Switzerland – Liability for termination of contract negotiations

QUICK SUMMARY: Contract negotiations do not take place in a legal vacuum. A party who negotiates contrary to the principle of good faith and then breaks off negotiations may become liable to the other party. However, the requirements for such liability are high and the enforcement of damage claims is cumbersome. At the end of the post I will share some practical tips for contract negotiations in Switzerland.

Under Swiss law, the principle of freedom of contract is of fundamental importance. It follows from the freedom of contract that, in principle, everyone is free to enter into contract negotiations and to terminate them again without incurring any liability. A termination of contract negotiations does not have to be justified either.

However, the freedom of contract is limited by the obligation to act in good faith (cf. article 2 para. 1 of the Swiss Civil Code), which is of equal fundamental importance. From the moment when parties enter into contract negotiations, they are in a special legal relationship with each other. That pre-contractual relationship involves certain reciprocal obligations. In particular, the parties must negotiate in a serious manner and in accordance with their actual intentions.

Negotiating parties must not stir up the hope of the other party, contrary to their actual intentions, that a contract will actually be concluded. Put differently, a party’s willingness to conclude a contract must not be expressed more strongly than it actually is. If a party realizes that the other party wrongly beliefs that a contract would certainly be concluded, such illusion should be dispelled in due course.

A negotiating party that terminates contract negotiations in violation of these principles, whether maliciously or negligently, may become liable to the other party based on the culpa in contrahendo doctrine. However, such liability exists in exceptional cases only.

• The fact that contract negotiations took a long time is not sufficient for incurring such liability. The duration of negotiations is, in itself, not decisive.
• It is not possible to derive liability from pre-existing contractual relationships between the negotiation parties, as for example in cases where parties negotiate a “mere” prolongation of an existing agreement. The decisive factor is not whether parties were already contractually bound before, but only whether the party that terminated the contract negotiations made the other party believe that a new agreement would certainly be concluded.
• It is not decisive whether the party who terminates contract negotiations knows that the other party has already made costly investments in view of the prospective contract. In principle, anyone who makes investments already prior to the actual conclusion of a contract does so at its own risk. Even where a party to contract negotiations knows that the other party has already made (substantial) investments in the prospective agreement, a termination of the contract negotiations will, in itself, not be considered as an act of bad faith.

What does a liability for breaking off negotiations include?

If a party violates the aforementioned pre-contractual obligations, the other party may be entitled to compensation for the so-called negative interest. This means that the other party must be put in the position it would have been if the negotiations had not taken place. Damages may include, e.g., expenses in connection with the negotiation of the contract (travel costs, legal fees etc.), but also a loss of income in cases where a party was not able to do business with third parties because of the contract negotiations. However, the other party has no right to be treated as if the contract had been concluded (so-called positive interest).

Having said that, it must be kept in mind that the requirements set by Swiss court for the substantiation of damages are rather high, so that the enforcement of a liability for breaking off negotiations will often be a cumbersome process. Therefore pursuing damage claims with relatively low amounts in dispute might often require a disproportionate effort.

Practical tips – Do’s and don’ts when negotiating contracts

• Do not overstate your willingness to conclude a contract. Be frank with your counterparty. Make it clear from the beginning of the negotiations what clauses are important to you.
• Do not tell the other party that you are willing to sign a contract, if you still have doubts or you are even unwilling to do so. Confirm that you will sign only if you are convinced to do so.
• Do not allow someone else (e.g., a representative, employee, branch office etc.) to negotiate on your behalf if you are not willing to enter into an agreement anyway. Keep an eye on how the negotiations are going on and intervene if necessary.
• Do not make costly investments before a legally binding agreement is concluded. If, for time or other reasons, such investments are necessary already before the conclusion of an agreement, insist on the conclusion of an interim contract governing such investments for the event that the envisaged agreement is not concluded finally.