Introduction
Statutes of limitation
Lack of coordination between various statutes of limitation
Exclusion of statutory limitation by agreement
Introduction
The Federal Convention is in the process of revising the regulatory regime in relation to statutory limitations. According to Article 210 of the Code of Obligations, and unless otherwise agreed between the contracting parties, an action for breach of warranty of quality and fitness in a sales agreement (including a stock purchase agreement) becomes time barred one year after the delivery of the sales object to the buyer, even if the buyer does not discover the relevant defect until later. This relatively short period causes certain practical problems. The revision of the respective legislation will extend the one-year period to two or even five years and coordinate the various statutes of limitations. This update examines the key aims of the planned revision.
Existing law
According to Article 210 of the code, claims for defects in purchased movable objects must be made within one year of delivery to the buyer, even if the buyer does not detect the defect until later. In respect of the sale and purchase of real estate, an action for breach of warranty of quality and fitness becomes time barred after five years (Article 219(2) of the code).
Need for revision of commercial transactions
Pursuant to a report by the Committee for Legal Affairs, the one-year statutory limitation period is not in line with consumer protection aims. The one-year period favours the seller ex parte and disregards the interests of the buyer. Additionally, the relatively short period of one year is inadequate and unsatisfactory when the purchased goods are complex, as is the case in the sale and purchase of companies and in commercial transactions generally.
The existing one-year limitation period is inconsistent with the statute of limitation according to Article 39(2) of the Convention on Contracts for the International Sale of Goods (CISG). Furthermore, the existing statutory period of limitation is short compared to the minimum time limit of two years which applies to commercial relations between consumers and commercial entities according to the EU Sale of Consumer Goods Directive (1999/44/EC).
Proposal for revision
The convention proposes primarily to extend the statutory limitation period. Two draft amendments were submitted for consultation.
The first draft suggests the extension of the statutory limitation period from one to two years as a general rule. The period will be five years if:
- the movables sold were intentionally built into an immovable construction; and
- the defect in the object sold caused the defect in the construction.
The statutory period of limitation for real estates remains five years.
According to the second draft, the statute of limitation will be extended to five years with no distinction between movable and immovable objects and would correspond to the existing time limit for real estate.
Comment
The existing time limit for defects in goods relating to sale and purchase agreements is considered restrictive, particularly compared to the 10-year period as a general statute of limitation for receivables (Article 129 of the code). Hence, an extension of the time limit to two years appears appropriate. Additionally, a statutory limitation period of two years would be in line with the CISG and the minimum requirements of the directive.
In contrast, an extension of the statutory limitation period to five years would make it longer than that specified in the aforementioned international regulations and could cause issues regarding evidence of defects. From this perspective, the necessary distinction between the statutory limitation period for movables (two years) and movables intended to be built into immovable constructions (five years) appears acceptable.
Lack of coordination between various statutes of limitation
Applicable law
Articles 363 and following of the code apply to contracts for work and services. By law, a contract for work and services is an agreement whereby the contractor undertakes to carry out work and the customer undertakes to pay the contractor for the work performed. In this context, Article 371(1) of the code states that the customer's claims in respect of defects in the work are subject to the same statutory limitation period as the corresponding claims of a buyer regarding the sale and purchase contract (ie, one year). However, a customer's claims in respect of defects in immovable construction work against both the contractor and any architect or engineer to have rendered services in connection with such work is time barred five years after completion of the work (Article 371(2)).
Need for revision
Concerning movables, the customer may bring a claim against the contractor for defects in the work even if such defect is caused by goods bought and processed by the contractor. The contractor in turn may claim for breach of warranty of quality and fitness against the seller regarding the defective movables which it purchased. Both the customer and the contractor must observe the statutory limitation periods of one year in each case.
In contrast, the customer's claims in respect of defects in immovable construction work against the contractor which performed the work become time barred five years after completion of the work. However, the contractor has only one year to claim against the vendor in respect of the corresponding defects in purchased movable goods which were built into immovable constructions (Article 210 of the code).
As a consequence, a defective moveable good that is built into an immoveable construction may lead to a claim by a customer against the contractor during the five-year period, whereas a claim by the contractor (ie, purchaser) against the seller for the same defect is time barred after only one year.
Proposal for revision
The drafts for revision seek to address the problem in two ways:
- The second draft increases the statutory limitation period for a claim in respect of defective goods under a sale and purchase agreement from one to five years. The revised Article 371 of the code, referring to contracts for work and services, submits a customer's claims in respect of defects in the work to the same limitation periods as the corresponding claims of the buyer. As a result, the statutory limitation period regarding defects in the contractual goods and services will be five years for both defects in work and defects in immovable construction work caused by purchased movables which were defective.
- The first draft extends the statutory limitation period from one to two years for defective goods purchased and from one to five years if the purchased good was built into an immovable construction and caused the defect in the construction. Thus, the second draft remedies the lack of coordination, but retains a distinction between the statutory limitation periods for, on the one hand, a defective good purchased which was built into an immovable construction and, on the other hand, defects in work caused by defective movables.
Comment
The revision aims to correct the lack of coordination between the statutory limitation periods of the sale and purchase agreement and the contract for work and services, and has been widely supported. However, the difference between the beginning of the statutory limitation period in sale and purchase agreements and contracts for work and services remains unresolved and creates the potential for legal uncertainty.
Exclusion of statutory limitation by agreement
Applicable law and revision
Pursuant to the applicable law, the parties to a sale and purchase agreement are not bound by the statutory limitations regarding a claim for breach of warranty of quality and fitness. In line with the revision of the statutory period of limitation in respect of sale and purchase agreement, an explicit exclusion or reduction to less than two years will no longer be valid. However, a distinction is envisaged between business-to-business and business-to-consumer relations: the exclusion or reduction regarding limitation applies to business-to-consumer relations only.
Comment
The drafts are likely to establish a 'rope of sand'. The statutory limitation in regard to the business-to-consumer relations may, according to the drafts, not be reduced to less than two years. This means that claims in respect of defects in purchased goods may be brought for a period of at least two years. However, these provisions, which are motivated by customer protection concerns, do not affect the parties' right to exclude or limit liability for defects as such. In other words, the revision concerns only the period during which a claim may be made, whereas the very fact of a claim arising may be excluded by agreement. Otherwise, a mandatory time limit of at least two years may be seen as adequate in regard to the general statutory limitation period of 10 years, which may not be extended, limited or excluded. Attention must be paid to the fact that the mandatory minimum time limit will merely affect the business-to-consumer relationship. Business-to-business relationships will be left to the parties' freedom of contract, despite the fact that the extension of the statutory limitation is motivated by the increasing complexity of commercial transactions (eg, the purchase of companies).
For further information on this topic please contact Markus Dörig or Alexandra Bösch at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 1 266 20 70) or email ([email protected] and [email protected]).