Distribution relationships often run for a long time. Renewals may therefore feel like a “natural” next step. Yet the period before a new agreement is signed is legally sensitive.
Parties are generally free to start negotiations, to continue them, and to stop them again. That freedom, however, is not unlimited: it is governed by the overarching requirement of good faith. The practical question is therefore not whether a party may end renewal negotiations, but when ending them can trigger pre-contractual liability.
The baseline: freedom of contract (also in long-term relationships)
Swiss law starts from a clear premise: freedom of contract. Even in long-standing distribution relationships, neither side is automatically obliged to renew. Equally, a party does not need to justify why it is discontinuing negotiations.
Swiss law’s focus is not on protecting disappointed hopes as such, but on sanctioning conduct that violates good faith during the negotiating process.
Culpa in contrahendo: what is (and is not) prohibited
Once negotiations begin, the parties enter a special legal relationship that carries certain duties. These duties are commonly discussed under the doctrine of culpa in contrahendo (pre-contractual liability).
In essence, parties must negotiate seriously and in line with their real intentions. They must not present their willingness to conclude the contract more strongly than it truly is, and they must avoid creating a false sense of certainty on the other side.
The risk area is therefore not the decision to stop negotiating. The risk lies in behaviour that keeps the counterparty under the impression that signing is effectively assured, even though that is not the case, or in failing to correct such an impression in due time once it becomes apparent.
Why liability is the exception: high thresholds and commercial reality
This also explains why the thresholds for liability are high. Swiss courts are cautious not to undermine freedom of contract by turning ordinary negotiating dynamics into damage claims.
Lengthy negotiations alone are not enough. Nor is it decisive, by itself, that one party knows the other has incurred costs in anticipation of the new agreement. In commercial reality, parties often incur expenses in order to be ready if a deal is done. Under Swiss law, investments made before a binding contract exists are, as a starting point, made at the investor’s own risk. The fact that these investments may be substantial does not automatically shift that risk to the negotiating counterparty.
The decisive element: protectable reliance created in breach of good faith
The key question is whether a protectable reliance interest has been created through conduct that breaches good faith. Put differently: did one party, by words or actions, encourage the other to believe that concluding the contract was a done deal?
This can happen through overly definitive assurances, by continuing negotiations in a manner that suggests all key points are settled when they are not, or by failing to flag – early enough – that certain issues remain “deal breakers”.
Importantly, good faith does not require a party to label every important clause as “non-negotiable” in formal terms. It does, however, require honest signalling. If a point is genuinely central, the other side should not be left to assume it is a secondary detail that will be resolved later.
A recurring practical scenario: parallel talks and the “double game” risk
For suppliers, a recurring practical risk arises where renewal talks run in parallel with exploring alternative partners. Swiss law does not generally prohibit this. A party may, in principle, end negotiations and contract with a third party instead.
The legal sensitivity lies in running a “double game”: keeping the existing counterparty engaged by suggesting renewal is likely, while internally having moved on or having no real intention to close. For distributors, the mirror-image risk is over-committing resources on the assumption that renewal is practically guaranteed.
Summary: risk management in renewal negotiations
If a negotiating party wishes to preserve flexibility, it should communicate in a manner that reflects its actual level of commitment. The party should avoid language that implies certainty unless it genuinely intends to be bound. It should also keep a clear record of open points and of what remains subject to agreement. Where negotiations are progressing but one or two issues are genuinely decisive, the party should signal this early and consistently.
Conversely, where a party makes advance investments in anticipation of signature, those investments should, as a rule, be treated as that party’s own risk unless contractual protection has been secured. If the business reality requires significant preparatory spend before signature, an interim agreement may be considered to allocate who bears which costs if the deal does not materialise.
Ultimately, Swiss law seeks a balanced outcome: it protects serious, good faith negotiations without converting every failed deal into litigation. For distribution relationships, the practical takeaway is therefore to structure the negotiation process. Clear communication, adequate documentation, and targeted interim arrangements can substantially reduce the risk of misunderstandings and, in exceptional cases, pre-contractual liability.
Article published by MLL
