International commercial contracts governed by Swiss law
As a general rule, parties to international contracts are free to choose the law governing their contract. Swiss law also provides that contracts are governed by the law chosen by the parties.
In practice, particularly in the context of international arbitration, Swiss law is one of the most attractive laws for international commercial contracts.
Force majeure events in contracts
Swiss substantive law upholds to the maximum the principle of freedom of contract. Therefore, according to this principle, the parties are basically free to establish the content of the contractual provisions, the conditions of the contract and the consequences of non-performance.
For example, the parties are free to determine the events which shall be considered events of force majeure, and the consequences thereof.
Under Swiss law, force majeure events are events beyond the reasonable control of the parties which are unexpected and unforeseeable to both parties, and which cannot be prevented by applying due care.
In practice, the parties usually draft a general definition of force majeure and enumerate a set of events (illustrative or exhaustive list) that will excuse performance and the consequences thereof.
If the parties do not regulate force majeure in the contract, force majeure events can be taken into account based on the Swiss Code of Obligations.
Force majeure events in the Swiss Code of Obligations
With respect to force majeure events, some provisions of the Swiss Code of Obligations apply. For example:
- A debtor under a contract governed by Swiss law is liable for damage caused by the non-performance of its obligations under the contract, except if it can prove that the non-performance was due to reasons beyond its responsibility;
- An obligation is deemed to be extinguished where its performance is made impossible by circumstances not attributable to the obligor. However, this provision only applies in cases of acts of God (i.e. events that are completely beyond the control of the debtor, for example earthquakes, flooding and war);
- If a work is destroyed by accident prior to completion or delivery, the contractor is in principle not entitled to payment for work done or expenses incurred;
- Where completion of the work becomes impossible due to extraordinary circumstances, which lies in the employer’s risk sphere, the contractor is entitled to the payment for the work already completed and for expenses incurred. Where the employer is at fault for such impossibility, the contractor may also claim damages.
On 30 January 2020, the World Health Organization has declared the spread of the new coronavirus to be an international health emergency.
On the same day, the China Council for the Promotion of International Trade announced that it would issue force majeure certificates.
In order to determine whether the coronavirus can be qualified as a case of force majeure, it should first be checked if the contract contains an explicit provision. If not, a contractual partner can in principle still invoke force majeure under specific provisions of the Swiss Code of Obligations.
If the contract contains an explicit provision, the availability of force majeure as an option will mostly depend on the construction of the force majeure provision.
If the contract contains a general definition of force majeure, the coronavirus could be qualified as a case of force majeure provided the general requirements are met.
If the contract enumerates a set of events expressly mentioning the term “epidemic” or “disease”, the coronavirus clearly qualifies as such. If these terms are not listed as a force majeure, then a party should try to rely on another provision, such as for example “quarantine”.
In any event, the party seeking to rely on the force majeure clause will in principle have to prove that it has been prevented (or hindered) from performing the agreement as a result of the force majeure event.
In other words, a party invoking force majeure would need to show that it is effectively impossible to perform its contractual duties as a result of the coronavirus.
Please contact us if you would like to discuss the implications in more detail.
28/02/20 - David Kohler, partner at Ochsner & Associés