Collateral Securities under Swiss Law

collateral_securities_swiss_law

08 Oct 2017 Collateral Securities under Swiss Law

With the exception of the “natural obligations”[1], debt obligations are always connected to a legal action which guarantees the execution of a transaction between parties to a commercial relationship. However, the creditor sometimes needs to secure their position with additional guarantees[2]. Hence, collateral securities exist in order to facilitate the trade relationship. These are most common in the banking sector.

 

There are two types of collateral securities under Swiss law: (i) security interests and (ii) personal securities.

 

Security interests relate to goods; that is to say, movable and immovable property. The goods are then allocated to secure a debt and can be sold if the debtor does not perform on their respective obligations[3]. The main types of security interests are pledges, which can be issued over movable and immovable property, but also on rights and debts[4]. Security interests will be analysed in more detail in a forthcoming newsletter.

 

Personal securities concern a third party’s commitment to fulfil an obligation if the debtor does not perform on same[5]. The purpose of this newsletter is to focus on the essential features of two particular personal securities; the contract of surety (cautionnement) and the guarantee of performance by a third party (promesse de porte-fort). A summary is provided at the end of the newsletter in order to present the principal differences between both types of personal securities.

 

The contract of surety (cautionnement)

 

Definition

 

According to Section 492(1) of the Swiss Code of Obligations (“SCO”), the contract of surety is defined as “[when] the surety undertakes as against the creditor of the principal debt to vouch for performance of the obligation”.

 

In other words, the contract of surety is an agreement between the creditor of the principal obligation and a third party, the guarantor, to secure the principal debt existing between the principal creditor and the principal debtor.

 

A typical “contract of surety” relationship is where A and B have entered into a lease agreement. A is the landlord (creditor of the lease payment) and B is the tenant (debtor of the lease payment). C (the guarantor) enters into a contract of surety with A to secure B’s payment. If B does not pay, A can ask C for payment. The structure of this relationship is set out in detail below.

 

The two different types of contracts of sureties:

 

Under the term “contract of surety” two principal modalities of guarantees exist:

 

  • the simple contract of surety and
  • the joint and several surety.

 

The distinction between those modalities hinges on the differing condition to fulfil in order to call on the guarantee.

 

(a) The simple contract of surety

 

In the case of a simple contract of guarantee, when the debt is payable, the creditor must do everything possible to obtain the payment from the principal debtor before requiring the guarantor to perform on its obligations[6]. The creditor can get to the guarantor only if the following situations occur:

 

  • The principal debtor has been declared bankrupt[7].
  • The principal debtor has obtained a debt restructuring arrangement (sursis concordataire)[8].
  • The principal debtor is the subject of debt enforcement proceedings instigated with due diligence by the creditor which has resulted in the issue of a definitive certificate of loss[9].
  • The principal debtor has relocated his domicile abroad and can no longer be sued in Switzerland[10].
  • A legal action against the principal debtor in foreign courts has been substantially impeded as a result of such relocation.

 

(b) The joint and several surety

 

Contrary to the simple contract of surety, a joint and several surety allows the principal creditor to get to the guarantor directly if the following conditions are fulfilled:

 

  • the principal debt is payable[11];
  • the payment was not made on time[12];
  • the creditor has made a demand for payment without success[13]. However, if the debtor’s insolvency is known, such a demand is not required[14]; and
  • the words “joint and several”, or an equivalent phrase, must be stated in the agreement[15].

 

Principe de l’accessoriété” or independence

 

As the contract of surety is based on and inherently linked to the principal debt, it can only exist if the principal debt exists and is valid[16]. Swiss law defines this principle as “principe de l’accessorieté”: the guarantor’s obligation to pay the principal creditor is dependent upon the relationship with the principal debtor. This concept is the key feature of the contract of surety and is distinct from personal securities. In particular, this situation allows both the debtor and the guarantor to invoke a set-off against any monies already paid to the creditor by the debtor.[17]

 

Formal aspects

 

To protect the guarantor, who is considered the weaker party to the contract, strict formal requirements must be observed for the valid conclusion of the contract of surety (in both of its forms). More precisely, formal requirements apply to the guarantor’s declaration and do not apply to the creditor[18]. The guarantor must be aware of the risk they take in entering into the contract of surety[19]. The formal requirements are as follows:

 

  • the contract must contain the guarantor’s identity and must be signed by them;
  • it must state the obligation upon which the contract of surety is based (principal debt);
  • a declaration from the guarantor undertaking to become the guarantor; and
  • the amount of the guarantee must be indicated in numerals in the contract itself[20].

 

Moreover, depending on the case, different forms may be required:

 

  • If the guarantor is a company, the contract of surety must be in writing[21].
  • If the guarantor is a physical person, the contract must be drawn up before a notary[22].
  • However, if the guarantor is a physical person but the amount of the guarantee does not exceed CHF 2’000, written form is sufficient, without the requirement to be drawn up before a notary (cf. (i))[23].

 

Finally, a married person cannot validly conclude a contract of surety without the written consent of his or her spouse[24]. The same rule applies for the same-sex couples under the Swiss partnership regime[25].

 

The guarantee of performance by a third party (promesse de porte-fort)

 

The definition of the guarantee of performance by a third party is stated at Section 111 SCO, which states the following: “A person who gives an undertaking to ensure that a third party performs an obligation is liable in damages for non-performance by said third party”.

 

In this case, the guarantor promises, in their own name and at their own risk vis-à-vis the creditor, to execute a third party’s obligation. The creditor is compensated by the guarantor if the third party does not fulfil their obligations[26].

 

The obligation to pay is determined by the agreement of guarantee of performance by a third party. If nothing is provided in the agreement, the guarantor is liable when the third party does not perform in accordance with the commitment[27]. Unlike the joint and several surety, there is no necessity to call on the third party before the guarantor or to issue a formal notice[28].

 

An example of a guarantee of performance by a third party is where A promises to B that C will construct a building on B’s land. If C does not act on such performance, A (subject to the requirements set out below) is liable toward B.

 

Two types of guarantees of performance by a third party:

 

Legal doctrine provides for two types of guarantees of performance by a third party: (a) the “Reine Garantie” and, (b) the “bürgschaftähnliche Garantie”.

 

(a) The “Reine Garantie”

 

Legal doctrine uses this expression when the guaranteed fact has no link with a determined obligation. In other words, the guarantor is not linked to the creditor in the underlying agreement between the creditor and the third party[29].

 

(b) The “bürgschaftähnliche Garantie”

 

The “bürgschaftähnliche Garantie”, on the other hand, results in the guarantor being directly liable to the creditor of the guarantee of performance by a third party as the guarantor has actually entered into an agreement with the creditor[30].

 

Independence of the guarantee

 

Contrary to the contract of surety, the guarantor’s obligation is totally independent from a potential legal relationship between the creditor and the third party[31]. In this case, the guarantor is not a party to the arrangement between the creditor and the third party[32]. Hence, the guarantor cannot, in this situation, invoke any sort of set-off.[33]

 

Formal aspects

 

The guarantee of performance by a third party requires no specific form. The only condition is the undertaking made by the guarantor to ensure the third party’s performance.

 

Main Differences

Below is a summary chart which sets out the main differences between the contract of surety and the guarantee of performance by a third party:

 

  Contract of surety Guarantee of performance from a third party
Link with the principal obligation The guarantor’s obligation is dependent upon the principal’s obligation. The guarantor’s obligation is totally independent from the principal obligations of both the creditor and the debtor.
Formal aspects High formal requirements, especially for physical persons. No formal requirements.
Call on the guarantee Simple contract of surety: The creditor must do everything possible to obtain the payment from the principal debtor before turning to the guarantor.

 

Joint and several surety: The creditor can get to the guarantor if the payment of principal debtor is delayed and the creditor has made a demand to the debtor without success.

Allows the guarantor to request payment from the guarantor when, in accordance with the agreement, the obligation is not performed.

 

Our Experience
lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.

 

This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Mr. Dominique Lecocq on moc.e1537280909taico1537280909ssaqc1537280909ocel@1537280909lrd1537280909 for any questions.

 

 

Footnotes in this article:

 

[1] The performance of a « natural obligation » can not be obtained by a legal action. (SJ 1980 p. 172). Swiss law defines it as a non-actionable claim. For instance, this is the case of gambling and betting (Section 513 of the Swiss Code of Obligations).

[2] Tercier Pierre/ Bieri Laurent/ Carron Blaise, Les contrats spéciaux, 5e Ed., Schulthess, 2016, p. 909 (Tercier/ Bieri /Carron, p. 909).

[3] Tercier/ Bieri/ Carron, p. 909.

[4] Idem.

[5] Idem.

[6] CR CO I, Meier, art. 495 N 6.

[7] Section 495(1) OCS and Section 175, 189 and 190 of Swiss the Federal Act on Insolvency Proceedings and Bankruptcy.

[8] Section 495(1) OCS and Section 295 of Swiss the Federal Act on Insolvency Proceedings and Bankruptcy.

[9] Section 495(1) OCS and Section 149 and 265 of Swiss the Federal Act on Insolvency Proceedings and Bankruptcy.

[10] Section 495(1) OCS and Section 23 of the Swiss Civil Code (“CC”).

[11] CR CO I, Meier, art. 496 N13.

[12] Idem.

[13] CR CO I, Meier, art. 496 N 14.

[14] Section 496(1) SCO.

[15] Idem.

[16] Section 492(1) and (2) SCO.

[17] CR CO I, Meier, art. 492 N 34-35.

[18] CR CO I, Meier, art. 493 N 2.

[19] CR CO I, Meier, art. 493 N 1.

[20] CR CO I, Meier, art. 493 N 4.

[21] Section 493(1) SCO.

[22] Section 493(2) SCO.

[23] Idem.

[24] Section 494(1) SCO.

[25] Section 493(4) SCO.

[26] CR CO I, Tevini, art. 111 N 2.

[27] CR CO I, Tevini, art. 111 N 14.

[28] CR CO I, Tevini, art. 111 N 14.

[29] CR CO I, Tevini, art. 111 N 3.

[30] CR CO I, Tevini, art. 111 N 3.

[31] CR CO I, Tevini, art. 111 N 20.

[32] CR CO I, Tevini, art. 111 N 3.

[33] CR CO I, Tevini, art. 111 N 20.

[34] CR CO I, Tevini, art. 111 N 8.