duty exists. However, there are certain situations where it does, e.g., the seller may be obliged according to the principles of good faith to disclose certain properties of the object of purchase to the buyer. This is in particular the case if the seller is aware that a specific issue is of particular interest to the buyer. A duty to disclose therefore subsists: (1) if there is a material issue which could have negative effects and which may not be known to the buyer on the basis of the facts that are obvious to the buyer and the documents usually handed over to the buyer and which, if known to the buyer, would have changed its negotiation strategy materially or (2) if the seller recognizes or has to recognize from the course of the negotiations that the buyer is acting under a material error (see our previous blog on rescission of contracts). Analogous considerations apply to other kinds of contracts.

The applicability of the concept of c.i.c. always requires fault of the part of the defaulting party. The buyer must therefore prove that the seller has acted at least with negligence.

Remedies

If a court finds culpa in contrahendo, the damaged party may be awarded compensation or the contract may be rescinded. If due to the culpa in contrahendo no contract was concluded, the remedy will be damages. However, if the culpa in contrahendo resulted in a disadvantageous contract, the legal doctrine is in favor of a right to terminate the contract.

If you have any questions on extra-contractual liability under Swiss law, please do not hesitate to contact our team.

Other articles in the series:

Authors: Christian Oetiker, Pascal Burgunder, Selim Keller

Categories: Litigation and Arbitration, Blog

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