Judgment of the Federal Supreme Court of 2 September 2021

Case Reference: 4A_531/2020

Facts

The case concerned the owner of an ancient villa in Geneva. He undertook to completely renovate his villa and entrusted an architect to supervise the renovations.

Initially, the total cost of the home renovation was estimated at CHF 880,000. The owner asked the architect to reduce the cost by CHF 30,000 as he did not want to exceed the amount of CHF 850,000. He made this request known several times and even made concrete proposals to lower the total cost. He also asked for a new quote with several of the items reduced. Although he never received this new quote, he regularly paid all the invoices submitted by the architect during the project. He also ordered additional work at a cost of about CHF 20,000.

When the final bill arrived six months later, the total cost was CHF 915,000. The owner requested that the architect be ordered to pay the difference between the total cost of the renovations and the maximum amount he did not want to exceed.

Issue

The issue was whether the architect breached his contractual duty since the cost of the home renovations had been higher than the owner wished and, if so, whether the architect had to reimburse the owner for the excess amount.

Decision

For the architect to be held liable either (1) the principal set a binding cost limit or (2) the quotes were inaccurate or exceeded the acceptable margin of uncertainty.

1) Did the principal set a binding cost limit?

Under the rules of the contract of agency (Art. 394 SCO), which are, as a rule, applicable to the contract agreed upon with an architect regarding construction works, the principal can set a limit on the construction costs to avoid the risk of having to assume additional costs. There are two possibilities: (1) a binding cost limit, which is tantamount to a formal instruction given by the principal to the architect (Art. 397 SCO); or (2) a merely non-binding guideline as to the wished maximum amount. Whether the principal had imposed a binding cost limit on the architect is a matter of interpretation (Art. 18 par. 1 SCO).

If the cost limit ordered by the principal is binding on the agent, violating this instruction constitutes a breach of contract (Art. 97 and 398 SCO). Specifically, if the architect notices or should notice that the cost limit cannot be met or if he doubts that it can be met, the architect must stop the construction works, investigate and inform the owner so that the latter can take appropriate measures to maintain the cost limit. If the architect fails to perform these duties promptly, he shall compensate the client for the damage incurred, which corresponds to the additional costs that the principal specifically wanted to avoid with the binding cost limit.

In the case at hand, the judges ruled out the existence of a binding cost limit of CHF 850,000.

According to the Court, the owner should have indicated precisely which renovations he thought should be reduced and required the architects to submit a new quote. However, he let the renovations go ahead and paid all the contractors’ and architects’ payment orders and invoices with no objection until the work was completed. Given the owner’s behavior, there could not have been a binding cost limit.

2) Were the quotes inaccurate and was there a margin of uncertainty?

A quote is an assessment of the presumed costs of the works to be performed by third-party contractors. As such, any quote contains an inherent element of uncertainty. The overruns may be caused by two factors: (1) an inaccurate estimate of the costs at the outset; (2) an error in the way the work of the architect is conducted (not applicable in the case at hand).

To avoid miscalculating the costs, the architect must draw up the quote carefully, give the client all the necessary information regarding costs, including the degree of uncertainty attached to the estimate, and monitor the development of costs during the work so that any overruns can be reported promptly. If the architect fails to meet these obligations, he is liable for this breach of confidence in the accuracy of the quote and must compensate the principal for the damage resulting therefrom and for having made arrangements accordingly.

However, a slight overrun does not yet constitute a breach of the architect’s duties. The architect must in principle indicate the margin of uncertainty in his quote, but if the margin of uncertainty has not been stated, Courts generally acknowledge that a 10% margin of uncertainty is acceptable for new constructions.

In the case at hand, the architect did not indicate the margin of uncertainty in his quotes. The final price was about 2% higher than the initial estimate, after deduction of the additional work ordered by the owner. Under these circumstances, the client cannot argue disappointed confidence in the architect and the latter is not liable.

Key takeaway

When an owner hires an architect for home renovations and wants a cost limit to be respected, he must make it clear that there is a cost limit and that it is binding. It is advisable to clearly state the cost limit in writing in the contract. If this is not feasible, the client must either stop the work or make explicit proposals to the architect that are likely to lead to a reduction in costs. Otherwise, a cost overrun of up to 10% is generally considered acceptable.

Comments

Swiss and French law (Dutilleul/Delebecque, Contrats civils et commerciaux, Dalloz, 2019, p. 658), as well as German law (Oechsler, Vertragliche Schuldverhältnisse, Mohr Siebeck, 2013, p. 776), hold that an architect’s contract may include elements of a contract of agency, subject to an obligation of means (e.g., the management of the work), and elements of a contract for work and services, subject to an obligation of result (e.g., the preparation of the plans).  The legal rules governing a specific architectural contract therefore depend largely on the concrete content given to it by the parties.

This provides an opportunity to recall a fundamental principle of Swiss contractual liability law: the liability is limited by the extent of the obligation incurred by the debtor. However, unless this obligation is set out in the Code of Obligations, it must be sought in the contractual arrangements made by the parties. This was the reasoning behind the first test carried out by the Court in the case at hand (the binding cost limit test).

The first step of the analysis was therefore to determine the architect’s duty: what did he commit to? In this assessment, the judges had been relatively unyielding and blamed the principal for not proving that the limit of CHF 850,000 was a binding cost limit. To prove the existence of a binding cost limit, the principal should have: studied the quotes more carefully; made clear and relevant cost reduction proposals; not paid all the invoices for the work carried out without complaint; and not ordered additional work. It can be observed that the architect is therefore relatively well protected against a binding cost limit if such binding cost limit had not been explicitly mentioned in the contract.

Nevertheless, it is still possible to rely on a principle of good faith, taken from the particular point of view of loss of confidence, when the overrun of the estimate exceeds what is acceptable (in principle 10%). This was the reasoning behind the second test performed by the Court (the margin of uncertainty test). Here, the test failed due to the small cost overrun.

It should be added that, even in the case of a significant cost overrun, the entire cost overrun does not necessarily have to be paid by the architect. On the one hand, the client must prove that he would have adopted a different behavior and thus saved some costs. On the other hand, the architect does not have to reimburse the value that the client would have likely accepted if the architect had informed him correctly.

Judgment of the Federal Supreme Court of 19 March 2020

Case Reference : 4A_313/2019

Facts

The case concerned a hairdresser, tenant of a commercial lease, who had decided to hand over his business. Various merchants were interested, among them a chocolatier who wanted to open a new shop.

The hairdresser and the chocolatier had started negotiating the handover of the business. During the negotiations, the chocolatier had agreed to offer the hairdresser the sum of CHF 50,000, subject to the landlord’s acceptance of the change of tenant.

The hairdresser had two choices: 1) to transfer the commercial lease directly to the chocolatier, by remaining jointly and severally liable for the rent for two years (Art. 263 of the Swiss Code of Obligations [SCO]); or 2) to terminate his lease contract and have the chocolatier conclude a new lease contract with the landlord. Given that the hairdresser was not satisfied with the first option, the parties decided they would meet with the landlord to sign, in writing, both the business sale (between the hairdresser and the chocolatier) and the new commercial lease (between the chocolatier and the landlord). Shortly thereafter, however, the hairdresser asked the chocolatier to sign the business sale agreement the day before the tripartite meeting was scheduled to take place.

Without any news from the chocolatier – who suddenly disappeared – the hairdresser opted to break off negotiations with him. Later on, he discovered that the chocolatier had come to an agreement directly with the landlord to conclude a lease agreement and rent the premises previously held by the hairdresser, thereby avoiding to pay the sum of CHF 50,000.

The hairdresser put the chocolatier on notice to pay the price of the business sale discussed among them, i.e. the expected CHF 50,000.

Issue

The Federal Supreme Court had to clarify the scope of the duty to negotiate in good faith: was the chocolatier entitled, after negotiating the business handover agreement with the hairdresser, to enter into a lease agreement directly with the landlord and to get the premises without paying the agreed fee to the hairdresser?

Decision

1. The Federal Supreme Court explained the legal framework for contractual negotiations. The main principle is contractual freedom: everyone is free to enter into, or interrupt a negotiation whenever they want, even without justification.

However, the possibility to interrupt negotiations is subject to good faith (cf. Art. 2 para. 1 of the Swiss Civil Code [SCC]), generally known, in this context, as the culpa in contrahendo.

The culpa in contrahendo is a basis for liability for persons negotiating a contract. It is based on the idea that talks by their very nature create a form of legal relationship between the negotiating parties and impose on them reciprocal duties, in particular the obligation of negotiating seriously and in accordance with their true intentions. The purpose is to make a party liable for having, through behavior which does not align with its true intentions, given rise to the illusory hope that a deal would be concluded and thus leading the other party to make arrangements or incur expenses in view of this deal. It is contrary to the rules of good faith to agree in principle to the conclusion of a formal contract and to refuse in extremis, without reason, to translate it into the required form.

In practice, culpa in contrahendo for breach of contract is only accepted in exceptional situations, especially when the type of contact is subject by law to a written form. Neither long negotiations nor the knowledge that the other party has made investments are sufficient. Indeed, incurring costs before the conclusion of the contract has, in principle, to be carried out at one’s own risk. The conduct contrary to the rules of good faith does not consist so much in having broken off the negotiations as in having kept the other party in the belief that the contract would certainly be concluded or in not having dispelled this belief in time. In practical terms, failed negotiations will not, in principle, give rise to liability, unless specific elements such as an oral or written commitment give rise to a legitimate expectation that the contract will certainly be concluded.

2. In this case, the Federal Supreme Court clarified that legitimate expectations (that the contract would be concluded) were excluded from the outset – and therefore the pre-contractual liability of the other party would not come into play – when the allegedly injured party knew or should have known that the negotiations would not be successful.

3. In the case at hand, the Federal Supreme Court found that there was no evidence of any agreement that would have been entered into between the chocolatier and the landlord before the hairdresser broke off the negotiations with the chocolatier. Besides, it is rather the attitude of the hairdresser that was at the origin of the misunderstanding that affected the last phase of the negotiations: after having fixed a meeting to sign the business sale and the lease agreement simultaneously, the hairdresser demanded that prior to that meeting the chocolatier sign the business sale contract. This conflicting behavior created an unclear situation for the chocolatier, who was legitimately reluctant to enter into the business transfer agreement without the guarantee of obtaining the commercial lease. The chocolatier’s silence obviously did not help the parties find a solution, but he simply refused to sign the business sale since the initial plan was to sign the new lease agreement at the same time.

4. The pre-contractual liability of the chocolatier could not be triggered.

Key takeaway

When the tenant of a commercial lease wants to sell his business, there is a risk that the would-be transferee will come to an agreement directly with the landlord of the premises without the transferor being involved. In order to avoid direct negotiations between the would-be transferee and the landlord, it is in the business interest of the seller to obtain the landlord’s consent in advance or, alternatively, to proceed with a transfer of the lease in accordance with Art. 263 SCO, even if it means remaining jointly and severally liable for two years. Last option: draft a letter of intention preventing the buyer from negotiating directly with the landlord.

Comments

Unlike other laws (specifically French law), Swiss law does not, strictly speaking, recognize the concept of “fonds de commerce” (sale of a business) nor does it provide for a specific legal framework. Under these conditions, the transfer of a business must be carried out according to several legal rules, specific to each of the components of the business (lease, furniture, clientele, etc.). In the same way, Swiss law does not recognize the French concept of “droit au bail” (right to the lease), which authorizes a business owner to transfer his lease to another business owner without the landlord being able to oppose it.

Art. 263 SCO does limit the landlord’s right to oppose the transfer of the lease under justified reasons; but, in exchange, the first tenant remains liable, jointly with the new tenant, for a period of up to two years. When the tenant has not obtained the prior agreement of the landlord to transfer his lease to any other merchant, he is in an unfavorable position if he wants to sell his business. Indeed, the lease contract is an essential element of the transfer of a business and it is unlikely (as the case commented here shows) that anyone will buy a business without the relevant lease agreement for the premises where the business will be carried out. Case law shows that the absence of a specific legal regime for the transfer of business gives significant power to commercial lessors to the detriment of lessees (cf. recently 4A_30/2020).

In this case, the hairdresser, being in an unfavorable position, acted improperly. He sought to transfer his business at all costs without considering that the chocolatier would not be satisfied with a transfer of the business without assurance that he will take over the lease. Although the attitude of the chocolatier may seem to lack transparency and be unfair since he stopped the negotiation with the hairdresser and began negotiations directly and separately with the landlord, the Federal Supreme Court did not sanction this behavior.

Good faith is the underlying principle of the liability for culpa in contrahendo. Since such liability is based on the protection of the legitimate expectations that one negotiating party holds over the other, it is subject to a fairly subjective assessment by the courts, who put themselves in the shoes of both negotiating parties and rule according to the behavior they find most appropriate.

In short, since pre-contractual liability is only rarely admitted, there is a requirement for the party claiming fault on his counterparty to show irreproachable conduct. If his behavior was not impeccable, it would have been difficult for him to accuse the other party of violating the rules of good faith by refusing to enter into the contract. However, in this case, the hairdresser changed his strategy and pushed for an unrealistic agreement since it cannot usually be expected that the other party would accept this in good faith.

Other sources presenting the case

Blaise Carron, in Droit du bail, 2020 p. 15.