Switzerland: The Euro and the Swiss legal framework: Principle of the continuity of contracts

INTRODUCTION

Although Switzerland is not taking part in the European Monetary Union (EMU) and therefore will not belong to Euroland, the Swiss legislature and the legal community are arguing about different euro-related legal issues. The discussions focus in particular on the continuity of contracts for foreign currency contracts governed by Swiss law.

THE PROBLEM

On 1 January 1999 - with the start of the transition period - the euro replaced the currency of every member state that participates in EMU. The questions which arise are all related to the consequences of this new situation for contracts which are governed by Swiss law, but which involve payments or calculations denominated in an "old" currency or price source references to currencies now substituted by the euro. The contractual relationship between a financial service provider and its clients or other counterparties will usually be governed by the general conditions and the provisions of the Swiss Code of Obligation (CO).

PRIVATE INTERNATIONAL LAW

As soon as a contract governed by Swiss law involves a foreign element (e.g. one of the counterparty is headquartered outside of Switzerland), the provisions of Swiss law applicable to that contract may be affected by the Federal Act on Private International Law (IPRG). The IPRG determines the jurisdiction whose law is applicable to questions of currency, and the effect of that law on the amount of liability and on the currency of payment.

GENERAL RULES

Usually financial obligations in Swiss Law contracts are to be discharged in the Swiss national currency (Article 84, para.1 of CO). If a contract provides for payment in a foreign currency, the debt may nonetheless be discharged in Swiss Francs, unless the contract makes it clear that the parties have agreed that payment must be made in foreign currency (Article 84, para.2 of CO).

The principle that a foreign monetary obligation is payable in the legal tender of the state whose currency is involved is determined in Article 147 IPRG:

1. The currency shall be defined by the law of the state the currency of which is in question.

2. The effects of a currency on the amount of the debt shall be subject to the law governing the debt.

3. The law of the state in which payment is to be made shall determine the currency in which payment must be effected.

PRACTICAL EFFECTS

As a result a sum payable under a contract governed by Swiss law and determined in a currency of a country participating in EMU will automatically be converted into euro, in accordance with that country's legislation introducing the euro. However, that this provision can by applied in all situations is disputed by some relevant authors. And furthermore, Article 147 IPRG applies only to the currency obligations (lex monetae) contained in a contract governed by Swiss law. Other contractual provisions will be governed by Swiss law as the lex obligationes.

OTHER IMPLICATIONS

Regarding the implications which EMU will bring to an existing contract, there are mainly two principles or provisions of Swiss law which might operate to challenge the concept of continuity of contract: Articles 23 and 24 of the CO (i) and the clausula rebus sic stantibus (ii).

(i)Articles 23 and 24 CO

Article 23 provides that a person who was acting under a material error when a contract was concluded is not bound by it. Furthermore, Article 24 specifies what amounts to a material error. In the context of EMU some authors envisage circumstances where the terms of Article 23 might apply.

(ii) The clausula rebus sic stantibus - Under Swiss law the principle of clausula rebus sic stantibus by which a contractual obligation becomes void whenever the economic or social circumstances have profoundly changed before that obligation is performed, is applied only exceptionally. However, the application of the principle should be considered by parties who have long term contracts which they believe may be subject to economic disruption as a result of EMU.

Regarding contracts subject to Swiss law and redenominated in the ECU basket one can make a distinction between "Post-Maastricht" and "Pre-Maastricht" clauses. In the case of "Post-Maastricht" ECU clauses, it seems appropriate to assume that the parties to a contract agreed to them with knowledge or awareness of the scope of the treaty. By contrast, with regard to "Pre-Maastricht" ECU clauses, it seems difficult to assume systematically that the parties who agreed to an ECU obligation rather than a obligation in a specific currency intended to follow any possible future change in the nature of the monetary index so chosen. In other words, each contract denominated in ECU and concluded before the Maastricht treaty must be examined carefully. This view is also taken by the Swiss Bankers Association. As one will see the distinction between "Pre-Maastricht" and "Post-Maastricht" clauses might even have its relevance, if ever, in a possible landmark decision of a Swiss court regarding continuity of contracts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.