04 Contracts in digital projects

Have you signed a contract today? Very probably not just one, but even several. The contract is probably the most common legal transaction. But what is a contract? And when and how does it come about? And how do contracts work in the digital world? In this chapter I will explain the contract in general and then go into the special circumstances for contracts in digital projects.

The contract, the agreement

The first article of the Swiss Code of Obligations (CO) already regulates the contract. Art. 1 of the Swiss Code of Obligations stipulates that the conclusion of a contract requires the mutual consent of the parties. This may be explicit or tacit. “Mutual” means that at least two parties are required to conclude a contract. However, there are also multilateral agreements which are concluded by three or more parties. When concluding a contract, the parties express their will to enter into rights and obligations, the so-called “expression of will”. These rights and obligations must also be “congruent”, i.e. they must be congruent. Put simply, the parties must agree on the rights and obligations (“Nothing is agreed, until everything is agreed”).

Offer and Acceptance

In fact, a contract is concluded in which one party submits an offer and the other party accepts it (acceptance). The duration of the validity of an offer depends on how long the other party objectively needs to examine the offer and respond to it. The more complex the subject matter of the contract, the longer this period is likely to be. From a legal point of view, however, it is advisable to set a time limit for offers. Then there will be no discussion on this point. It is also possible to submit a non-binding offer or quotation. According to Art. 7 CO, jurisdiction and literature, offers in e-commerce are always binding if they can be downloaded directly (especially software, music, videos, e-books; direct offers). However, if the products have to be delivered by post or courier or if the services are provided offline (indirect offers), the offers in e-commerce are non-binding. This means that if the customer orders such an offer, he in turn submits an offer, but then a binding offer (!).

Use of the terms “contract”, “agreement”.

The terms “contract” and “agreement” are synomym. This means that both the term “contract” and the term “agreement” can be used to describe a contract. I myself use the term “contract” more for formal, comprehensive agreements, the term “agreement” more for simpler, shorter contracts. The same also applies to the English terms “contract” and “agreement”. In the English language there are also the terms “treaty” and “convention”, but these are used exclusively for intergovernmental agreements.

On the Internet practically all contracts informal

According to Art. 11 of the Swiss Code of Obligations, contracts only require a special form in order to be valid if the law prescribes such a form. In other words, in Swiss contract law the principle of freedom of form applies. And effectively, all contracts important for the digital world can be concluded informally, in particular the sales contract, order, contract for work and services and licence agreement. The forms provided for by law are simple written form, qualified written form and notarisation. Simple written form means that a contract is printed on paper and signed by hand. The latter is also possible in PDF format using a qualified digital signature (see below). In the case of qualified written form, for example, individual elements of the contract must be completed in handwriting, such as the guarantee. Finally, a contract in which the law provides for the form of assessment must be concluded with a notary, which is the case, for example, with the purchase of land. The contracting parties can also always agree themselves that a contract itself or its amendments must always be made in writing. This can even be done via the Internet using a qualified digital signature (see below).

Qualified digital signature

Pursuant to Art. 14 CO, the qualified electronic signature associated with a qualified time stamp is treated in the same way as a handwritten signature under the Federal Act on Electronic Signatures (ZertES). Important: this signature is not simply a scanned signature, but a purely electronic signature that functions de facto like a login, e.g. in e-banking. Such a digital signature usually consists of a hardware part (usually a card with chip or a USB stick with chip) and a password.

In order to obtain a qualified digital signature, you must contact one of the certified providers (list of providers of certification services recognised in accordance with ZertES). In my case, it was the Swiss Post that subsequently issued me a “SuisseID” (www.suisseid.ch). To do this, I had to identify myself at a post office counter with my national identity card. As a result, I received a USB stick with a chip and a pin code. I had to plug the stick into my PC. I also had to download the appropriate software. Now I can easily sign a PDF document. This is done by inserting a signature via the corresponding program and entering the corresponding pin code. If I now send this digitally signed PDF document to an addressee, the addressee can click on the signature. Subsequently, a server of Swiss Post or a partner of Swiss Post confirms to the addressee that the document has effectively been digitally signed by me.

The application possibilities of a qualified digital signature are currently not particularly large. As attorneys, we can, for example, submit petitions to the courts via an additional Swiss Post infrastructure (IncaMail) digitally or via online mail. Or you can, for example, digitally sign expense receipts. It could also be used to conclude contracts, which we have not yet done in practice.

Pacta sunt servanda

Many people assume that you can simply cancel contracts telquel or simply return purchased products, for example. This is a mistake, especially in Switzerland. In general, the Latin proverb applies: pacta sunt servanda (pacta sunt servanda). Contracts must be adhered to. Even if the Federal Court has ruled that there are no “perpetual contracts” (BGE 114 II 159 “beer supply contract”), contracts can in principle only be terminated if they provide for a termination clause. The idea that contracts can be terminated telquel is probably due to the fact that most e-commerce providers now provide for a “money-back guarantee”, i.e. the possibility of returning products without reason. In addition, the EU Consumer Rights Directive provides for a general fortnightly right of withdrawal for digitally concluded contracts in the business-to-consumer (B2C, consumer contracts) area in the EU. There is no such general right of withdrawal in Switzerland, in particular for digitally concluded contracts.

Contracts for a certain period of time, on the other hand, end at the end of the period. In practice, there is a need for contracts to be automatically extended for a certain period of time under certain conditions. Corresponding clauses are often incorrectly worded, in which contracts for an indefinite period are mixed with contracts for a certain period of time. The correct legal wording is as follows:

This agreement is concluded for an indefinite period of time. It can be terminated with a notice period of [number of days or months] to [date], for the first time as of [date at the end of the intended minimum duration, de facto of the specified time].

Drafting of contracts

Editing a contract is basically not difficult and you don’t have to be a lawyer to do it; they simply have more practice with it. The “be-all and end-all” of contract drafting is whether the text is clear and comprehensible to everyone. A “worst case thinking” (Anything that can go wrong will go wrong) is also groundbreaking. Contracts are not only concluded for sunshine, but also for rain. It must be borne in mind that the contract must not only be clear to the parties, but also to third parties, since it is often not those contracts that they later apply that are negotiated and edited. In addition, in the worst case, lawyers and judges will also be involved with a contract. Whether a contract is good or not becomes particularly clear when the matter goes wrong. This is why, when drafting a contract, one has to ask oneself whether all worst cases and their consequences have been taken into account as far as possible. For this reason lawyers may also be better off in contract drafting because they are confronted with the worst cases on a daily basis and it is easier for them than legal laypersons to imagine what could go wrong …

Letter of Intent, Non-Disclosure und Non-Use Agreement

In digital projects, so-called Letters of Intent are often concluded. These also included non-disclosure agreements. The latter can of course also be agreed separately. In both cases, English terms are also regularly used in German-language contracts.

Letter of Intent

The term “letter of intent” (LoI) or “declaration of intent” is not defined anywhere in Swiss law. In legal practice, a LoI is usually concluded with regard to the conclusion of a main contract, whereby the conditions for the contract negotiations are regulated, among other things, in particular also who bears the resulting costs, in particular if the main contract is not concluded. This is because a LoI typically does not obligate the customer to conclude the main contract (!), but merely regulates the failure to conclude it. A simple example from the non-digital world is the case in which interested parties for a house purchase, which still requires extensive preparatory work on the part of the seller or broker, undertake to pay a certain amount for the corresponding expenses as well as a new tender if the purchase is not concluded (legally also called “repentance money” or “repentance money”).

Non-Disclosure Agreement

A non-disclosure agreement, short for NDA, is an agreement that contains a promise not to disclose information to third parties that is not known to them. This means that part of an NDA can only be what is not already known to third parties. It is also important that a confidentiality declaration be accompanied by a contractual penalty (Art. 160 ff. CO), which must also be so high that the obligated party is “motivated” to adhere to it. A disproportionately high contractual penalty may, however, be reduced by the judge to an acceptable level in the event of a dispute (Art. 163 CO). An NDA without a penalty is like a tiger without teeth.

Non-Use Agreement

Particularly with regard to innovations, practice shows that an NDA is not enough. In addition, a non-use agreement (NUA) is needed which not only prohibits the obligated party from disclosing secret information to third parties, but also from using it itself and unauthorised by the owner or from supporting third parties in its use. This agreement must also be accompanied by a contractual penalty (see above).

General terms and conditions

An important role in contract law in the digital world is played by the General Terms and Conditions (also known as General Contract Terms and Conditions or in the insurance business also as General Insurance Terms and Conditions, AVB for short), not least because e-commerce is naturally designed as a mass business and it is not possible to negotiate and conclude individual contracts with every customer in this area. In addition, experience has shown that industries linked to the digital world obviously do not feel like negotiating and concluding extensive individual contracts, even for individual transactions. The corresponding contracts are therefore often concluded simply by exchanging the order and order confirmation. However, it is precisely in this context that general terms and conditions, which nevertheless regulate the details in writing, are indispensable.

General terms and conditions are contractual clauses formulated by a party and generally applied to all its business relationships or at least to a specific business area. On the one hand, general terms and conditions serve the purpose of rationalisation, but on the other hand they can also serve as a checklist for smaller companies. I.e. one formulates GTC once, pulls for it perhaps even a lawyer in, and must then no longer with each business transaction ask itself, what one should agree. GTC have however still an important negotiation tactical function. Those who enter into contract negotiations with ready-made contract clauses of their own have a great chance of enforcing these in the negotiations (contract dominance); this is only because many people think that it is not possible to amend general terms and conditions. The latter of course does not apply. General terms and conditions can always be changed by individual agreements.

A decisive point is the acceptance of general terms and conditions by the other contracting party. Contrary to popular opinion, general terms and conditions need neither be read nor understood. It is sufficient if the other contracting party was able to take note of the GTC. It is indeed possible to simply publish the GTC on one’s homepage. However, if a contract is concluded offline or by correspondence, it is advisable for reasons of provability to enclose the GTC with the offer, the individual contract or the correspondence. In e-commerce, the GTC must be integrated into the online process in such a way that the contract can only be concluded with the explicit acceptance of the GTC.

From a legal point of view, it is even assumed that the other contracting party does not read or read the GTC at all, but does not understand them. For this reason, two special rules are applied to general terms and conditions. The ambiguity rule is based on the principle of good faith (Art. 2 Civil Code, CC) and is generally applied in contract law. The rule states that unclear clauses, in this case in the general terms and conditions, are interpreted in favour of the party who has to adopt the general terms and conditions and to the disadvantage of the party who uses them (Latin also: in dubio contra stipulatorem). There is also the unusual rule. According to this rule, provisions in the general terms and conditions are non-binding for the obligated contractual partner if this contractual partner did not have to reckon with an unusual provision for the corresponding transaction.

Logically, general terms and conditions must be presented to the other contracting party before the conclusion of a contract (Art. 1 CO). It is best to enclose the general terms and conditions with the offer. The presentation of the GTC with the invoice would clearly be too late.

Today it often happens that both or several parties to an agreement have their own general terms and conditions, which they also want to apply in the contractual relationship. However, this is not advisable. It can come to the so-called “Battle of the Forms”, if the GTC are contradictory. The solution is to take one GTC and adapt it in an individual contract according to the acceptable wishes of the other party(s).

In e-commerce, Art. 8 of the Act against Unfair Competition (UCAuse of abusive terms and conditions) must also be observed. This article states that those who use general terms and conditions which provide for a considerable and unjustified disproportion between the contractual rights and the contractual obligations to the detriment of consumers in a manner which is unfair and offensive to good faith are acting unfairly. Anyone who wants to “pull the wool over the eyes” of consumers should do so in an individual contract ;-).

License and sales contract – digital contracts

Before digitisation, the sales contract was probably the most important type of contract used in practice. In the meantime it has probably been replaced by the license agreement. My iPhone tells me I have 127 (sic!) apps on my device, even though I’ve never counted them before. I.e. I have signed 127 license agreements for the corresponding software for these apps alone.

License agreement

The license agreement is not explicitly regulated in Swiss law and therefore belongs to the so-called innominate agreements (agreements not mentioned in the law). With the license agreement, the licensee receives a right of use from the licensor; in the case of the software, this is the copyright.

Contract of sale

The difference between a license agreement and a purchase agreement lies in the scope of the transferred rights. In a sales contract, the buyer receives the property from the seller and thus all rights to it (in copyright, the relevant commercial rights, but not the personal rights).

Smart contracts

Among the contracts in the digital world are currently the so-called “Smart Contracts”. The term “Smart” is commonly used to describe products that have more features than the basic functions or are multifunctional, such as the “Smartphone”, a mobile phone with numerous additional functions. Smart Contracts are “smart” in the sense that they can execute or manage themselves. Technically, this is not a document, but a software code that is developed to execute predefined conditions, functions or actions. Currently, such Smart Contracts are based on a so-called Blockchain. This is an Internet platform, whose characteristic is in particular that it is practically immune against interventions due to its decentralization and transparency and therefore cannot be changed.

From a legal point of view, these technical conditions result in two essential parameters, which in my opinion can currently be seen as both an advantage and a disadvantage. On the one hand, a Smart Contract is set up once with the corresponding conditions. After that, nobody has to control the execution any more. On the other hand, once the contract starts to execute, it can no longer be intervened due to the characteristic of the blockchain not being able to be changed.

A simple example would be the software license. As a smart contract, it checks itself whether a license fee has been paid and, if so, releases the software itself for use.

Sharing contracts

The term “Sharing Economy” is commonly used to describe the business of companies with business models, platforms, online and offline communities and practices that enable the shared use of [completely or partially unused] resources (see in particular Wikipedia with further references). One of the best-known sharing platforms is servige of the US company Airbnb, Inc., which has been in existence since 2008. Airbnb is an agency platform where private accommodation (houses, apartments, rooms) is rented to travellers. Depending on availability, these can be booked for one day, several weeks or months. If a suitable accommodation is found on the platform, a booking request can be sent directly to the owner; the contract is therefore concluded directly between the landlord and the tenant. The landlord can arrange his offer freely, he can determine strict booking conditions, e.g. that one cannot cancel free of charge. If the booking request is confirmed, the price must be paid via Airbnb. The transfer to the landlord account by the mediation platform takes place only 24 hours after the arrival of the guest. Thus the tenant has a smaller risk if the accommodation should not be available or not according to agreement. Airbnb receives a commission for the mediation, which is already included in the price. As the host lets the guest living space to Airbnb for a fee, a tenancy agreement in accordance with Art. 253 of the Swiss Code of Obligations is concluded between the two parties. The relationship between the host and his landlord is problematic if the former is not the owner of the apartment. This is because it is a sublease according to Art. 262 CO. According to this provision, the tenant may sublet the object or apartment only with the consent of the landlord. However, this consent is not a prerequisite for a tenancy agreement to be concluded between the tenant and the subtenant. Rather, the consequences of a lack of consent vary depending on whether the landlord has rightfully or wrongly refused consent. The landlord may refuse consent only for the reasons mentioned in Art. 262 of the Swiss Code of Obligations, namely if the tenant refuses to inform the landlord of the terms and conditions of the sublease, if the terms and conditions of the sublease are abusive in comparison with those of the main lease agreement, or if the landlord suffers substantial disadvantages as a result of the sublease. If the tenant wishes to sublet his apartment, he should always obtain the landlord’s consent. In the literature on tenancy law, it is predominantly stated that the consent must always refer to a specific subtenancy. Since Airbnb accommodations are usually only rented for a few days and repeatedly, it is not practicable for the landlord to have to agree to each guest. Therefore, the main tenant should submit a single basic application to the landlord and inform him of the essential points of the sublease. It is unclear and controversial whether the landlord must agree to a general agreement. This shows a gap or at least a lack of clarity in the applicable tenancy law for this new form of subtenancy. Subtenancy conditions are abusive if the conditions of the subtenancy agreement are considerably less favourable for the subtenant than the conditions of the main tenancy agreement. From this it can be deduced that no profit may be made by subletting. The sublease may not exceed the rent of the main rental agreement. On the other hand, services such as access to WLAN or subsequent cleaning of the accommodation may be charged additionally (analogous to many open source license conditions). It is questionable what happens if there is an inadmissible subletting. A distinction must be made between whether the tenant has failed to obtain consent or whether the landlord has lawfully refused consent. If the lessee fails to obtain the consent, this constitutes a breach of contract according to Art. 97 CO, but it is disputed whether the lease can be terminated due to this breach.

If, on the other hand, consent to subletting has been rightly refused, the landlord has the right to terminate the tenancy agreement properly or even extraordinarily in the event of subletting. It should be noted that income from the letting of rooms and apartments constitutes taxable income. Any associated costs may be deducted from the proceeds. In accordance with cantonal tourism laws, such income also triggers a cantonal and possibly local accommodation tax, a visitor’s tax and a tourism tax. The municipality regulates these levies in a municipal regulation. Who does not keep to the defaults can be punished with fines. As there was no clear regulation regarding visitor’s tax on overnight stays on Airbnb in the past, some cantons are now negotiating with providers of private holiday accommodation such as Airbnb for an automated procedure to collect visitor’s tax. Professional apartment and room providers want equal treatment for private competitors, not only in taxis but also in hygiene and fire protection. Airbnb also exacerbates the problem that apartments, because they are offered commercially on Airbnb, are becoming scarcer for normal tenants and rental prices are tending to rise.

In the near future, it will become clear whether the current laws are sufficient to regulate the Sharing Economy appropriately.

Termination of digital contracts

In the analogue world the case was clear. The safest way to cancel a contract is by registered letter. Now, however, more and more digital providers are moving towards demanding that their customers exclusively terminate their contracts digitally.

Switzerland’s second-largest telecom provider, Sunrise, for example, has announced that it will no longer accept subscription cancellations by letter or e-mail. With Sunrise, termination can only be legally valid via chat or call in the call center. Sunrise justifies the change in particular with the avoidance of misunderstandings in the termination process. More and more customers would have subscribed to bundled offers from telephony, Internet or television. This is why there are often ambiguities in written cancellations, and more and more queries need to be clarified on the phone or chat in direct customer contact.

From a legal point of view, the question arises as to whether a digital provider can tell its customers which (digital) communication channel to use to terminate a contract and whether a termination by post is effectively invalid.

Permanent digital offers, such as telecom subscriptions, are usually orders and contracts not expressly mentioned in the law (so-called “innominate contracts”), such as licenses. On the one hand, these contracts are subject to contractual freedom under Art. 19 of the Swiss Code of Obligations (CO) and, on the other hand, the law does not provide any special provisions for the termination of such contracts.

Thus, digital providers are in principle permitted, e.g. within the framework of their General Terms and Conditions (GTC; see above), to stipulate that notices of termination must be given exclusively via a specific communication channel, e.g. via an online form. From this point of view, notices of termination on another channel, e.g. by post, would then not be legally valid.

The question arises, however, whether such a clause is tenable in accordance with the principle of good faith pursuant to Art. 2 of the Civil Code (CC). Imagine that a customer unambiguously cancels a Telekom subscription by registered letter, that the provider clearly recognizes the customer’s will, but then insists on the digital channel. Such an attitude is against all reason and thus also contrary to good faith according to Art. 2 CC.

In addition, such a provision in GTC could also be unusual in the sense of the unusualness rule in GTC (see above) and thus invalid again according to the principle of good faith, since a customer did not have to expect such a clause in GTC.

Finally the proof for the customer must be ensured with the notice over a digital channel also. In the case of terminations, the access principle generally applies. This means that the customer must receive a time stamp for the moment of access from the corresponding system, as in the case of a registered letter; analogous to the order confirmation in e-commerce pursuant to Art. 3 Para. 1 lit. s No. 4 Lauterkeitsgesetz (UCA; see also Chapter 07 Competition law in the digital world).

Even if this does not have to be reckoned with directly, sooner or later courts will have to decide whether the regulation of a digital provider to use a certain, exclusively digital channel for termination is legal. Should a court affirm this, the court or the legislator will also have to determine the conditions, e.g. in particular the obligation to provide the customer with an immediate confirmation of receipt of the termination with a time stamp.