Contractual penalty or liquidated damages?

Question
May a general contractor (GC) or a total contractor (TC) agree in the contract for work and services with the client by means of a lump-sum compensation clause that in the event of damage caused by delay or delay in the performance of the work, the contractor shall be liable to pay compensation to the client. other damage, the liability of the GC/TC is only limited to a predetermined amount? What is the difference between liquidated damages and a contractual penalty?

The contractual penalty
The GC/CC and the client can agree a contractual penalty (“contractual penalty”), which is triggered if the debtor breaches a specific contractual obligation. Despite its name, a contractual penalty serves primarily to promote the fulfillment of the main performance obligation and thus to secure the interests of the creditor and not solely to punish the debtor. The contractual penalty improves the creditor’s position by exempting the creditor from proving the loss. In addition, a contractual penalty is often used where it is difficult or impossible to calculate the damages (e.g. in connection with non-competition clauses in employment contracts, confidentiality agreements or delays and damage caused by delays in contracts for work and services). The contractual penalty shall become due as soon as the agreed conditions (i.e. non-performance or breach of the main performance obligation) are fulfilled. Unless otherwise agreed, the creditor is not obliged to prove the occurrence of an actual loss in order to enforce the contractual penalty (Art. 161 para. 1 CO). If the creditor has suffered a loss and this loss exceeds the amount of the contractual penalty, the creditor may additionally claim the amount in excess of the contractual penalty, provided that the creditor can prove that the loss was caused by the fault of the debtor and the parties have not contractually waived the claim in excess of the contractual penalty.

The liquidated damages clause
Liquidated damages are not expressly regulated in Swiss law, but are nevertheless permissible. The purpose of this is to compensate for an expected loss and to simplify the enforcement of the claim for damages in cases where it is difficult to determine the actual loss incurred and yet the amount of liquidated damages is appropriate and proportionate compensation to this actual and expected loss. If the liquidated damages are disproportionately high, it could be a contractual penalty. The purpose of liquidated damages, like the contractual penalty, is to ease the burden of proof on the creditor: in addition to the contractual agreement, the only requirement for the enforceability of liquidated damages is the occurrence of damage, the amount of which, however, does not have to be proven. This is a considerable relief in cases where it is difficult to calculate the damage. In addition, lump-sum compensation provides the contracting parties with greater transparency regarding the financial consequences of a claim, as it usually contains a limitation of liability. As a rule, liquidated damages limit liability to the agreed amount. If a loss has occurred, the debtor must always pay the agreed amount, no less and no more, even if a lesser loss has occurred. A reduction is only possible in exceptional cases. In principle, the creditor may not claim additional damages, except in cases of unlawful intent or gross negligence on the part of the debtor (an agreement to waive liability for gross negligence or unlawful intent is null and void if it is concluded in advance).

Difference between contractual penalty and liquidated damages
In contrast to the contractual penalty, liquidated damages do not have a punitive function to ensure the fulfillment of the contract, but are aimed at the expected compensation. As a rule, the creditor only has to prove the existence of an actual loss, but not its extent. If, on the other hand, the parties agree a contractual penalty, the creditor is generally not obliged to prove actual damages incurred as a result of the enforcement of such a contractual penalty.

Conclusion
Although liquidated damages are rather uncommon in the Swiss contract system, it is certainly possible to limit the financial loss for which the debtor is responsible to an amount agreed in advance if the conditions are right.

We would like to thank Luigi Lanzi for this article. 

Legis Rechtsanwälte AG
MLaw Luigi Lanzi
Zurich
044-560-80 80
lawyer@legis-law.ch
legis-law.ch