Ensuring the durability of consultancy agreements – Partial choice of law offers the solution

Nino Sievi
Nino Sievi

Under Swiss law, a mandate agreement may be terminated at any time. The relevant legal provision is of mandatory nature, which means that the fixed term of a mandate (e.g. consultancy contract) is of no significance. In the case of cross-border contracts, however, it is possible to circumvent this problem by subjecting the termination of the contract and its consequences to a different law. In this context one speaks of partial choice of law. This possibility may even be extended to purely national contracts by including an arbitration agreement. A consultant can thus secure the long-term nature of his mandate by drafting his contract with foresight and care. In doing so, he must make use of the possibilities offered by private international law and arbitration.

The Swiss Code of Obligations provides for the possibility to terminate the mandate at any time (Art. 404 para. 1 CO). This provision is of mandatory nature, which precludes any other party agreement (e.g. fixed term of a consultancy contract). In 2019, parliament rejected a proposal to reform this controversial legal provision (Motion Barthassat).

In the commercial sector, this possibility of termination at any time has a disruptive effect. Often the parties want to commit themselves for a longer period of time. This predictability is particularly important in the consulting environment, especially since a consultant can only perform a certain number of mandates at the same time. If a consultant decides to take on a long-term mandate, he will inevitably have to give up other commitments. However, the law denies the consultant any protection with regard to the stability of his long-term mandate. 

Despite this unfavourable legal situation for an advisor, there are various approaches to protect against termination or at least the financial loss that would result. If a termination takes place at an inopportune time compensation is owed (Art. 404 para. 2 CO). Yet, compensation for lost profit cannot be claimed in most cases. Furthermore, there are various cantonal judgements that have to a certain extent approved contractual penalties or lump-sum damages in connection with the termination of a mandate agreement. However, the enforceability of such clauses is very controversial in case law.

Overall, Swiss law does not offer sufficient protection to consultant who wish to protect the long-term nature of their mandate. The question therefore arises as to whether a consultant should not subject his consultancy contract to another law which treats the terminability of mandates less liberally.

However, subjecting a consultancy contract to a different law altogether might not be the best option. Swiss law offers many advantages with regard to a consultancy contract. It leaves the parties a large amount of flexibility in determining the content of their contractual relationship. In addition, the risk that individual contractual clauses are declared null and void due to rules applying to the review of certain contractual terms (see e.g. the review mechanism applying to general terms and conditions under German Law or the English Unfair Contract Terms Act 1977) is very small under Swiss law. Only the permissibility of terminating the consultancy contract at any time has a negative effect for the consultant.

The solution to this one negative aspect of Swiss law for a consultant can be a so-called partial choice of law. In the case of a partial choice of law, individual or several parts of a contract are made subject to a different legal system. For example, the contract is generally governed by Swiss law, but an exception is made for the termination and its consequences, which are governed by the law of England and Wales (which gives the parties greater freedom in respect of setting forth the termination of a consultancy agreement).

Under EU law, the admissibility of such partial choice of law clauses arises directly from the Rome I Regulation (Art. 3 para. 1, second sentence). In Switzerland, the law does not explicitly guarantee the admissibility of a partial choice of law clause. However, there is no legal provision that would contradict the admissibility of partial choice of law in contracts. The majority of Swiss doctrine holds that a partial choice of law clause is admissible as long as the partial questions can be separated objectively and the different choice of law does not lead to contradictory results.

Additional certainty can be gained from including of an arbitration agreement. In arbitration proceedings, the parties' choice of law is handled more liberally than in state court proceedings. This is particularly evident from the eligibility of non-state law, e.g. UNIDROIT Principles.

Finally, the inclusion of an arbitration agreement also offers the possibility of incorporating a choice of law clause into a purely domestic contract, since choice of law is also handled more liberally in domestic arbitration than in state court proceedings (Art. 381 Code of Civil Procedure). In this context, the doctrine expressly confirms the admissibility of a partial choice of law. However, it is controversial whether the choice of foreign law is permissible if the facts of the case lack any international element.

In summary, a consultant can ensure the long-term nature of his mandate by drafting contracts with foresight and care. In doing so, he must make use of the possibilities offered by private international law and arbitration.

More Blog posts

 
Let’s
Team Up
You have a project, case, legal issue or anything else you want to ask us? We are passionate to find out how we can team up with you to get it done.
Let's get in touch