Swiss law is one of the most frequently chosen governing laws in international contracts. As such, it is important for parties to arbitration proceedings where Swiss law has been chosen as the governing law of their contractual relationship to understand the framework of Swiss contract law. More particularly, it is crucial for those parties to understand why characterising (properly) a contract matters under Swiss law. For that reason, I have decided to reflect briefly in this contribution on one area of Swiss contract law which, in practice, is likely to spark debate between parties to an arbitration; that is whether a contract (usually for the design or manufacturing of a good) should be characterised as a sales contract, a contract for works or a so-called “innominate” contract.
The Swiss legal system is based on the civil law tradition. As such, it depends heavily on written codes as a primary source for authoritative statements of law.
Swiss law categorises contracts, and contains specific provisions for the various “typical” contracts most often found in practice (for example, sales, employment, contract for works, lease, agency, and so on). Contracts that fall into none of those “typical” categories − also referred to as “innominate” contracts − can either be governed by a combination of rules that would apply to different contracts, or by none of the rules applicable to “typical” contracts.
The main feature of Swiss contract law, however, is that the parties’ intent will usually prevail over statutory provisions. The primary source of contractual obligations is therefore the contract itself, the parties being their own legislators. Except for certain areas of law (such as labour law for instance), where there exists a specific regulatory framework, Swiss law contains few mandatory provisions that would apply irrespective of the contract’s terms. Therefore, statutory provisions will usually apply only if the parties have not entered into a detailed contract (in which case the statutory rules would serve to complete the contractual terms), or in order to provide guidance for the interpretation of unclear contractual terms.
For this reason, it is important to characterise, as a starting point, a contract under Swiss law, since this can lead to fallback provisions or have an impact on the interpretation of the parties’ rights and obligations.
Under Swiss law, a sales contract is defined as an agreement under which one party, the seller, undertakes to deliver an object and to transfer title to that object to the other party, the buyer, who in turn undertakes to pay the agreed price.
Under a contract for works, the contractor commits to the manufacturing and delivery of a work, and the owner to paying the contractor for such work. The manufacturing of a work is the typical performance owed under the contract for works and includes the duty of delivery. The fact that the item is manufactured before being delivered has no impact on the nature of the contract. The work is usually a physical, material object such as a building, part of a building (for example, a ventilation system), a ship, a component, and so on.
But how can a sales contract be differentiated from a contract for works? The main distinction between a contract for works and a sales contract resides in the contractor’s obligation to carry out the work and to produce the object of the contract. By contrast, in the sales contract, the seller’s obligation is to transfer possession of and title to the object of the agreement.
The distinction between a contract for works and a sales contract is very important, due to the additional rights and remedies available to the owner as compared to those that are open to a buyer (right to terminate before completion of the work; right to demand personal performance from the contractor; and right to terminate for convenience) and to the additional obligations owed by the contractor as opposed to the seller (duty of care, duty to inform, obligation to act with “diligence” and “fidelity”, with its attendant concrete implications).
In practice, the following main criteria are generally used to determine whether a contract must be characterised as a sales contract or a contract for works:
- The first criterion that distinguishes a contract for works from a sales contract is the specificity of the object of the agreement. A contract for works relates to an agreement where the object is an individual item, produced specifically for the owner. Where the buyer/owner sets out technical specifications to which the object must conform, the contract will usually be characterised as a contract for works. By contrast, where the object is produced serially or listed in a catalogue, even if colour and optional extras are selected by the buyer/owner, the agreement will generally be characterised as a sales contract.
- Where the buyer/owner did not know or did not care whether the object already existed at the time when the contract was entered into, or if it was clear that the contractor/seller would have produced the object in any event (for example, in order to dispose of a stock of products), the contract is usually characterised as a sales contract.
- Finally, the price structure can also be an indicator. For instance, if the price is a target to be determined finally once the work has been completed (for instance, “cost plus” price structure, or a target price with bonuses and penalties in case the ultimate price is lower or higher than the target), the contract will more likely be characterised as a contract for works.
For their part, innominate contracts may be described in a negative way as contracts which are not “typical” contracts. In other words, they cannot be ascribed to a certain type of contract as per the legally defined content.
The main criteria for the allocation of a particular contract to a certain contract type are primarily the essentialia negotii. The contract’s content must therefore be assessed with regard to its concurrence with the main performance obligations related to a certain type of contract.
A demonstrative example for this is the “sale with an installation obligation”: if the duty to install is merely an ancillary duty, the main contractual performance is identical to the main contractual performance under a sales contract. The contract is therefore a regular sales contract. If, however, the delivery of the product and the installation are more or less of equivalent value, and both can be viewed as the main contractual duties, the framework of a sales contract is exceeded, and the contract is a mixed contract consisting of a sales contract and a contract for works. It is therefore an innominate contract. Case-to-case provisions regulating these individual contracts (that is, sales contract and contract for works) will thus apply to individual obligations stipulated in that innominate contract.