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13 September 2023

The essentials of Swiss contract law: Liability for breach of contract (no. 7)

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

A.     Requirements

Art. 97(1) CO deals in a general manner with breach of contract. If the performance of an obligation cannot be effected duly or at all, the obliged party must compensate for the damage arising from this, unless it proves that no absolutely no fault is attributable to it. This general rule for breach of contract in principle applies to any kind of performance that is inconsistent with the contractually agreed-upon performance.

The application of Art. 97 CO requires that there is (1) a breach of contract, (2)  damage, (3) a causal nexus between the breach of contract and the damage and (4) negligence (or unlawful intent) of the defaulting party (the existence of which is presumed).

1.     Breach of contract

The notion of breach of contract is very wide. First, it encompasses any inconsistency between the contractual performance and the content of the contractual obligation which covers the total absence of performance, incomplete performances, the delivery of an item which is not consistent with the subject matter of the contract and defective performances.

Second, the notion of breach of contract includes the breach of secondary obligations ("Verletzung von Nebenpflichten"), i.e., obligations that are not directly linked to the performance of the contract. They include duties accompanying the performance ("leistungsbegleitende Pflichten"), the so called duties of conduct ("Verhaltenspflichten") and the duties to omit ("Unterlassungspflichten"). These duties of conduct encompass the duty to disclose any fact that may be of importance to the counterparty before signing the contract. Hence the breach of an existing pre-signing duty to disclose also amounts to a breach of Art. 97 CO.

2.     Damage

Swiss law defines damage as the involuntary diminution of the net worth of one's assets, which may consist in a reduction of assets or an increase of 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 existed 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 breach of contract. 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 a good 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.

3.     Causal Nexus

Liability under Swiss law exists only if the breach of contract was causal to the damage occurred.

Firstly, there must be a causal connection between the harmful conduct and the damage inccurred. 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 have 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 behaviour is likely to induce the occurrence of the respective result or if the occurrence of the result seems at least favoured by such behaviour

4.     Fault

The liability for breach of contract requires fault. Negligence of the defaulting party is sufficient and presumed under Art. 97 CO ("unless he can prove that he was not at fault"). The burden of proof regarding negligence (or unlawful intent) shifts to the defaulting party, who has to prove that the breach of contract was not due to their negligence. It has to be noted that the defaulting party is liable for any negligence, whatever the degree  (Art. 99(1) CO). The hurdle to prove that the breaching party is not at fault is quite high in practice and there are not many cases in which the liability hinges on the question of fault.

B.     Remedies

In the event of a breach of contract, the party who has the benefit of the obligation (the 'obligee') may claim for specific performance and for damages resulting from the breach of contract. The damages include so-called positive interest: The obligee may ask to be put in the same financial position as if the contract had been fully and correctly performed. In addition, some authors claim that the obligee should be entitled to withdraw from the contract in the event of a breach similarly to the situation in case of default (see our blog on default).

Swiss law does not provide for any remedy with a punitive character. However, as we pointed out in one of our earlier blogs there is the possibility to include a contractual penalty into contracts governed by Swiss law. 

We have also published a podcast episode on this topic, in which we explain the legal remedies available under Swiss law if there is a breach of contract.

If you have any questions on the liability for breach of contract 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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