Eversheds Sutherland: Contractual penalty and disciplinary action

In FTD 4A_579/2017 of 7 May 2018, the Federal Tribunal commented on the question whether and to what extent it is permissible to agree on a contractual penalty to sanction a breach of contract.

The disputed contract clause stated that “in the event of any violation of contractual obligations, in particular of the non-competition or confidentiality obligation, the employee has to pay a contractual penalty of CHF 50,000 per contract violation”.

The Federal Tribunal pointed out that the employee’s liability, as provided by Art. 321e Swiss Code of Obligations, may not be increased unilaterally or by mutual agreement. Therefore, contractual penalties with compensation character should reflect the actual damage potential and the employee's degree of fault. A contractual penalty, which is payable regardless of fault, is null and void. Null and void are also contractual penalties, which are payable irrespective of a damage incurred by the employer, or contractual penalties that exceed the actual damage.

While it is generally possible to apply contractual penalties as a disciplinary sanction, the Federal Tribunal specified that

     i.        the action/omission to be sanctioned must be clearly defined, and
    ii.        the amount of the penalty must be defined and proportionate in relation to the misconduct.

The court held that the disputed contract clause cited above increased the employee’s liability in violation of the law, did not apply to specified actions/omissions, and was in addition disproportionate. Therefore, the entire contract clause was considered to be null and void. 

In the light of this judgment, contract clauses, which provide for contractual penalties or liquidated damages should be reviewed and adapted, if necessary.

For questions or further information on this subject, please contact our employment law team here.

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