The question
May a general contractor (GU) or a total contractor (TU) agree with the client in the contract for work and services by means of a lump-sum compensation clause that in the event of damage caused by delay or other damage, the liability of the GU/TU is limited to a predetermined amount only? What is the difference between lump-sum damages and a contractual penalty?

The contractual penalty
The GU/TU and the building owner can agree on a contractual penalty ("contractual penalty"), which is triggered if the debtor violates a certain contractual obligation. Despite its name, a contractual penalty serves mainly to promote the fulfilment of the main obligation and thus to safeguard the interests of the creditor and not only to punish the debtor. The contractual penalty improves the creditor's position by relieving the creditor of the burden of proving the damage. Furthermore, a conventional penalty is often used where it is difficult or impossible to calculate the damage (e.g. in connection with non-competition clauses in employment contracts, confidentiality agreements or delays and damages caused by delay in contracts for work and services). The contractual penalty becomes due as soon as its agreed conditions (i.e. non-fulfilment or breach of the main obligation to perform) are met. Unless otherwise agreed, the creditor is not obliged to prove the occurrence of actual damage in order to enforce the contractual penalty (Art. 161 para. 1 CO). If the creditor has suffered a loss and this loss amounts to more than the amount of the contractual penalty, the creditor may additionally claim the amount exceeding the contractual penalty, provided the creditor can prove that the loss was caused by the debtor's fault and the parties did not contractually waive the claim exceeding the contractual penalty.

The liquidated damages clause
Lump-sum damages are not expressly regulated in Swiss law and are nevertheless permissible. Its purpose is to compensate for an expected damage and to simplify the enforcement of the claim for damages in cases where it is difficult to determine the actual damage that has occurred and yet the amount of the lump-sum compensation is an appropriate and proportionate compensation to this actual and expected damage. If the liquidated damages are disproportionately high, the penalty could be a contractual penalty. The purpose of liquidated damages, like the conventional penalty, is to relieve the creditor of the burden of proof: apart from the contractual agreement, the only condition of enforceability of liquidated damages is the occurrence of damage, the amount of which does not have to be proved. This is a significant facilitation in cases where it is difficult to calculate the damages. Moreover, the lump-sum compensation agreement gives the parties to the contract more transparency regarding the financial consequences of damages, as it usually contains a limitation of liability. As a rule, liquidated damages limit liability to the agreed amount. If damage has occurred, the debtor must in principle pay the agreed amount, not less and not more, even if the damage is less. A reduction is only possible in exceptional cases. In principle, the creditor may not claim additional compensation, except in cases of unlawful intent or gross negligence on the part of the debtor (an agreement to waive liability in cases of gross negligence or unlawful intent is null and void if concluded in advance).

Difference between contractual penalty and liquidated damages
In contrast to the contractual penalty, the lump-sum compensation does not have a punitive function to ensure the fulfilment of the contract, but aims at the expected compensation. As a rule, the creditor only has to prove the existence of actual damage, but not its extent. If, on the other hand, the parties agree on a contractual penalty, the creditor is usually not obliged to prove actual damage caused by the enforcement of such a penalty.

Conclusion
Although lump-sum damages are rather uncommon in the Swiss contractual system, it is quite possible, given the circumstances, to limit the financial loss for which the debtor is responsible to an amount agreed in advance.

We thank Luigi Lanzi for this article.

Legis Rechtsanwälte AG
MLaw Luigi Lanzi
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Zürich Switzerland
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