Governing Law for Cross-Border Contracts: Why is Swiss Substantive Law Such an Attractive Choice?
This month we hear from Andrea Haefeli, who was featured in Lawyer Monthly’s April 2021 edition. When last we spoke with her, Andrea discussed the limitation of liability in commercial contracts governed by Swiss substantive law.
Here, Andrea expands on our last discussion; what are the qualities of Swiss substantive law that make it such an appealing choice-of-law to international parties, and how has the COVID-19 pandemic affected the regulation of liability in commercial contracts?
Since our last interview with you, have you observed any trends in contractual parties from different countries choosing to apply Swiss substantive law to their commercial contracts?
The choice of Swiss substantive law remains a very popular choice in international commercial contracts (B2B), regardless of the origin of the parties. In ICC arbitration, it is traditionally the most frequently selected governing law from among all civil law countries.
For the sake of completeness, it should be noted that in B2C contracts (unlike in B2B contracts) the parties can only choose the applicable law within narrow limits.
Why do international parties choose Swiss substantive law as the applicable law for a commercial contract?
There are many reasons. Besides being perceived as a “neutral” legal system, Swiss substantive law is popular with users around the world for its stability and business-friendliness, the latter also reflected by extensive party autonomy that allows the parties to contractually regulate nearly all aspects of their relationship (with regard to liability, see below).
Swiss law is codified law and thus more easily accessible than legal systems based on case law. Swiss statutes are deliberately worded in an understandable language for lawyers and non-lawyers. Federal laws are published on the Swiss government website in the three official languages (German, French and Italian) and sometimes an unofficial English translation is provided as well. Moreover, given the fact that fewer special laws exist compared to other countries, it is easier to keep on top of the applicable rules.
Furthermore, Swiss substantive law is predictable and there is little risk of contractual gaps resulting in invalidity of entire contracts. As long as the parties have agreed on the essential points of their contract, they have concluded a valid contract, and gaps are filled by recourse to general principles and statutory law. These default provisions principally correspond to international commercial expectations regarding the parties’ respective rights and obligations. Furthermore, in interpreting statutory law, Swiss courts take into consideration the reasonable and good faith expectations of the parties and the needs of commerce. This allows contracts to be much shorter and less exhaustive than in many other countries’ contract laws.
Swiss substantive law is popular with users around the world for its stability and business-friendliness
Nevertheless, Swiss law should not come to scene randomly – it is advisable to negotiate the choice of law and jurisdiction/arbitration clause early and to structure the contract accordingly.
In our last discussion, you mentioned that Swiss contract law provides considerable scope for contractual limitation. How does this compare to contract law abroad?
Swiss contract law is very flexible. It is strongly based on the principle of freedom of contract, and few mandatory provisions on the exclusion or limitation of liability exist – with the most important mandatory provision stating that liability cannot be excluded for intent and gross negligence. In principle, no special notice (caps, bolded etc.) is required for limitation of liability germs to be effectively incorporated into a contract.
Since in B2B-relationships the rules applicable on general terms and conditions (standard form contracts) are rather light, liability can, for example, be excluded or limited to a much greater extent than under German law.
Finally, as noted above, fewer special laws exist in comparison to other bodies such as the European Union.
How has the COVID-19 pandemic affected parties’ appetite for limiting liability in their commercial contracts?
Limiting liability in commercial contracts has always been paramount and the respective provisions are usually the hardest negotiated clauses.
In light of the COVID-19 pandemic, the appetite for limitation of liability has of course become greater on the side of the supplying parties. For example, suppliers of goods wish to exclude (or at least limit) their liability for raw material shortages, closures of factories or delayed deliveries. On the receiving side, it is exactly the opposite. The recipients want to ensure that they receive the goods or services as agreed and that the supplying party takes all necessary measures to overcome COVID-19-related obstacles. In many cases, however, a somewhat balanced solution serves a good cooperation best.
With regard to the COVID-19 pandemic, it is usual to allocate the respective risks and limit (or exclude) liability by insertion of specific provisions in the contract that deal with the non-performance or delay in performance due to such events. This is often done by way of so-called force majeure clauses. Force majeure clauses typically excuse non-performance by a party of its contractual obligations where such non-performance is caused by a defined force majeure event (ideally explicitly including the COVID-19 pandemic). They further provide specific remedies or consequences (e.g. termination rights or obligations to re-negotiate the contract in good faith) if the force majeure event lasts for a defined period of time.
Do you foresee any significant changes in Swiss contract law or the limitation of liability on the horizon?
Overall, Swiss (contract) law is very stable. Yet there are, of course, new challenges on the horizon. Take for example the increasing use of artificial intelligence, machine learning and big data and the question of who is liable for damages caused by artificial intelligence. The existing general principles of liability need to be stretched or even over-stretched to provide answers. The situation regarding liability can thus be unclear and the parties are advised to contractually set out their respective responsibilities and liabilities. Currently no formal change to the Swiss Code of Obligations is decided or planned in this respect, but Swiss courts will certainly, based on the general principles of law, modernise and further develop the general principles of Swiss contract law.
Andrea Haefeli, Counsel
Seefeldstrasse 123, PO Box 8034 Zurich, Switzerland
Tel: +41 58 658 58 58
Mob: +41 58 658 56 71
Fax: +41 58 658 59 59
Andrea Haefeli is a counsel at Walder Wyss Ltd, one of the leading Swiss commercial law firms. She advises clients in all areas of contract, commercial and corporate law.
Andrea has profound knowledge of and extensive experience in commercial and contract law across various industries. Her key areas include sales and supply, manufacturing and other works, distribution and franchising, agency, service, rental and leasing, development, license, joint venture and cooperation agreements, IT contracts and General Terms and Conditions (GTC). She advises on such projects from the conceptual, drafting and negotiation phase to dispute settlement.