Distinction of a Participatory Loan from a Joint Venture under Swiss Law

Distinction of a Participatory Loan from a Joint Venture under Swiss Law

Joint ventures governed by Swiss law have a certain success with international business partners. During my professional career, I could personally appreciate this, having dealt with several cases in which international business partners, i.e., non-Swiss companies, had agreed to submit their joint ventures (JV) to Swiss law. Among the reasons for such a choice of law is certainly the general attractiveness of Swiss contract law to international commercial actors, a topic that I have discussed in a LinkedIn post on 22 December 2017 (see: https://www.linkedin.com/pulse/reasons-attractiveness-swiss-contract-law-commercial-h-haberbeck). Other likely reasons that come to mind are, in random order, the political stability of Switzerland, the high quality and reputation of its civil courts, the attractiveness and success of Switzerland as a seat for international commercial arbitral tribunals, the generally favourable tax environment in Switzerland, etc.

Given the attractiveness and success of Swiss law as being the law governing JV formed by international commercial actors, a recent judgement issued by the Swiss Federal Tribunal (SFT), Switzerland’s highest court, may be of interest and worthwhile discussing in this short article. The judgment at issue, with the case reference 4A_276/2020, is written in French and is dated 26 February 2021.


Factual Background

The factual circumstances as well as the procedural history of the relevant matter are quite complex. Therefore, the following summary highlights only the key aspects of the relevant background, in a highly compressed form.

The parties to the matter at hand – an architect on the one hand and, on the other hand, a real estate developer – had a business relationship going back to the year 2000, during which they had realized a first project together, i.e., the development of a shopping centre, contractually organized under the umbrella of a JV governed by Swiss law (Art. 530 et seq. of the Swiss Code of Obligations; the “CO”).

A further project had been contractually agreed by the parties in November 2007, when they entered into a written contract with the title “joint venture agreement”. It is this contract that is at the basis of the dispute that ultimately led to the SFT case 4A_276/2020 discussed herein.

In their November 2007 contract, the parties agreed to develop three real estate projects, one complex of luxury apartments and two Swiss holiday villages. Under the contract, the real estate developer committed to make an investment of in total CHF 5m, in the form of a cash wire transfer to the architect, to be made in the middle of November 2007, and was promised to receive back his investment with a return of 100% in three instalments payable at the end of 2009 (CHF 2m), 2010 (CHF 4m) and 2011 (CHF 4m), respectively. The contract further contained a clause pursuant to which the real estate developer would be returned his investment, without interest, in the event that the real estate projects should not be authorized by the relevant authorities (i.e., no granting of the required construction permits).

The “joint venture agreement” entered into in November 2007 became the issue of a dispute between the parties, in which the real estate developer essentially sued the architect for returning to him his investment, what had been refused by the architect. One of the key issues in the dispute was the qualification of the mentioned agreement.


The Issue to be Decided by the Court

In the relevant dispute, the architect, who had received the above-mentioned investment from the real estate developer, essentially argued that their contractual relationship had to be qualified as a JV under Swiss law (as mentioned, governed by Art. 530 et seq. of CO).  When a JV under Swiss law is terminated, the JV is to be liquidated (Art. 548 et seq. of the CO). In this context, Swiss law contains the rule that if the liquidation of a JV results in a loss, such loss is to be borne by the partners of the JV (Art. 549(2) of the CO). In the dispute at issue, the architect basically referred to this rule when arguing that he did not have to reimburse the real estate developer’s investment. In contrast, the real estate developer argued that the relevant contract was, despite its title, not to be qualified as a JV, but rather as a so-called participatory loan (partiarisches Darlehen), i.e., a loan that has the specific characteristic that the creditor has a participation in the profits made by the borrower.


The Considerations of the SFT

As mentioned above, the determination of the relevant dispute significantly hinged on the qualification of the November 2007 agreement entered into by the parties, in other words, depended on whether the agreement was to be qualified as a JV or rather as a participatory loan. The SFT judgment 4A_276/2020 at issue contains noteworthy considerations that elaborate on such distinction which in practice can be tricky.

Generally speaking, the creditor who grants a participatory loan does neither participate in the management of the JV nor in its representation vis-à-vis third parties (judgment 4A_276/2020, at consideration 8.2). Further, he or she does not intend to assume any of the JV’s responsibilities, and he or she does not become a debtor to the borrower’s creditors, i.e., does not assume any of the latter’s liabilities (Id.). The creditor granting a participatory loan does not have the so-called animus societatis, a technical term referring to a partner’s willingness to pool goods, resources and/or activities to achieve a specific objective, to influence the decision-making, and share not only the risks and profits, but above all the substance of the enterprise (Id.). Where the creditor reserves the right to be consulted or even to collaborate with the business, thus going beyond the right of control inherent in the loan, there is, according to the SFT, a strong indication of a JV, possibly in the form of a silent partnership (Id.). Interestingly, and deviating in this regard from the prevailing opinion in the Swiss legal doctrine, the SFT does not give a decisive weight to the criterion of a participation in the risks and losses of an enterprise (judgment 4A_276/2020, at consideration 8.2 in fine). Nevertheless, the SFT recognizes that pursuant to the Swiss legal doctrine, this criterion of a participation in the risks and losses of an enterprise will often make it possible to distinguish a JV from a participatory loan (Id.).

With regard to the case before it in the matter 4A_276/2020, the SFT endorsed the lower instance’s qualification of the November 2007 contract as being a participatory loan, rather than a JV, for different reasons, among them the circumstance that the real estate developer did not engage himself to participate in potential losses of the relevant project (judgment 4A_276/2020, at considerations 8.3 and 8.4).

It is noteworthy that both the lower instance as well as the SFT did not attach a decisive importance to the title of the November 2007 contract (“joint venture agreement”), although the parties to such contract are experienced entrepreneurs (Id.). The SFT pointed out in this regard that when assessing and qualifying the November 2007 contract, an overall assessment of all the relevant circumstances is to be made, in which the judges of the lower instance were entitled not to attach particular importance to the qualification given to the contract by their parties, despite them being, as mentioned, experienced business partners.



As is demonstrated by this SFT judgment 4A_276/2020, the distinction between a participatory loan on the one hand and a JV on the other hand can have significant importance in a dispute, and such distinction can be disputed between the parties. The judgment discussed herein shows that pursuant to the SFT, it is neither the title given to the relevant contract by the parties, even if the parties to the contract are experienced business people, nor the question whether or not a party participates in the risks and losses of the relevant project. Such elements are, in the SFT’s jurisprudence, just more or less strong circumstantial evidence in the context of contract qualification. According to the SFT, it is decisive to find out, by assessing all the relevant circumstances in a given matter, whether or not the main characteristic of a JV is present, namely the so-called animus societatis (see also Fanny Rathe, Einfache Gesellschaft oder partiarisches Darlehen?, in: ius.focus 5/2021, at page 13). Obviously, such an exercise may be tricky in practice, the outcome of which may be difficult to predict for the parties (and their counsel), depending on the circumstances. It is to be kept in mind in this regard that judges before Swiss courts have, depending on the circumstances, a significant amount of discretion both when assessing the facts and evidence presented to them as well as when construing and applying the law to such facts and evidence.

Philipp H. Haberbeck, Zurich, 25 May 2021 (www.haberbeck.ch)

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


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