About the settlement culture in Swiss commercial disputes

Recently, I represented a corporate client in settlement negotiations related to a multi-million CHF claim. The negotiations were terminated with the conclusion of a settlement, as many or probably even most Swiss commercial disputes are, and this further experience of successful settlement negotiations made me think about the question why it is that the settling of commercial disputes has such a long tradition in Switzerland. In other words, which factors are responsible for the highly developed settlement culture in Swiss commercial disputes, which exists since a long time and has nothing to do with mediation having become a fashionable topic recently? In this contribution, I would like to share some thoughts on such factors, in random order.

(i) Obligation to pay an advance on court costs

Commercial litigations before Swiss courts are not a free lunch for claimants. There are different reasons for this, among them the circumstance that pursuant to the Swiss Civil Procedure Code (the CPC), the court may ask the claimant to make an advance payment up to the amount of the expected court costs. The statutory basis of this court competence, Art. 98 of the CPC, does not require the court to ask for such an advance payment, but rather gives the court the discretion to decide on a case by case basis whether or not to ask for an advance and, if so, in which amount. However, the Swiss courts have, at least in the past, applied Art. 98 of the CPC in a way that resulted in always asking for an advance in the amount of the expected court costs. Such court costs are calculated on the basis of a cantonal tariff that takes different factors into consideration. The most important factor is the amount in dispute, with the effect that the higher the amount asked for by the claimant is, the higher is the court fee calculated on the basis of the cantonal tariff. By way of an example for illustration purposes, the ordinary court fee in the canton of Zurich for a claim of CHF 5m is around CHF 70’000. Such ordinary amount may, depending on the circumstances, be decreased or increased in the court’s discretion. Consequently, a claimant filing a civil action with a Zurich court, in which the claimant is putting forward a claim of CHF 5m, will have to be prepared to make an advance payment for court costs in an amount of around CHF 70’000. If no advance payment is made, the court will not hear the claimant’s case. I would think that it is quite safe to assume that this cost hurdle serves as a deterrent to spurious claims and also has the function of motivating a claimant to consider serious settlement offers in a pre-litigation phase.

(ii) The Swiss implementation of the English rule

There is a further reason that commercial litigations before Swiss courts are not a free lunch for claimants, which, however, not only applies to claimants, but equally to defendants. The Swiss system is based on the English rule with regard to litigation costs. Consequently, the party losing a case before a Swiss commercial court will not only have to assume the court costs, but will also have to compensate the opposing party for his or her legal fees. The party fully losing the case will actually face three cost elements: First, the court costs that are, as mentioned at (i) above, calculated on the basis of a cantonal tariff; second, an amount to compensate the opposing party for his or her legal fees; third, his or her own lawyer’s fee.

The second of the above-mentioned elements, i.e., the compensation for the opposing party’s legal fees, is also calculated on the basis of a cantonal tariff. By way of an example for illustration purposes, the ordinary compensation amount in the canton of Zurich for a claim of CHF 5m is also around CHF 70’000, as the above-mentioned ordinary court fee. As with the court fee, such ordinary amount may, depending on the circumstances, be decreased or increased in the court’s discretion.

As far as the third cost element is concerned, i.e., the losing party’s own lawyer’s fee, such costs are generally to be borne by the party losing a Swiss commercial litigation, for the following reasons (in random order):

• Swiss lawyers are prohibited by law from entering into pure play contingency fee agreements with their clients. In an article dated 13 August 2018, I have explained why I think that this legal situation is unjustified and should be more flexible, but currently Swiss lawyers only have very limited options to subject their legal fee to the outcome of a litigation.
• Only a certain portion of the Swiss population has legal expenses insurance, and those who do have such insurance are not fully covered, as has been explained, for instance, in an article in the NZZ dated 16 June 2017. In other words, legal expenses insurance policies sold in Switzerland do contain a significant amount of reservations as to the type of claims covered.
• Litigation funding has become more important in Switzerland in recent years, but as I have explained in an article dated 25 June 2018, the litigation funding companies active in Switzerland have a very prudent approach to the kind of cases that they are willing to finance. The three basic requirements that (1) a claim must be important and (2) has a high chance of success, and (3) that the successful collection of a favorable judgment must also be highly probable, are responsible for quite significantly limiting the situations in which a claimant can rely on litigation funding.

Although there is talk of alternative billing methods since some time in Switzerland as well, Swiss disputes lawyers do, to my knowledge, still largely prefer to agree on hourly rates with their clients. Since Switzerland is expensive, which is especially true for its financial centers Zurich, Geneva, and Basle, experienced Swiss business lawyers are not cheap. This means that more complicated commercial disputes, which require an important amount of lawyer time, can generate important legal costs for the party represented in commercial disputes before Swiss courts.

Now, depending on the value in dispute, the three cost elements described above may add up to a significant amount, especially if proceedings are conducted in more than one instance, which the party fully losing in a commercial litigation before a Swiss court has to assume. In my experience, this cost risk related to Swiss commercial litigations, about which disputes lawyers have to inform their clients in detail pursuant to the Swiss Federal Tribunal (the SFT), is a significant incentive for both parties to consider settlement negations at a very early stage in a dispute.

(iii) No jury trials in Swiss commercial litigations

The Swiss civil procedural system is, compared to other systems, very rational and less likely to be manipulated by non-legal influences. As I have explained in a LinkedIn-contribution dated 19 December 2019, Swiss commercial litigations are predominantly conducted in writing, without “emotional” elements such as oral opening statements or the cross examination of witnesses. Also, there are no jury trials in Swiss commercial litigations, but exclusively bench trials, and the Swiss judges are highly trained and professional, at least at the commercial courts and the higher cantonal courts as well as, of course, the SFT. For this reason, early case assessments of commercial claims to be litigated before Swiss courts can be quite accurate, obviously always in the realm of what is possible at such an early stage of a dispute (regarding the importance and content of early case assessments, see my article dated 25 September 2017). In other words, although there is, also with regard to commercial disputes before Swiss courts, a certain inevitable degree of uncertainty regarding the prediction of the outcome of a given dispute, experienced commercial disputes lawyers (and with that their clients) are not at a total loss in terms of their clients’ legal positions and the likelihood of prevailing or underlying in a trial. In my opinion, this structural rationality of Swiss commercial litigations is a factor that contributes to the willingness of parties to discuss settlements at an early stage.

(iv) No punitive damages under Swiss law

One of the fundamental principles of Swiss damages law is that any judgment is capped at the financial damage actually sustained by the damaged party. Differently put, a party that sustained a financial damage by breach of contract or tort shall never be overcompensated under Swiss law, the actual financial damage sustained by such party being the maximum amount that he or she may obtain. This circumstance, which excludes, particularly, a punitive damages element under Swiss law, makes it easier than in other legal orders to assess the amounts at stake at an early stage of a commercial dispute.

Another important aspect in the present context is the circumstance that Swiss commercial courts are generally very demanding as far as the specification and proving of a financial damage is concerned. Before Swiss commercial courts, it is not sufficient to describe a financial damage in general terms, even if there is no doubt that the party did indeed sustain a certain financial damage. Swiss commercial courts will still require that the claimant explains and proves his or her financial damage with a high degree of specificity (see, in this regard, my doctoral thesis of 2017, for instance).

Because of the reasons mentioned above, a claimant before a Swiss court realizes that not only is there no room for fantasy claims such as punitive damages claims, but that he or she will, to the contrary, have to explain and prove the asserted financial damage specifically in the proceedings before the Swiss court(s). Depending on the circumstances, these features of Swiss commercial law also facilitate serious early settlement negotiations.

(v) Settlement facilitation by Swiss courts

Pursuant to Art. 124(3) of the CPC, a judge may at any time attempt to facilitate a settlement between the parties. According to my knowledge, this authority is widely used by Swiss courts. Especially the Commercial Court of the Canton of Zurich (the Zurich Commercial Court) has a longstanding tradition of inviting the parties to a settlement hearing at an early stage of the proceedings, i.e., after the first exchange of written briefs (i.e., the statement of claim, statement of defense). As I have explained in an article dated 6 January 2014, the Zurich Commercial Court is very successful in closing cases through settlements at this early stage of the proceedings.

As mentioned at the start of this contribution, the factors briefly described above are, in my opinion, responsible for the highly developed and longstanding settlement culture in Swiss commercial disputes. Given the very important costs that may be incurred by commercial litigations and also arbitrations, this Swiss settlement culture or tradition is, in my opinion, a significant advantage of the Swiss justice system, which should be further cultivated by the attorneys and judges practicing in Switzerland.

Philipp H. Haberbeck, Zurich, 11 January 2020 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice. Any mandate is subject to the full execution of an engagement letter.

Rechtsgebiete: Allgemeines Vertragsrecht