Posts in "Contracts"

 Liability for Termination of Contract Negotiations

Swiss law provides a great deal of importance on the freedom of contract principle. Negotiations may become liable if one party terminates them in good faith before they are completed. Damage claims must be enforced in a complicated manner due to the high requirements for liability. An obligation to act in another’s interest limits the freedom of contract. There are certain reciprocal obligations involved in that pre-contractual relationship.

During negotiations, parties should not boost the expectation of the other party that a contract will be negotiated contrary to their actual intentions. When expressing willingness to conclude a contract, a party should not be overly enthusiastic. According to the doctrine of culpa in contrahendo, a party that terminates contract negotiations in violation of these principles may be liable for damages.

A preexisting contractual relationship between the negotiating parties cannot be construed as a basis for liability. Taking a long time to negotiate a contract does not imply liability. Despite knowing that the other party has already invested (substantially) in the prospective agreement, a party who terminates the contract negotiations will not be deemed in bad faith.

When negotiations are broken off, who is liable?

Negative interest may be claimed by the other party if the violating party fails to fulfill its precontractual obligations. In addition to expenses incurred during contract negotiations (travel costs, legal fees, etc.), damages may also include loss of income arising from the inability to do business with third parties. Swiss law requires fairly high substantiation requirements for damages, so enforcing liability for breaking off negotiations will often be a difficult process.

How to negotiate effectively – practical tips

Keep your commitment to signing a contract in check. Honesty is the best policy. Let the other side know from the beginning what clauses you are most concerned about.

If you still have doubts about signing the contract, or if you are unwilling to do so, do not tell the other party. Make sure you only sign if you are convinced.

Negotiations should not be undertaken on your behalf by another person (e.g., your representative, employee, branch office, etc.). You should monitor the negotiations and intervene when needed.

Be careful not to make costly investments before concluding a legally binding contract. The conclusion of an interim contract should be considered if, for time or other reasons, such investments must be made before an agreement is concluded. The agreement may not be completed in the event of failure.

Overview of the Goodwill Indemnity for Termination of a Distribution Agreement

The Swiss Code of Obligations does not specifically govern distribution agreements, which are innominate contracts. Following article 418u CO, commercial agents are entitled to a goodwill indemnity at the end of an agency relationship (sometimes referred to as “compensation for clientele”).

A goodwill indemnity is a payment made by the terminating party to the other party in order to compensate for the loss of customer relationships and business opportunities that result from the termination of the distribution agreement. This is particularly relevant in situations where the distribution agreement has been in place for a long period of time, and the parties have developed a significant customer base.

Under Swiss law, a goodwill indemnity can be agreed upon by the parties in the distribution agreement itself, or it can be determined by a court if the parties are unable to come to an agreement. In the latter case, the court will take into account various factors, such as the duration of the distribution agreement, the level of exclusivity granted to the distributor, and the extent to which the distributor has contributed to the development of the business.

It is important to note that the goodwill indemnity is intended to compensate the distributor for actual losses suffered as a result of the termination and not to provide a windfall for the distributor. Therefore, it is essential for the parties to carefully document the distributor’s contributions and the potential losses that may result from the termination of the agreement in order to ensure that the goodwill indemnity is fair and reasonable.

The distribution agreement is governed by article 418u CO by analogy

As a distribution agreement is analogous to a supply agreement, Article 418u CO requires a large degree of integration between the distributor and the supplier. Price and delivery terms may be unilaterally changed by the supplier. Contract products must be kept in minimum stock by the distributor. The distributor is required to report on his or her sales and competitors’ activities periodically by the distribution agreement. No goodwill indemnity will be needed if none or a few of these elements exist.

Goodwill indemnity eligibility requirements

Distributor expands customer base significantly.

Swiss law provides for goodwill indemnities for distributors who expand the customer base of a supplier “considerably” through their activities. From a legal standpoint, this is unclear. Before the agreement ends, the distributor’s turnover must be at least double that of the customer.

The customer base must continue to benefit the supplier

In agency relationships, access to the customer base is usually not an issue, as suppliers know who their customers are. To continue doing business with such customers after the termination of the distribution relationship, there must be some loyalty from the customers toward the supplier. As a measure of customer loyalty, turnover after the end of a distribution relationship may indicate the quality of the relationship.

The equity of the goodwill indemnity

An indemnity for goodwill cannot be unjust – the supplier should be compensated for the benefit it receives from its customers. Having already benefited economically from the acquired customers, the distributor is entitled to special compensation in exchange for complying with the post-contractual non-compete agreement.

The distributor is not responsible for the termination

Distributors may be eligible for indemnification up to the average of their last five years’ net annual earnings from the distribution relationship. If the distributor has terminated the distribution agreement itself, no goodwill indemnity will be due, unless the supplier has been responsible for the termination.

Goodwill indemnity is mandatory.

There is a tendency for suppliers to exclude goodwill indemnities from distribution agreements. If, however, an analogous application of article 418u CO to the distribution agreement is justified and all goodwill requirements are contractually excluded. Provisions of this nature would be invalid. Despite this, specific provisions in distribution agreements related to goodwill indemnity remain relevant, for instance, provisions addressing how the supplier should compensate the distributor for acquired customers. Goodwill indemnities could be rendered inequitable by such rules.

In conclusion

The concept of goodwill indemnity in Swiss law provides a means for parties to a distribution agreement to protect their interests in the event of termination. By clearly documenting the distributor’s contributions and potential losses, parties can ensure that the goodwill indemnity is fair and reasonable. It also helps in maintaining a healthy business relationship between the parties.