Supply bottlenecks and short-time working: Answers to frequently asked legal questions

Raw material shortages, high purchase prices, and long waiting times: Supply bottlenecks have been restricting operations – and resulting in renewed short-time working – at Swiss industrial companies in particular for months. Read our blog to find out your rights and obligations as a business owner towards employees, suppliers, and customers.

«Pacta sunt servanda» (agreements must be kept): Does this principle still apply during a pandemic?

In principle, agreements should always be kept (pacta sunt servanda), regardless of whether they are still beneficial for one party or have become a burden. With long-term agreements in particular, the parties must expect that the conditions at the time the agreement was concluded will change subsequently.

«Force majeure»: How is force majeure defined in the case of the COVID-19 pandemic?

Unlike foreign legislation, the Swiss Code of Obligations (CO) does not explicitly define force majeure. However, it is recognized in case law and falls under Art. 119 CO. Force majeure is generally defined as a completely exceptional, unpredictable, and unavoidable event that cannot be assigned to the sphere of risk or responsibility to be borne by a party. Pandemics or novel pathogens (excluding seasonal diseases) generally come under this definition. In this regard, official orders resulting from pandemics are also considered to be force majeure. 

It is important to check each agreement separately as to whether epidemics and pandemics are also included since every agreement may define force majeure differently. 

When are suppliers released from their obligation to supply?

In some circumstances, it is possible for individual contracted services or entire contractual relationships to become forfeit (or "extinguished") in application of Art. 119 CO. Possible examples of – objective and subjective – impossibility include a production stoppage or the inability to procure a required machine component due to a global shortage resulting from the current pandemic. The supplier would consequently be released from their obligation to supply, and the buyer would no longer be obliged to pay.

That being said, an agreement should exceptionally be amended in line with changed conditions if the circumstances have fundamentally altered (principle of «clausula rebus sic stantibus»). This legal principle will always apply where, cumulatively,

• fundamental changes have occurred following conclusion of the agreement
• the changes cause a serious imbalance in the schedule of services,
• the changes were neither foreseeable nor avoidable, and
• there is no inconsistent conduct by either party.

The requirements for amendment of various agreements are likely to have been met due to the COVID-19 pandemic. Whether and how the agreements should be amended depends on the specific case.

Do companies have to switch to alternative sources of supply, even if procurement or the goods themselves are much more expensive?

If the company providing the service is no longer able to deliver while a competitor is still able to do so, the principle of «clausula rebus sic stantibus» may apply. If in the case in point procurement from an alternative source would only be possible at a disproportionate cost (e.g. due to excessive increases in market prices), either amendment of the agreement or – if the disruption to the contractual equilibrium cannot be corrected – the release of the supplying party from the obligation to perform based on the principle of «clausula rebus sic stantibus» would apply.

There is therefore no general obligation to switch to alternative sources of supply. If supply becomes impossible following conclusion of the agreement due to circumstances for which the supplier cannot be held responsible or liable, Art. 119 CO could also be applied, and the supplier released from their obligation to perform. This would ultimately result in a need to switch to alternative sources of supply, even if this led to additional costs for procurement or goods. 

What penalties do Swiss companies face if goods that have been ordered are not delivered on time?

In principle, the ordering party can claim all losses incurred as a result of delayed delivery by the supplier. These include in particular loss in value or lost profits. The ordering party must prove the individual losses. Providing this proof can be extremely difficult in individual cases. A further deadline may have to be set for the supplier. Only after expiry of this deadline can the claims then be asserted.

Depending on the case, contractual penalties may apply if goods that have been ordered are not delivered on time unless the supplier has alternative sources of procurement and supply. Even though this option may be less convenient and more expensive, the principle of «pacta sunt servanda» applies.

If the failure is the result of an alternative source of procurement or supply, as always, the individual contractual situation is key, in particular the specific contractual penalties agreed. First, the effectiveness of the contractual penalties must be checked; whether the agreement gives rise to further grounds that could be applied against the enforcement of the penalty clause should also be clarified. It should also be verified with the supplier whether the contractual penalties can be passed on upstream within the supply chain. However, this is rarely the case.

What are the legal options for companies that have had to wait longer than agreed for ordered materials/goods?

If the parties had agreed a specified delivery date, the supplier is already in default when the delivery date expires, and no additional warning or reminder is required. If the supplier has missed delivery once, it must as a matter of principle be given a reasonable extension to enable it to subsequently fulfill the agreement.

After this extension has expired, companies have the following options:

• The ordering party adheres to the fulfillment of the agreement and claims compensation for the losses associated with the delay,
• The ordering party forgoes performance immediately and claims compensation for losses resulting from non-fulfillment of the agreement,
• The ordering party withdraws from the agreement and claims damages in respect of the failed agreement.

Outside of the legal framework, the only short-term options are to try to find alternative sources of supply or constructive possibilities for substitution. 

When can I give notification of reduced working hours for my company and how do I have to do it? 

Delivery shortages, temporary closures and the slump in demand: coronavirus is forcing many companies to give notification of reduced working hours. As an entrepreneur, you can give advance notification of reduced working hours if you can prove a compelling link between your loss of working hours and coronavirus and if you meet the requirements for the right to compensation for reduced working hours specified by SECO (only in German).

What exactly do I have to prove?

A general reference to coronavirus is not enough to adequately illustrate the link. You must give a convincing explanation of how the fall in demand and work is linked to the pandemic. You should send the advance notification or notification to the cantonal employment office based in the same location as your company. 

Can I also apply for compensation for short-time working for apprentices, staff on a fixed-term contract, or work-on-demand staff?

The entitlement to compensation for short-time working for persons on a fixed-term contract with no agreed option of terminating the contract, apprentices, and work-on-demand staff with a permanent contract whose working hours fluctuate considerably lapsed at the end of September 2021. An entitlement for this group of persons exists again from December 20, 2021 at the earliest until March 31, 2022, if the company is subject to the 2G+ rule (vaccinated/recovered plus test).

In which cases can I claim compensation for short-time working?

In the case of compensation for lost working hours due to Covid, a distinction must be made between lost working hours as a result of official measures (e.g. restricted access to restaurants) or of a drop in demand due to fears of infection or the requirement to wear a mask (business reasons). You can find further information here: Short-time working compensation (KAE COVID-19).

I have applied for short-time working but some of my employees still have overtime. Do my staff now have to reduce their overtime before I can apply for short-time working?

Overtime accumulated outside of the short-time working period does not need to be taken before the end of March 2022 prior to receiving short-time working compensation and does not reduce the eligible number of lost working hours.