This blog series gives a short and compact overview on the essential elements of Swiss contract law.
Introduction
At the time parties conclude a contract, they usually have – at least subjectively – the impression that the terms agreed upon are clear for both parties and that both parties attribute the same meaning to the terms used in the contract. However, during the performance of the contractual obligations, it sometimes becomes apparent to the parties that a term used in the contract can have different meanings or that the parties actually had different opinions on a specific issue. In these situations, the question arises as to how the contract has to be interpreted. Swiss law provides for a variety of approaches, which are applied in a hierarchy.
Subjective interpretation: True intent of the parties
Art. 18(1) Swiss Code of Obligations ("CO") deals with the interpretation of contracts. It establishes that, as regards both the form and the content of a contract, the mutually agreed, true intent is decisive, and not an incorrect statement or manner of expression used by the parties, whether due to error or with the intention of concealing the true nature of the contract. The wording of a contract, even if it is clear, is therefore not the only decisive element when a court has to establish the actual content of an agreement between two parties. Rather, the courts seek to establish the true intent of the parties at the time they entered into the contract.
When assessing the true intent of the parties, the courts will apply different interpretation techniques (see below). As to the facts, they will consider the circumstances of each individual case, in particular the parties' conduct, the various stages of the negotiations, earlier drafts of the contract and other facts that are relevant to the particular case. In general, the courts tend to construe contracts in a way that upholds their validity and enforceability ("favor negotii"). They are allowed to take into account customs and usages existing in the particular business and/or in the particular place where the contract was made or is to be performed.
The four main elements of contract interpretation
According to the classic approach of interpretation of legal texts under Swiss Law, there are four elements that have to be considered: (1) the wording, (2) the systematics, (3) the purpose and (4) the history of the contract. At least in theory, all four elements are of equal importance, although in practice the wording, in particular if clearly formulated, is always taken as some kind of starting point.
The classic method is mainly applied to the interpretation of the statutory law. Modern approaches to contract interpretation avoid the aforementioned categorization of the elements that have to be considered. They state that the wording of an agreement should be the starting point.
The interpretation of the wording should be based on the general use of the words. However, the individual use of some words by the parties, specific professional or ambient language or technical legal language may be considered if all parties to the agreement are familiar with it. The interpretation of the wording must not be limited to the words themselves but should also take into account the position of the words in the context and in the general concept of the contract (systematic element of contract interpretation). Contract (as statutory) interpretation is not limited in any case to the wording. There is no such rule pursuant to which the clear wording of a contract would be binding.
The parol evidence rule, from Anglo-American law, does not exist under Swiss law. Hence, the content of a contract is never limited to the written instrument it is embodied in, even if there is a clear statement to that effect. The courts may always have regard to extrinsic evidence as to the parties' true intent.
In addition, when assessing the true intent of the parties which is authoritative for the content of the agreement in the first place, the court may consider everything appropriate to show such intent. This includes in particular the following:
- the history of the conclusion of the contract, including the content of the negotiations and any correspondence and drafts in this regard (historic element);
- the circumstances of the conclusion of the contract, in particular place and time;
- the conduct of the parties before and after the conclusion of the contract (e.g., the manner in which the parties fulfil the contract);
- the purpose of the contract;
- customs and usages.
When interpreting a contract, the court has to follow certain rules. These rules serve as guidelines. They include the following:
- good faith: most importantly, the court has to construe a contract based on the principles of good faith;
- relevant time: contracts have to be interpreted ex tunc, meaning that the circumstances as they existed at the time of the conclusion of the contract are decisive;
- prohibition of merely formal or grammatical interpretation: a contract may not be interpreted exclusively on the basis of its wording;
- structure and entire interpretation: the courts have to consider the structure of the contract and the entire circumstances when interpreting a contract;
- interpretation in conformity with the law: deviations from the codified law should be interpreted restrictively;
- in case of doubt: if there are several possible interpretations, the court should chose the alternative (a) which allows the contract to survive, (b) which favours the position of the party that did not formulate the respective clause and (c) which burdens the debtor least (contentious).
Objective interpretation: Principle of trust ("Vertrauensprinzip")
The position, pursuant to which the subjective common true intent of the parties prevails over the objectively declared intent, is reversed where there is no true common intent of the parties.
In cases of divergence, the parties' intentions as expressed and declared (and not their interior perception thereof) are authoritative for the determination of whether a contractual agreement has been reached and what is its content. This means that any expression and declaration by one party of its intent must not be interpreted subjectively (according to their personal understanding of their own declaration). Decisive is rather the interpretation which the other party and addressee was entitled to give to the declaration under the actual circumstances in good faith. It is neither the interior (subjective) intention of the declaring party nor the wording of the declaration, but the meaning that the (presumably honest and reasonable) addressee may give to such declaration. This is even true in cases of error in declaration or defective transmission. The meaning of the declaration as the addressee understood it prevails over the true intent of the declaring party. The consequence of this concept is that there may be a deemed consensus even if the true intent of the parties is not identical (normative consensus; "normativer Konsens").
This objective interpretation of contract is based on the principle of trust ("Vertrauensprinzip"). According to this principle, statements of the parties are to be interpreted according to their wording and context as well as the circumstances as a whole as they could and should have been understood by a third party acting in good faith. This principle of trust is supplemented by a duty of the addressee of a declaration to take into account any facts identifiable from the circumstances in order to identify an error in the declaration of the declaring party and in order to correctly and fully understand the declaring party's declaration according to their true intent. Furthermore, if the declaration of a party as understood by the addressee in good faith deviates substantially from its true intent, the statutory rules for cases of error (Art. 23 CO) provide for remedies.
When applying an objective interpretation of a contract, the courts will have regard to the four main elements of contract interpretation mentioned before, namely the wording, the history, the systematics construction and the purpose of a contract. It has to be noted, however, that the conduct of the parties after the conclusion of the contract (which is often relevant for determining what they actually intended) is not relevant for the objective interpretation of a contract.
We have also published a podcast episode on this topic, in which we briefly summarise all the essentials about the interpretation of contracts. If you have any questions, please do not hesitate to contact our team.
Other articles in the series:
- The essentials of Swiss contract law: Formation of Contracts (no. 1)
- The essentials of Swiss contract law: Limitation of Liability (no. 3)
- The essentials of Swiss contract law: Contractual Penalties (no. 4)
- The essentials of Swiss contract law: Termination for Cause (no. 5)
- The essentials of Swiss contract law: Incorporation of General Terms and Condition (no. 6)
- The essentials of Swiss contract law: Liability for breach of contract (no. 7)
- The essentials of Swiss contract law: Default (no. 8)
- The essentials of Swiss contract law: Rescission of Contracts (no. 9)
Authors: Christian Oetiker, Pascal Burgunder, Selim Keller
