Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

Supply contracts are not specifically provided for in the CO. Supply contracts are governed by the general terms of the CO as well as, by analogy, the specific provisions of the CO relating to types of contracts that are specifically defined in the CO (sales agreements, service agreements, agency agreements, etc) and that are, depending on the overall construction and concept of the supply agreement, deemed comparable to the supply contract in question.

Given the lack of clear provisions, it is recommended specifically addressing the conditions of the termination of the supply contract in the agreement to avoid legal insecurity. Subject to the principle of good faith, the parties are generally free to agree on the applicable rules relating to termination. However, some limitations are noteworthy.

Most importantly, with regard to the supply of services, the mandatory provision of article 404 of the CO states that a service agreement can be terminated at any time with immediate effect, unless the notice of termination is mistimed. Accordingly, a clause providing for a fixed or minimum term of the contract for the supply of services would be considered to be null and void.

Also, the Swiss Civil Code prohibits the entering into of agreements for an excessively long fixed term. Whether the duration of a supply agreement would be deemed excessive depends on the specific circumstances, but the maximum can reasonably be assumed to lay somewhere in the range of 10 to 20 years.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

If the notice period is not agreed in the contract, the court will look for rules of the CO applicable to contracts that are similar to the supply contract in question by analogy (see question 17). To avoid legal uncertainty, properly drafted termination clauses are advisable.

For example, for distribution agreements, two different provisions have been applied: the rules relating to agency agreements (article 418q, paragraph 1, CO) provides for a notice period of one month applicable in the first year of the contract. If the contractual relationship has been maintained for longer, courts are more likely to apply the provisions relating to a simple partnership (article 546, paragraph 1, CO), namely a notice period of six months.

Where a contract has been concluded for an indefinite period, the prevailing legal doctrine suggests that a contract can be terminated with six months’ notice.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

As a general rule, the insolvency of or the opening of a bankruptcy proceedings over a contractual party does not automatically lead to the termination of a contract. However, certain kinds of contracts (eg, service agreements, contracts for the transport of goods or agency agreements) automatically terminate with the opening of the bankruptcy proceedings. Whether automatic termination also applies by analogy to a specific supply contract has to be evaluated based on the characteristics of the specific case (see also question 17).

The consequences of the opening of bankruptcy proceedings are manifold. Among other things, an assembly of creditors may resolve to continue the business of the debtor and to maintain the existing contractual relationships (to the extent not automatically terminated) or to liquidate the business and terminate all relating agreements.

If on bankruptcy a contract (that is not automatically terminated) has not yet been performed in full by the bankrupt party, the bankruptcy receiver may perform the obligations under the contract in lieu of the bankrupt party. However, the right of subrogation of the bankruptcy receiver only exists to the extent the other party has no rightful interest in the individual performance of the contract by the bankrupt party and only if the parties have not agreed otherwise. Moreover, the non-bankrupt party can request that the performance by the bankruptcy receiver be guaranteed.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

Where the insolvency of a party jeopardises the claim of the other party under the contract, the other party may withhold performance until security has been provided for the consideration.

The solvent party may withdraw from the contract if, on request, no security is provided within a reasonable time.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Generally, a debtor under a contract governed by Swiss law is liable for damage caused by the non-performance of its obligations under the contract, unless it can prove that the non-performance was due to reasons beyond its responsibility. In accordance with article 119 of the CO, an obligation is deemed to be extinguished where its performance is made impossible by circumstances not attributable to the obligor.

However, article 119 of the CO only applies in cases of acts of God, which are by nature completely beyond the control of the debtor (eg, earthquakes, flooding and war). Therefore, if the parties wish to extend the application of the rules regarding force majeure events to matters falling into a broader sphere of influence of the parties (eg, strikes), including a specific clause in the agreement is advisable.

The debtor released under article 119 of the CO loses its counterclaim and is liable for the repayment of any consideration already received.

Also, in a sales contract, unless otherwise agreed, the benefit and risks relating to sold goods pass to the buyer on conclusion of the contract, typically before delivery. As a result, if goods to be delivered to a specific buyer are destroyed before their delivery for reasons not attributable to the seller, the seller will be released of the obligation to deliver and will still have a claim for compensation.