Performance of contractual duties under Swiss law and COVID-19 health crisis
With the current COVID-19 crisis, companies face multiple challenges on how to deal with the performance of their contractual duties. This article gives an overview of the rights and duties of such companies and advice on how they should deal with customers’ requests when the contract is governed by Swiss law.
According to Swiss law, an obligation is deemed extinguished where its performance is made impossible by circumstances not attributable to the obligor. Only an impossibility that is final justifies the application of this rule. Impossibility is considered final when there is no prospect that the impediment will disappear.
A temporary impediment may however be considered as final when it calls into question the achievement of the purpose of the contract and thus the impeded party cannot in good faith expect the other party to fulfil the agreement.
This will be the case for instance when the performance of services only make sense before a certain date given that they were linked to a scheduled event.
In case of impossibility considered as final, in bilateral contracts, the obligation is deemed extinguished and the obligor released by impossibility must return the consideration already received and loses his counterclaim to the extent it has not yet been satisfied. The party prevented to fulfil its contractual duties is protected by Swiss law but only if it demonstrates that the impediment results from circumstances not attributable to it. The obligor should be prepared to demonstrate that external circumstances related to the COVID-19 crisis caused the impediment.
Apart from the cases where impossibility could be considered as final according to the above, in many occurrences the circumstances triggered by the COVID-19 crisis will be considered as a temporary impediment only. This can be the case for companies that have their delivery trucks blocked at a border or for companies which have a reduced production capacity because they have to implement the social distancing guidelines issued by governmental bodies in their factory. In the area of service providers, performance of services might be prevented by travel restrictions applying to staff planned to perform such services.
Where the impediment is temporary, the obligations of the impeded party will not be deemed extinguished. The counterparty can set a grace period to the supplier, which has to be appropriate. Upon receipt of the notification of such grace period, the supplier should check if it would be capable of meeting the set deadline. If it knows it will not in the circumstances it is facing, it has to react immediately and offer to perform within a deadline that it deems in turn appropriate.
If the supplier does not perform its duty within the grace period, the counterparty has three options:
- continue to insist on performance and claim for damages due to the delay,
- waive performance and claim damages for non-performance or
- terminate the agreement.
It has however to be noted that the party prevented to perform will not be liable for damages if it can prove that it is not at fault. As the COVID-19 crisis could be a basis of proof that a party is not at fault, and hence it will not be in a position to successfully claim for damages, the counterparty should insist on performance rather than terminate the agreement except where, at the stage where it has to make such decision, the performance of the delivery or of the services is no longer useful for it. On their side, suppliers should be aware that they face termination of contracts by their counterparties even if their failure to perform is due to the COVID-19 crisis and they are not at fault.
In any case, in order to avoid any problem of liability for damages, suppliers and services providers should document in what manner the health crisis prevents them to respect the delivery deadlines or perform their services. Such explanation should be as detailed as possible. A general reference to the COVID-19 crisis is not likely to be deemed sufficient to prove that they are not at fault.
It might be that customers have put their requests for performance on hold and have not set any grace periods yet due to the health crisis. Suppliers and service providers should however be prepared for the time when the health crisis is declared to be over as it is likely that they will be flooded with short deadline requests for performance. Depending on the resources they expect to have available then, it might be worth already giving thoughts about the deliveries and services they will prioritize.