This blog series gives a short and compact overview on the essential elements of Swiss contract law.
Contracts for the performance of continuing obligations
The Swiss Code of Obligations does not contain a definition of contracts for the performance of continuing obligations (Dauerschuldverhältnisse; contrat de durée) or provide any rules specifically applying to them. However, this category of contract is recognized in case law and the courts have developed specific rules for them.
Ordinary termination
Swiss contract law is based on the principle of pacta sunt servanda. Thus, the parties to a contract are bound by it and are obliged to fulfill their contractual obligations. Specifically, in the case of contracts for the performance of continuing obligations, they must fulfil them during the entire term of the contract.
Swiss law distinguishes between contracts that provide for a definite (or fixed) term and those concluded for an indefinite term. Generally speaking, the latter continue to be binding until they are terminated by giving notice. Based on the principle of parties' autonomy – also a guiding principle under Swiss contract law –, parties are free to agree on the mechanisms for such termination.
In contrast, contracts providing for a definite (or fixed) term expire automatically at the end of the term. Unless there is an express provision to the contrary, contracts concluded for a definite term cannot be terminated ordinarily by giving notice.
Extraordinary termination
Pursuant to the established case law of the Swiss courts, contracts containing continuing obligations can be terminated for cause during their term. This possibility applies to all such contracts even if the parties have not agreed upon such a termination mechanism. Having said this, such a termination, which violates the principle pacta sunt servanda, must be the last resort, meaning that the threshold in relation to the cause is relatively high.
The case law applies the following requirements:
- An extraordinary termination for cause is only possible if it is not reasonable to require the affected party to terminate the contract in line with the contractual terms (e.g., lapse of fixed term or giving notice).
- The cause invoked must be significant from both an objective and a subjective point of view. Objective significance is given if it would be unreasonable to require a third party in the same situation to continue the contract. Subjective significance is given if continuation of the specific contract cannot be imposed on the affected party.
There is a further distinction between absolute and relative causes allowing for termination:
- An absolute cause exists if there is a single event of objective significance that allows for termination.
- Relative cause is not generally sufficient for termination. However, if certain events constituting only a relative cause are repeated despite due warning or if there are several relative causes, cumulatively they may give sufficient cause for termination.
Cause is an indeterminate legal concept. As such, it is subject to the discretion of the courts. Accordingly, the courts are free to assess whether good cause exists, taking into account the law and equity according to Art. 4 of the Swiss Civil Code. In doing so, the courts must take into account the circumstances of the specific case.
For example, the Zurich Commercial Court had to evaluate the situation of an exclusive distribution agreement, in which the distributor tried to replace the products of the supplier with its own products (Zurich Commercial Court, 25 May 2020, HE200180, c. 8). The Court found that such behavior destroyed the mutual trust and entitled the supplier to terminate for cause and that a warning was not necessary in these circumstances. The destruction of the mutual trust between the parties may serve as grounds for a termination for cause if the other party cannot reasonably be required to continue to be bound by the contract.
Exercise of termination right
The contracting party who wishes to terminate the continuing obligation extraordinarily must do so immediately after the occurrence of the cause. The period of reflection granted depends on the circumstances of the individual case. In the case of the termination of an exclusive distribution contract, the Thurgau High Court allowed a cooling-off period of about one week. The reflection period may be longer if it is not one absolute cause but rather several relative causes that are decisive for the termination of the contract. However, if the party wanting to terminate the contract exercises a reflection period that is too long, the subjective significance may be denied and the right to extraordinary termination of the continuing obligation forfeited. If a party waits to long to terminate the contract even though the reasons upon which they later base the termination are already known to them, then a court will consider that it is still reasonable for that affected party to terminate the contract by giving a notice of termination or to wait until the contractual agreed term expires.
The termination for cause does not need to contain the reasons for the termination. However, the terminated party can ask to be provided with such reasons. If the other party wants to contest the termination they can bring an action for specific performance of the contract. In this case, the terminating party will have to show in court that its termination was based on good cause.
Effects of termination for cause
A valid termination for cause has the following effects under Swiss law:
- The contract is terminated with immediate effect.
- The termination takes effect ex nunc.
- The termination becomes effective with the receipt of the notice of termination by the terminated party.
If the cause was a breach of contract by one party, that party is liable for damages pursuant to the general rules and principles. Because the contract is terminated by the notice of termination pro futuro there is no reversal of already fulfilled obligations that occurred in the past.
If the termination for cause is not valid, e.g., because the invoked cause does not exist, is not significant enough, or the termination notice was late or has otherwise no effect, the contract continues to exist.
If you have any questions on how to implement a limitation of liability or as to whether a specific limitation of liability is permitted under Swiss law, 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: Interpretation of Contracts (no. 2)
- 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: 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
