33.01  Swiss-law set-off (Verrechnung or Kompensation/compensation/compensazione) is a mechanism of substantive law that extinguishes two obligations to the extent of the smaller obligation. It is a form of performance, the satisfaction of one obligation by the sacrifice of a contrary obligation, the main purpose being the simplification of commercial transactions. It also allows a party to secure a claim with a claim of the counterparty against itself.¹ It can be exercised unilaterally, swiftly, without observing burdensome formalities, and in principle even if the counterparty is insolvent or disputes its own obligation.

33.02  Section B of this chapter introduces the basic legal framework for set-off as a unilateral act pursuant to Articles 120 et seq of the Swiss Code of Obligations of 1911, as amended (‘CO’), outlining its requirements, mechanism, and effects. Section C outlines the framework applicable to set-off against insolvent parties. Section D sets out issues of conflict of laws, jurisdiction, and insolvency in cross-border contexts. Section E concludes.

33.03  As a matter of Swiss statutory contract law, set-off requires (1) the existence of two obligations or claims; (2) mutuality, ie that the creditor under one obligation be the debtor under the other obligation, and vice versa; (3) that the two obligations be of the same kind; (4) that the claim of the party declaring set-off be due and enforceable; and (5) that the claim of the counterparty be dischargeable.²

33.04  The fundamental requirement for set-off is the existence of two opposing obligations or claims. The claim owed by the party declaring set-off is referred to as the ‘main claim’, whereas the claim owed to that party, ie the claim being ‘sacrificed’ in exchange for the discharge of the main claim, is called the ‘set-off claim’ or occasionally ‘counterclaim’.

33.05  The obligations must be mutual in the sense that the obligor (debtor) under one obligation is at the same time the obligee (creditor) under the other obligation.³ The separate legal personality of legal entities is disregarded only under exceptional circumstances. Branch offices, on the other hand, are not regarded as separate legal entities; therefore, a claim against a branch office of a bank may be set off against an obligation towards another branch office of the same bank.⁴

33.06  Mutuality can also be established by means of assignment of a claim or assumption of an obligation. Under Swiss law, except where the law, an agreement, or the nature of a claim provides otherwise, a claim can be validly assigned in writing without the debtor’s consent.⁵ The law protects the debtor by allowing it to raise against the assignee any objection, including set-off, that the debtor could have raised against the assignor’s claim if it already applied at the time the debtor first learned of the assignment.⁶ Additionally, if the debtor held a countervailing claim that was not yet due at that time, such claim may nonetheless be set off against the assigned claim provided it did not fall due later than the assigned claim.⁷

(p. 527) 33.07  In addition, the obligations must be of the same kind, essentially requiring that they both have as their subject matter the payment of money⁸ or the delivery of the same fungible goods. It is not necessary that they be equal in amount, arise from the same transaction, or be otherwise factually connected.⁹ In the event that the two obligations in question are not equal in amount, set-off discharges the two obligations only to the extent of the smaller obligation.

33.08  Contrary to the wording of Article 120 CO, it is generally accepted by Swiss courts and in legal doctrine that only the set-off claim need be due and enforceable.¹⁰ It is sufficient that the main claim is dischargeable, ie that performance of it by the obligor constitutes valid discharge.

33.09  Set-off is not prevented merely by the set-off claim being disputed by the counterparty, as long as the set-off claim is nevertheless enforceable.¹¹ In addition, due to the retroactive effect of a declaration of set-off, prescription (statute of limitations) of the set-off claim does not render ineffective a declaration to set off, provided that the set-off claim was not time-barred at the time it first became eligible for set-off.¹²

33.10  Finally, set-off can only be effected if the party declaring set-off has the power to dispose of the set-off claim.¹³ For example, such power may be restricted by the holding by a third party of a security interest in the set-off claim. Further, a bankrupt loses its power to dispose of the assets in the estate.¹⁴

33.11  Set-off may be excluded by contract or by statute. Article 125 CO provides that, without the consent of the creditor, the following (main) claims cannot be cancelled by set-off: (1) obligations to return or replace property deposited,¹⁵ unlawfully dispossessed, or withheld in bad faith; (2) obligations whose objective (p. 528) requires that they be performed in the form of an actual payment, eg alimony or salary obligations to a certain extent;¹⁶ and (3) obligations towards the community based on public law, eg tax obligations.

33.12  The parties may also exclude the right of set-off in advance by mutual agreement.¹⁷ The debtor of a main claim thereby waives its right to satisfy the main claim by way of set-off. Such waiver is, however, not always permitted by law. For example, the landlord or lessor and the tenant or lessee may not waive in advance their right to set off claims arising from the lease.¹⁸

33.13  In order to be effective, set-off must be declared and the declaration must be received by the counterparty.¹⁹ The declaration need not adhere to any particular formal requirements, but must be sufficiently specific as to enable the counterparty to identify both the main claim and the set-off claim.²⁰ However, depending on the circumstances, the written form may be advisable for evidencing the set-off. The effect of set-off as a unilateral act is not subject to the counterparty’s consent.²¹

33.14  The claims being offset are deemed to have been satisfied as of the moment when set-off of such claims first became possible.²² In other words, once set-off is declared, any consequences of default, such as default interest or contractual penalties, arising as of such moment when set-off first became possible are—in retrospect—deemed not to have arisen or accrued in the first place.²³

33.15  Due to the mostly non-binding nature of Swiss statutory contract law, including most of the provisions set forth above, parties may agree on their own rules for (p. 529) set-off in the form of a set-off agreement or, as the case may be, a set-off clause. The parties can define the rules governing future set-offs to take place with regard to claims between them, thereby amending the statutory rules of Articles 120 et seq CO. For instance, they can waive the requirement of mutuality and agree, for instance, on tripartite or on cross-affiliate set-off.²⁴

33.16  The fundamental objective of insolvency law²⁵ is to disentangle the deployment of the insolvent’s assets for the maximization of their value from the allocation of their value to the insolvent’s creditors. For this purpose, the insolvent’s existing assets and liabilities are pooled in the estate and subjected to collective decision making, as represented by a receiver (liquidator or administrator). The receiver may be authorized, in one way or another, to remove assets from the estate to employ them in the interest of creditors by making investments aimed at maximizing the value of the estate or distributions to creditors. For the benefit of the creditors of the estate, the receiver may also enter into new liabilities,²⁶ which are then treated as liabilities of the receivership (representing the collective of creditors) and backed by a super senior claim on the creditors’ rights to distributions. Swiss law treats the respective assets and liabilities of the estate and of the receivership as two separate pools of assets and liabilities. This differentiation is particularly important with regard to the requirement of mutuality, as set-off can generally only occur between assets and liabilities allocated to the same pool.²⁷ Specifically, a counterparty of the insolvent may use an obligation owed by the insolvent only for set-off against an obligation owed to the insolvent, which obligations are both part of the estate. Conversely, however, obligations owed by the receivership may be offset against obligations owed to the estate as well as obligations owed to the receivership.²⁸

(p. 530) 33.17  Obligations of the counterparty arising under existing executory contracts which the receiver has decided to assume under its step-in right are also owed to the receivership, in principle preventing them from being offset by the counterparty against claims owed by the estate arising under contracts not assumed by the receivership.²⁹ Parties wishing to ensure the mutuality of their obligations arising under a portfolio of mutual contracts may therefore decide to provide for early termination of their contract in case of one party’s insolvency.³⁰

33.18  The initiation of insolvency proceedings facilitates the operation of set-off in relation to claims and liabilities of the estate³¹ in several respects. Generally, only a set-off claim which is due can be offset. However, in the bankruptcy of the debtor of a set-off claim,³² all debts of the bankrupt debtor, with the exception of those secured by real security, become due, and set-off therefore becomes possible even if the set-off claim was not due prior to the judicial declaration of bankruptcy.³³ In addition, the Code of Obligations provides that a bankrupt’s creditors may set off their claims, even if they are not due, against the claims that the adjudicated bankrupt holds against them.³⁴

33.19  The scope of possible set-off situations is furthermore expanded by virtue of non-monetary claims against the bankrupt being converted into monetary claims against the estate as of the initiation of bankruptcy proceedings, unless the receiver exercises its step-in right and chooses specific performance of an (p. 531) obligation over conversion.³⁵ As a result, the creditor of a non-monetary claim against the bankrupt party can offset such claim against a monetary obligation it has towards the bankrupt party. Conversely, however, the claims of the bankrupt party are not automatically converted into monetary claims as a result of the opening of bankruptcy proceedings.

33.20  For reasons of equity and efficiency, Swiss law generally permits insolvency set-off.³⁶ This is, however, subject to statutory exclusions and a potential vulnerability to avoidance actions.

33.21  First, set-off cannot be invoked by a debtor of the bankrupt who acquired the claim owed by the estate only after the opening of the bankruptcy proceedings,³⁷ or by a creditor of the bankrupt who only incurred the claim owed to the estate or the receivership after the opening of the bankruptcy proceedings.³⁸ In other words, set-off against a bankrupt in principle requires mutuality of the main claim and the set-off claim among the parties already at the opening of bankruptcy proceedings.

33.22  Second, a member of an insolvent company may not offset equity capital contributions owed to the company against a claim owed by the company.³⁹

33.23  Third, set-off is avoidable if a debtor of the bankrupt party acquires a claim against the insolvent prior to the opening of insolvency proceedings but in awareness of the counterparty’s insolvency, in order, by means of such set-off, to gain an advantage for himself or a third party to the detriment of the estate.⁴⁰ In addition, actions of the bankrupt prior to the opening of the proceedings, such as a declaration of set-off or the creation of a situation allowing for set-off amounting (p. 532) to, inter alia, transactions at an undervalue, preferences violating the pari passu principle or actions defrauding creditors, may also be vulnerable to avoidance actions.⁴¹

33.24  Such restrictions and vulnerabilities not only apply to set-off in the event of bankruptcy but also to set-off during composition proceedings.⁴² Composition proceedings aim at reorganizing a debtor in financial distress, but de facto also constitute a means for the orderly liquidation of assets outside the more stringent rules applying to bankruptcy proceedings. The precise effect of these restrictions in the context of composition proceedings therefore depends on the characteristics of the particular composition. The date of the opening of the composition proceedings (granting of moratorium) replaces the date of the opening of bankruptcy proceedings.⁴³

33.25  The special proceedings applicable to financial intermediaries such as banks and securities dealers, as well as financial market infrastructures and their participants, strike a different balance between permitting and restricting set-off. On the one hand, these procedures seek to insulate from insolvency measures ordered under them, in particular, previously concluded agreements regarding the offsetting of claims, including the agreed method and valuation.⁴⁴ On the other hand, they include certain powers of the Swiss Financial Market Supervisory Authority, FINMA, to impose a limited stay of no more than two business days on, inter alia, the exercise of set-off and termination rights.⁴⁵

33.26  Swiss conflict-of-laws rules treat set-off as a matter of substantive law, irrespective of the views taken by any potential governing law or forum. The prevailing opinion holds that any applicable set-off rule should be treated by a Swiss court or arbitral tribunal, to the extent possible and with the modifications required (p. 533) therefor, as a substantive rule, even if the legal system of that particular rule would regard it as procedural. The characterization as procedural by any other applicable law of a rule functionally equivalent to a substantive set-off rule would therefore not be followed by Swiss courts as a renvoi to the law of the forum.⁴⁶

33.27  The substantive issues of set-off, which before a Swiss court or arbitral tribunal would be subject to the law governing set-off, and any procedural matters related to set-off, which before a Swiss court or arbitral tribunal would be part of the lex fori or lex arbitri, may nevertheless be interlinked. For example, while the form and time of a declaration of set-off required for it to be effective at the level of substantive law are subject to the law governing set-off, any procedural rules determining at which point over the course of court or arbitral proceedings a defence of set-off must be raised would be subject to the lex fori or lex arbitri.⁴⁷

33.28  If the main claim and the set-off claim are not subject to the same governing law, the question arises whether set-off of the two claims should be subject to the governing law of the main claim, of the set-off claim, both governing laws, or whichever is more permissible. In proceedings before a Swiss court, the relevant conflict-of-laws rules are contained in the Private International Law Act of 1987, as amended (‘PILA’), subject to the applicability of any international treaties.

33.29  According to prevailing opinion, the parties may elect a law specifically to govern set-off.⁴⁸

33.30  In the absence of such choice of law, pursuant to Article 148 paragraph 2 PILA, the extinction of a claim by way of set-off is subject to the law governing the claim to be extinguished, ie the law governing the main claim.⁴⁹ If, pursuant to the law governing set-off, set-off occurs ipso iure, it may be more difficult, at least in theory, to distinguish the main claim from the set-off claim. For all practical purposes, however, the problem is mitigated by the fact that a Swiss court would (p. 534) not have to search for norms in potentially applicable legal systems providing for ipso iure set-off and that ipso iure set-off does not necessarily require a judge to take into account set-off ex officio, ie without it having been raised in defence by one of the parties.⁵⁰ The claim owed by that party is the main claim.

33.31  The law governing set-off covers all matters of substantive law related to the set-off, particularly the following issues:

• •  The requirements for set-off. With regard to the capacity of the claims involved to be offset, the respective requirements (eg whether each claim must be due and payable or merely payable, enforceable, liquidated, etc) are subject to the law governing set-off, whereas the fulfilment of such requirements is subject to the law governing the respective claim. The applicability of any statutory prohibition of set-off or of contractual no-set-off clauses is subject to the law governing set-off.

• •  The mechanism for set-off (eg whether set-off occurs ipso iure, must be declared in writing, or occurs upon judicial decision).

• •  The effects of set-off (eg whether any extinction of a claim occurs ex tunc or ex nunc). According to prevailing opinion, the law governing set-off determines the effect of set-off not only on the main claim but also on the set-off claim, at least unless the concept of set-off is entirely unknown to the governing law of the set-off claim.⁵¹

33.32  Swiss law’s mandatory set-off prohibitions, as well as its prohibitions of no-set-off clauses, will only interfere in a set-off governed by another law before a Swiss court if matters of fundamental Swiss public policy are involved.⁵² By contrast, applicable rules of the lex monetae,⁵³ monetary and exchange controls, and Swiss insolvency law will take precedence.⁵⁴

33.33  In the case of contractual set-off, the law governing the set-off agreement is determined independently, pursuant to Article 148 paragraph 3 PILA. The parties may choose the law governing this agreement, and market-standard master agreements providing for mutual claims to be offset or netted out contain choice-of-law clauses. In the absence of a choice of law by the parties, the law governing the set-off agreement would be the law of closest connection: in the case of a (p. 535) set-off clause of a wider contract, this would likely be the law governing the main contractual obligation, whereas in the case of a stand-alone contract of set-off, other circumstances would have to be relied upon.⁵⁵ Where parties agree to continuously offset or net mutual claims, such as in the context of a current-account relationship, this agreement would likely be governed by the law of the jurisdiction where the party maintaining the account is domiciled.⁵⁶

33.34  In international arbitration, the Swiss lex arbitri for tribunals having their seat in Switzerland is (only) Chapter 12 of the PILA. A Swiss arbitral tribunal is not required to apply Article 148 PILA, as that provision is not part of Chapter 12. Instead, pursuant to Article 187 paragraph 1 PILA, the arbitral tribunal shall decide the dispute according to the rules of law chosen by the parties or, in the absence thereof, according to the rules of law with which the case has the closest connection.⁵⁷ The tribunal is thereby authorized to directly apply the substantive rules of law that are the most closely connected to the case, without the intermediate step of applying conflict-of-laws rules.⁵⁸ Furthermore, the tribunal is not required to choose a national legal system but may apply rules of a transnational lex mercatoria.

33.35  In contrast to proceedings before Swiss courts, the closest-connection test appears to lead arbitral tribunals more often towards the cumulative approach in the absence of a choice of law by the parties, ie the determination of the effectiveness of set-off in accordance with the governing laws of both the main claim and the set-off claim.⁵⁹

33.36  If set-off is raised before a Swiss court or arbitral tribunal with jurisdiction over the main claim but not the set-off claim, the question arises whether such court or tribunal may nevertheless adjudicate on the question of set-off. Jurisdiction over set-off is to be determined by a Swiss court based on the law of the forum (p. 536) (lex fori) and by a Swiss arbitral tribunal based on the law of its seat (lex arbitri).⁶⁰ Cross-border jurisdiction is governed for Swiss courts by the PILA, subject to international treaties, and for Swiss arbitral tribunals in international arbitration by Chapter 12 of the PILA. The most important treaty determining the international jurisdiction of Swiss courts is the Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters of 2007 (‘Lugano Convention’). Neither the PILA nor the Lugano Convention contains express provisions on jurisdiction for set-off.

33.37  In many cases, a Swiss court or arbitral tribunal with jurisdiction over the main claim will be able to draw on other provisions to establish jurisdiction over the set-off claim.⁶¹ For example, the parties may have resolved the issue by agreement (eg in jurisdiction or arbitration clauses, including by reference to institutional arbitration rules), or the claimant may not have raised the issue of jurisdiction over the set-off claim. Additionally, where the set-off claim has already been determined by a competent court or arbitral tribunal, the matter is reduced to one of recognition of a foreign judgment or award. Similar in effect is the situation where the set-off claim itself is not disputed. An arbitral tribunal will also generally be competent to adjudicate set-off if both claims stem from the same legal relationship. Similarly, where the main claim and the set-off claim are closely connected, a Swiss court may rely on its jurisdiction to adjudicate counterclaims.⁶²

33.38  For cases where the set-off claim itself is still outside the court’s jurisdiction, and in the absence of a jurisdiction or arbitration agreement, it is generally accepted that the court may nevertheless adjudicate set-off. Since set-off operates at the level of substantive law, retroactively, and even if the set-off claim is contested, its invocation in defence is regarded as going to the question of the existence of the main claim itself, which is within the court’s jurisdiction (‘the judge of the action is the judge of the exception’).⁶³

(p. 537) 33.39  This is seen as being in line with the European Court of Justice’s holding in relation to the Convention of 27 September 1968 on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (‘Brussels Convention’)—to which courts applying and interpreting the Lugano Convention ‘shall pay due account’⁶⁴—pursuant to which Article 6(3) of the Brussels Convention on jurisdiction for counterclaims

It is therefore assumed that, since the Lugano Convention conclusively determines cross-border jurisdiction among its Member States, there is no requirement for the court to have jurisdiction over the set-off claim in order to decide on the set-off.⁶⁶

33.40  A more controversial question is whether a jurisdiction or arbitration agreement giving jurisdiction over the set-off claim to a different court or tribunal must be construed as precluding a decision on set-off by the court or tribunal of the main claim. It is generally held that a presumption exists pursuant to which the parties to a jurisdiction or arbitration agreement did not intend to impose such a restriction of jurisdiction. More specifically, the prevailing opinion holds that no prohibition on set-off should be assumed to have been intended by the parties merely by virtue of their having entered into a jurisdiction agreement; into arbitration agreements for both claims, even if not for arbitration before the same tribunal; or into an arbitration agreement for the main claim, even if the set-off claim would have been under the jurisdiction of a state court. However, additional circumstances such as the prorogation for the set-off claim of a tribunal with particular expertise or of fast-track arbitration, or under institutional arbitration rules prohibiting set-off without jurisdiction over the set-off claim, may require a different conclusion. Further, if only the set-off claim is subject to an arbitration agreement, there is a tendency to deny the state court a decision on set-off.⁶⁷

(p. 538) 33.41  Since the requirements for jurisdiction are more stringent in relation to a counterclaim than to set-off, it is necessary to distinguish the two concepts. The mere fact that the purported set-off claim exceeds the main claim does not exclude it from being considered by the court as a mere set-off defence; instead, additional criteria such as how closely connected the two claims are or whether the purported set-off claim is liquid and readily determinable should be taken into account. The mere fact that set-off is only raised as a defence before the court is immaterial.⁶⁸

33.42  If one party becomes subject to Swiss insolvency proceedings,⁶⁹ with regard to jurisdiction, the forum for actions related to core insolvency matters is determined by Swiss insolvency law and may not generally be modified by the parties. With regard to the applicable law, the Swiss insolvency provisions will be applied by Swiss courts as part of the lex fori concursus, irrespective of the law governing set-off⁷⁰ and irrespective of the location of the claim owed to the insolvent.⁷¹

33.43  In general, the core insolvency effects of foreign proceedings on assets located in Switzerland are recognized by Swiss law only after formal recognition in Switzerland.⁷² The insolvent’s assets located in Switzerland include all claims owed by its Swiss-domiciled debtors.⁷³ It is assumed in legal doctrine that the effects of foreign insolvency proceedings on the rights of creditors, including any set-off rights, are therefore subject to the principle of territoriality and may be (p. 539) invoked before Swiss courts with regard to claims located in Switzerland only after a formal recognition of the foreign bankruptcy decree.⁷⁴

33.44  The consequence of the recognition of foreign insolvency proceedings is the opening of Swiss secondary insolvency proceedings for the insolvent’s assets located in Switzerland.⁷⁵ Initially, only secured claims and preferential claims owed to Swiss-domiciled creditors are provable in the Swiss secondary proceedings.⁷⁶ Any surpluses resulting from the Swiss secondary proceedings are made available to the foreign receivership after the distribution plan of the foreign proceedings is itself formally recognized, which is subject to equitable treatment of all Swiss-domiciled creditors under the plan.⁷⁷ In the absence of such recognition of a foreign distribution plan, the proceeds of the Swiss secondary proceedings are distributed among the remaining Swiss-domiciled creditors.⁷⁸

33.45  Therefore, the effects of foreign insolvency proceedings recognized in Switzerland on set-off by Swiss-domiciled debtors of the insolvent whose claims against the insolvent are provable in the Swiss secondary proceedings are those of Swiss insolvency proceedings. Set-off by holders of non-provable claims located in Switzerland also appears to be subject only to the restrictions imposed by Swiss insolvency law. For set-off of claims not located in Switzerland, some scholars have argued that a Swiss court should take into account the foreign lex fori concursus’s restrictions on set-off.⁷⁹

33.46  As a matter of Swiss substantive law, mutual claims may be offset by a declaration of one of the parties. This is generally also permissible in the insolvency of the counterparty, albeit with certain modifications.

33.47  In cross-border contexts, the law governing set-off may be elected by the parties; by default, it is the law governing the main claim. Swiss courts and arbitral tribunals with jurisdiction only over the main claim may generally nevertheless (p. 540) adjudicate on set-off, based on the maxim that ‘the judge of the action is the judge of the exception’. Swiss insolvency law asserts itself irrespective of the law governing set-off. Foreign insolvency proceedings affect set-off involving claims located in Switzerland only upon their formal recognition and upon the opening of Swiss secondary insolvency proceedings; consequently, their effects are those imposed by Swiss insolvency law.