Conventional penalty under Swiss CO: when it is due, how high it may be, when courts reduce it and what applies in employment contracts.
In Switzerland, a contractual penalty is usually called a conventional penalty (Konventionalstrafe). It is governed by Art. 160 to 163 of the Code of Obligations (CO). The parties may freely agree on the amount. If the penalty is excessive, the court reduces it, but only if the debtor requests and substantiates this. Whether the creditor can also demand performance in addition to the penalty depends on what the penalty was promised for. In employment contracts, additional limits apply, particularly in the case of non-compete clauses. This guide explains the rules so that you can review or draft a clause yourself. It is aimed at companies in Germany that conclude contracts with Swiss partners and at anyone facing a Swiss conventional penalty.
TL;DR
- Free amount, but with a corrective: The parties set the amount themselves. Excessive penalties are reduced by the court under Art. 163 para. 3 CO.
- Burden of proof on the debtor: Anyone seeking a reduction must allege and prove that the penalty is excessive. The court does not examine this of its own motion.
- Performance or penalty: In principle, the creditor chooses one of the two. In the case of delay or incorrect place of performance, they may demand both.
- Do not forget the reservation: Anyone wanting a penalty for delay must reserve it upon acceptance of performance, otherwise it is lost.
- Employment contract: A penalty for a non-compete clause only holds if the prohibition itself is valid and appropriately limited.
Table of Contents
- What a conventional penalty under Swiss law is
- Performance, penalty or both: the rule of Art. 160 CO
- How high may a contractual penalty be?
- When the penalty is not due at all
- Conventional penalty in the employment contract
- Cross-border contracts and GTC
- How to draft a clause that holds
- Our view on conventional penalties
- Have a clause reviewed
- Frequently asked questions about the conventional penalty
- Sources
What a conventional penalty under Swiss law is
A conventional penalty is a promise of performance, usually a sum of money, for the event that the debtor does not perform, performs late or performs defectively. The terms contractual penalty (Vertragsstrafe) and conventional penalty (Konventionalstrafe) mean the same in Swiss usage. The law speaks of conventional penalty.
The penalty serves two purposes. It exerts pressure to ensure the contract is observed. And it saves the creditor the often laborious proof of damage. The Federal Supreme Court has described the purpose of the conventional penalty and its relationship to the creditor's damage in detail in a leading decision. Precisely where damage is difficult to quantify, such as in confidentiality obligations, non-solicitation clauses or exclusivity undertakings, the penalty is the most effective instrument. The creditor only has to prove the breach of contract, not what it specifically cost them.
A conventional penalty never arises automatically. It must be expressly agreed, in the contract or in effectively incorporated general terms and conditions. Typical areas of application are:
- Supply and works contracts with fixed deadlines
- Non-compete and non-solicitation clauses in employment and shareholders' agreements
- Non-disclosure agreements (NDA)
- Exclusivity and distribution agreements
- Cease-and-desist declarations following disputes
Performance, penalty or both: the rule of Art. 160 CO
The most important question after a breach of contract is: Can I claim the penalty and still insist on performance? Art. 160 CO distinguishes according to the purpose of the penalty.
| What the penalty is promised for | What the creditor can demand | Basis |
|---|
| Non-performance or defective performance | At the creditor's choice either performance or penalty, in case of doubt not both | Art. 160 para. 1 CO |
| Non-observance of time or place of performance | Performance and penalty together, as long as the creditor does not expressly waive or accept without reservation | Art. 160 para. 2 CO |
| Penalty agreed as penalty for withdrawal (Reugeld) | The debtor can release themselves from the contract by payment, if they prove this | Art. 160 para. 3 CO |
The basic principle is called alternativeness: whoever collects the penalty cannot additionally demand performance. The parties may deviate from this. The Federal Supreme Court has specified exceptions to this principle in BGE 122 III 420, also for defective performance. Anyone wanting both should therefore state this expressly in the contract, for example: "Payment of the conventional penalty does not release the obligation to perform the contract."
In practice, this one sentence often decides a lot of money. A supplier who pays a penalty for non-delivery could otherwise argue that they have bought themselves free.
How high may a contractual penalty be?
There is no statutory upper limit. Art. 163 para. 1 CO states that the parties freely determine the amount of the conventional penalty. Fixed amounts, percentages of the order value or daily rates for delay are permissible. An example from case law: In the case behind BGE 122 III 420, it was agreed that after exceeding the delivery deadline by more than four weeks, 400 francs per working day would become due.
Reduction of excessive penalties
Freedom of contract has a limit. Under Art. 163 para. 3 CO, the court reduces excessive conventional penalties at its discretion. This rule applies, according to the wording of the law, to all contracts, without exception for transactions between businesses. Courts intervene, however, with restraint. Reduction occurs only if the penalty is in a glaring disproportion to the creditor's interest, not merely because it appears high.
In their assessment, courts typically consider:
- the creditor's interest in compliance with the contract
- the severity of the breach of contract and the debtor's fault
- the nature and duration of the contract
- the economic situation and business experience of both parties
- the actual or threatened damage
A penalty negotiated between two experienced businesses is less often reduced than one imposed on an individual employee or a small business.
Whoever wants a reduction must deliver
The procedural role is decisive. According to BGE 143 III 1, the debtor bears the burden of allegation and proof for the prerequisites of reduction. They must therefore specifically explain why the penalty is excessive, for example because the creditor suffered hardly any damage or the breach was minor. Anyone who only objects "too high" in the proceedings risks the full amount being awarded. The summary on BGEx shows the core of the judgment compactly.
For you as debtor this means: gather evidence early on the actual damage to the other side, your minor fault and the negotiating situation at the time of concluding the contract.
When the penalty is not due at all
Besides reduction, Art. 163 CO knows cases in which the penalty lapses entirely. Under para. 2 it cannot be demanded if it is intended to secure an unlawful or immoral promise. Equally not, if performance has become impossible due to a circumstance not attributable to the debtor, unless otherwise agreed.
A second, frequently overlooked trap concerns penalties for delay. Under Art. 160 para. 2 CO, the creditor loses the claim if they accept the delayed performance without reservation. The Federal Supreme Court already decided in BGE 97 II 350 that a penalty for non-observance of the time of performance in a works contract lapses if the customer does not reserve it at the latest upon delivery of the work.
Practically this means: anyone accepting a late delivery should record in writing in the delivery note, acceptance protocol or by email that they reserve the conventional penalty. One sentence suffices, but it must come before or upon acceptance, not weeks later with the final invoice.
Conventional penalty in the employment contract
In employment law, conventional penalties are permitted but more narrowly limited than in commercial transactions. Most frequently they secure a post-contractual non-compete clause.
Non-compete clause: the penalty stands or falls with the prohibition
A non-compete clause is binding under Art. 340 et seq. CO only if the employee had insight into the clientele or into manufacturing and business secrets and their use could cause the employer considerable harm. In addition, it must be appropriately limited in terms of place, time and subject matter. In the proceedings 4A_109/2021, it concerned a prohibition that forbade the employee any activity in a personnel services company in certain cantons for twelve months. Excessive prohibitions that unreasonably impede economic advancement are reduced by the courts to the permissible extent.
If the prohibition lapses, the penalty also lapses. This happens under Art. 340c para. 2 CO in particular when the employer terminates without justified reason or the employee leaves for a reason attributable to the employer. The Federal Supreme Court applied this rule again in 4A_426/2023. Anyone agreeing a non-compete clause with a penalty should therefore also document the grounds for termination cleanly. More on deadlines and grounds can be found in our guide to termination in Swiss employment law.
Buy out or remain bound?
Under the law, the employee can in case of doubt release themselves from the non-compete clause by paying the conventional penalty. If the employer wants to prevent this, they must expressly state in the contract that payment does not release the obligation to continue observing the prohibition. If this sentence is missing, the penalty is effectively the price for switching to a competitor.
Penalties for other breaches of duty
Penalties for breaches during the employment relationship, for example against confidentiality or due care obligations, move in the area of tension with the liability rule of Art. 321e CO, which makes the employee liable according to their fault and professional risk. Such clauses must clearly define the facts and remain moderate in amount. In contracts with employees from abroad, questions of applicable law arise, which we address in our article on the employment contract with foreign element.
Cross-border contracts and GTC
For companies in Germany working with Swiss customers or suppliers, the first question is which law applies. If Swiss law is chosen, the conventional penalty is governed by Art. 160 to 163 CO, even if one party has its seat in Germany. German contractual penalty law follows its own rules. Anyone adopting familiar formulations from German model contracts therefore sometimes experiences surprises during enforcement.
Three points deserve particular attention in international contracts:
- Choice of law and jurisdiction: Stipulate both expressly. A penalty clause without a clear choice of law opens room for dispute before it even gets to the penalty.
- Language version: If the contract exists in several languages, determine which version is authoritative. Terms such as "penalty", "liquidated damages" and "Konventionalstrafe" do not fully coincide.
- GTC: If the penalty is only in general terms and conditions, it must be effectively incorporated. Unusual clauses with which the other party did not have to reckon may not bind them. How Swiss courts incorporate and control GTC is explained in our article on GTC in Switzerland.
In supply contracts, the penalty supplements the statutory rights for defects and delay, but does not replace them. What other claims you have alongside are set out in our article on defects and delivery problems in the purchase contract. If the other party does not pay the due penalty, the general rules on default in payment under the Code of Obligations apply.
How to draft a clause that holds
A good penalty clause is short, unambiguous and tailored to the specific contract. These steps have proven effective:
- Define the obligation precisely: Which act or omission triggers the penalty? "Breach of this contract" is too vague. "Exceeding the delivery deadline under Clause 4" is precise.
- Choose a justifiable amount: Orient yourself on the realistic damage and the interest in compliance. A penalty you can explain in a dispute is more likely to survive a reduction review.
- Fix the calculation method: Lump sum per breach, daily rate for delay or percentage of the order value. For daily rates, an upper limit is advisable.
- Regulate the relationship to performance: State whether the penalty is due in addition to performance and whether payment releases from the obligation.
- Clarify damages: State whether a higher damage can additionally be claimed.
- Consider repeated breaches: Does the penalty accrue for each individual breach or only once? For non-performance obligations, this is often the core of later disputes.
- Organise the reservation: Determine internally who declares the reservation in writing in the event of late delivery.
Our view on conventional penalties
In our advisory practice we see conventional penalties mainly in cross-border supply and distribution contracts, in employment contracts with non-compete clauses and in non-disclosure agreements. The recurring problem is rarely the amount. Usually it lies in an unclear formulation or a translation that shifts the meaning. A clause that on German provides for a delay penalty in addition to performance reads in an English or Russian version quickly like a lump-sum compensation that settles everything.
That is why we review and negotiate contracts directly in German, English, French, Ukrainian and Russian, without external interpreters. This keeps the meaning of each language version the same. Our advice to both sides: Anyone demanding a penalty should reserve it in good time and be able to justify its amount. Anyone who is to pay a penalty should not pay hastily, but check whether the secured promise is valid at all and what arguments speak for a reduction. These arguments must come from you; the court does not supply them.
— Bitblade
Have a clause reviewed
You have a penalty clause on the table or have received a demand for payment? In the initial consultation we assess your situation, from CHF 150 per hour. For the review or drafting of entire contracts and for SMEs with ongoing Eastern European business, with a retainer from CHF 500 per month, you will find all offers under Packages and Fees.
Frequently asked questions about the conventional penalty
How high can a contractual penalty be in Switzerland?
There is no fixed upper limit; the parties freely determine the amount. If the penalty is excessive, the court may reduce it under Art. 163 para. 3 CO. Decisive factors include the creditor's interest, the severity of the breach, the fault and the economic situation of the parties.
Must the creditor prove damage?
No. The penalty is also due if no damage has occurred; that is precisely its advantage. If the creditor wants more than the penalty, they must prove the higher damage and, as a rule, the debtor's fault.
Are conventional penalties permissible in employment contracts?
Yes, but with restrictions. A penalty for a non-compete clause only applies if the prohibition itself is valid and appropriately limited. If the employer terminates without justified reason, the prohibition and the penalty usually lapse.
Can I demand the penalty and still insist on delivery?
For a penalty for delay or for the wrong place of performance, yes, provided you do not accept the delayed performance without reservation. For a penalty for non-performance, you must in case of doubt choose, unless the contract expressly provides for both.
Sources
Recommendations