COURS 11 MAY 4 Breach of Performance, Extinction of Obligations, and Tort Liability Case Study

Qualified Default and Additional Rights in Bilateral Contracts

  • Context of Breach of Contract: In bilateral (reciprocal) contracts, the debtor's principal obligation is balanced by the creditor's principal obligation. When a debtor is in default (not performing on time), the creditor may be granted additional rights, provided the situation is one of "qualified default."

  • Conditions for Qualified Default:     * Setting a Grace Period: The creditor must set a new deadline, known as a grace period, allowing the debtor a final opportunity to perform. This period must be "appropriate" and "reasonable."         * Inappropriateness: Setting a single day for a complex performance is considered non-reasonable.         * Monetary Debts: For monetary obligations, a few business days are generally regarded as an appropriate grace period.     * Exceptions to the Grace Period (Article 108 of the Code of Obligations): The law provides cases where a grace period is not required:         * Uselessness (Anticipatory Breach): It is clear from the outset that setting a grace period will not change the outcome, such as when a debtor declares in advance that they will not perform.         * Strict Fixed Terms (En French: Terme rigoureux): When the contract contains a deadline after which the creditor loses all interest in the performance.         * Metaphorical Example: A wedding dress delivery set for May 2nd for a ceremony that has already happened. Receiving the performance late is useless to the creditor.

  • Mandatory Declaration: Immediately after the expiry of the grace period (or immediately if no grace period was required), the creditor must declare their choice among three alternative rights.

  • The Three Choices of the Creditor:     1. Maintenance and Specific Performance: The creditor continues to claim the performance as originally contracted. No additional rights are exercised.     2. Maintenance and Positive Interest: The creditor no longer wants specific performance but modifies the contract to demand compensation for the "positive interest."         * Definition: Positive interest is the right to be placed in the financial position the creditor would have occupied had the contract been properly and correctly performed.     3. Termination and Negative Interest: The creditor terminates the contract entirely and claims "negative interest."         * Definition: Negative interest means placing the creditor in the situation they would have been in if they had never entered the agreement at all. This includes costs like legal fees or wasted negotiation expenses.

  • Decision Criteria: The choice depends on the creditor's best interest and the likelihood of achieving the goal (e.g., if specific performance is unlikely to happen, they may opt for interest or termination).

  • Applicability: While the legal regime of default was created for non-performance in due time, it is effectively applicable to any kind of breach of contract.

Defenses for Non-Performance and Creditor Default

  • Defense of Non-Performance (Article 82 CO): This applies to bilateral contracts where obligations are intended to be performed simultaneously.     * Verbatim Rule: A party cannot be forced to perform if the other party has not performed or offered to perform.     * Example: If an employer does not pay a salary, the employee is entitled not to perform their work.     * Status: This is a provisional exception; the obligation does not disappear, but performance is withheld as long as the other side fails to act. This is subject to the "freedom of contract," as parties can agree to different payment sequences.

  • Default of the Creditor (Incumbent Duties): Although a creditor primarily holds rights, they possess certain "incumbent duties" (not true obligations that can be sued for specific performance) to allow the debtor to perform.     * Examples of Incumbent Duties:         * Physical Presence: A patient must show up for surgery at the dentist for the dentist to perform the service.         * Preparatory Acts: Indicating the place of performance or delivery.         * Information Sharing: Handing over plans or necessary documents.         * Accompanying Acts: Issuing a receipt or handing over evidence documents.

  • Consequences of Creditor Default:     * The debtor cannot be deemed in default; they are not in breach if they cannot perform due to the creditor.     * The creditor is bound to compensate the debtor for any damage created by the breach of these duties.     * Risk Transfer: If an object is destroyed by a fortuitous event (e.g., a fire) while the creditor is in default of accepting delivery, the creditor bears the risk.

  • Remedies for the Debtor (Articles 92 and following CO):     * Right of Deposit (Article 92): For material objects (like a painting), the debtor may deposit the goods with a third party at the expense and risk of the creditor. Once deposited, the debtor's obligation is considered performed.     * Right to Sell (Article 93): If deposit is impossible or difficult (e.g., perishable goods), the debtor may sell the object.         * Requirements: A formal warning must be given to the creditor, and court permission is required.         * Procedure: This is handled via a "summary proceeding" due to the matter of urgency.         * Outcome: The sales proceeds must be deposited.     * Termination: For non-material performances, the debtor may terminate the contract or exercise rights similar to the qualified default of the debtor by analogy.

Extinction of Obligations

  • General Life Cycle: An obligation is created (formation), performed, and eventually extinguished (lapse).

  • Ordinary Extinction: Performance is the natural way an obligation ends. In duration contracts (e.g., a 3-year employment contract), the obligation is extinguished once the term elapses and duties are fulfilled.

  • Extraordinary Extinction - Impossibility (Article 119 CO): Performance becomes totally or partially impossible after the formation of a valid contract for reasons not attributable to the debtor.     * Risk Allocation: Article 119 states that if performance becomes impossible without the debtor's fault, the debtor is released. Consequently, the creditor is also released from their counter-performance.     * Generic Items: Specific items (like a specific horse) can become impossible to deliver. Generic items (money, generic apples) never become impossible; even if a specific batch perishes, the debtor must source others.     * Distinction: If the impossibility is "fault-based" (attributable to the debtor), it is treated as a breach of contract rather than extinction under Article 119.

  • Extraordinary Extinction - Set-off (Article 120 CO): Presupposes the existence of a claim and a counterclaim of the same nature (usually money).     * Example: Party A owes Party B $10,000$ and Party B owes Party A $15,000$.     * Mechanism: It is not automatic. The debtor must explicitly declare the intent to set off to the creditor.

  • Limitation Periods (Prescription): Claims become "time-barred." This is not a true extinction because the obligation still exists, but it provides a permanent defense to the debtor.     * Example: If a down payment is time-barred and the debtor pays it back, they cannot later demand it back by claiming it was expired; the underlying obligation remained.

Case Study: Construction and Liability in the Constellation Bar Fire

  • The Incident: A fire occurred at the "Constellation" bar in Crans-Montana on January 1, 2026.

  • Background and Human Cost:     * Capacity: Officially set at $100$ persons by some authorities, but more than $160$ were present during the incident.     * Casualties: $41$ lives lost ($50\%$ were minors); $115$ people seriously injured.     * Specific victims mentioned: Pauline (burned, lost two fingers), Mihaelo (a hero who broke plastic windows to save others).

  • Technical Failures and Physical Evidence:     * Renovations: Completed in $2015$ without proper authorizations or controls.     * Acoustic Foam: Highly flammable foam was used on the ceiling/walls; it was not properly maintained (sometimes glued back on when falling).     * Pyrotechnics: Pyrotechnic fountains fixed to champagne bottles were used inside, creating an immediate fire hazard.     * Egress Issues: Exit doors opened inward (illegal; they must open outward); emergency exits were obstructed; a basement staircase was narrowed from $1.20\,m$ to $90\,cm$ during renovations.     * Safety Equipment: No fire alarm system; only one fire extinguisher in the entire venue; no smoke extraction system; no evacuation plan or staff training.

  • Legal Liability – State and Commune:     * Public Entity Liability: Under Valais law, the commune is liable for damages caused by agents in the exercise of official functions. The "Commune of Crans-Montana" had a mandatory duty to perform fire inspections and building controls.     * The 5-Year Inspection Gap: No fire inspections were performed for five years ($2021$–$2026$). Local officials cited software issues involving a computer engineer who suffered a breakdown during COVID as a reason for lost security reports.     * Article 58 CO (Building Owner Liability): Liability of the owner of a building for defects in maintenance/construction.

  • Legal Liability – Individual Tort (Article 41 CO):     * Suspects: The owners (Jacques and Jessica Moretti) and several commune officials (e.g., Nicolas Feraud, Patrick Clivaz, Jean-Claude Savoy).     * Criminal Charges: Negligent arson, negligent homicide, negligent serious bodily harm.     * Tactical Pressure: Demand letters for $32$ million CHF were sent to individual officials to interrupt prescription (limitation periods).

  • Financial and Economic Consequences:     * Insurance Cap: The Morettis have insurance covering only CHF 8×106CHF\,8\times 10^6. Total damages are estimated near CHF 1×109CHF\,1\times 10^9.     * Commune Bankruptcy: The Commune of Crans-Montana has CHF 155×106CHF\,155\times 10^6, which is insufficient. Bankruptcy of a public entity leads to tax increases for residents.     * Property Values: Expert Sébastien Fanti noted that a $30$ million CHF chalet sale failed because the buyer feared future tax hikes due to the litigation.     * Interest: A 5%5\% legal interest rate on a CHF 300×106CHF\,300\times 10^6 claim adds CHF 15×106CHF\,15\times 10^6 every year.

  • International Implications:     * Victims from Italy, France, and Algeria have prompted diplomatic interest.     * Damage awards in Italy can reach CHF 3×106CHF\,3\times 10^6 per person, compared to Swiss standards of roughly CHF 2×105CHF\,2\times 10^5.     * Mediation is proposed to avoid a decade-long trial process that would exceed the $10$-year absolute limitation period.

Questions & Discussion

  • Question (Audience): Is impossibility of performance only to the detriment of the debtor?

  • Answer: Impossibility (like a stay at a restaurant banned during COVID) can be factual or legal. It must be permanent/lasting rather than transitory. It releases the debtor from performance but also typically releases the creditor from payment (Article 119).

  • Question (Audience): Regarding the dentist example: if I delay surgery appointments multiple times and don't show up, can the dentist ask for damages because he couldn't earn money elsewhere?

  • Answer: Yes. While you cannot be forced into specific performance (forced surgery), you have breached an incumbent duty. The debtor (dentist) can claim compensation. In extreme cases, by analogy to qualified default, the debtor can eventually terminate the contract after fixing a grace period.

  • Question (Audience): What about positive vs. negative interest in contract law?

  • Answer: Positive interest places the creditor where they would be if the contract was performed (e.g., value of the object). Negative interest replaces them where they were before negotiations started (e.g., reimbursement for hiring a lawyer).