Switzerland - Market Insights

Sanctions, impossibility and contractual integrity: why freezes do not extinguish debts under Swiss Law — or do they?

Introduction: Sanctions and the rise of the impossibility defence

The broad Western sanctions introduced since 2022 in response to Russia’s invasion of Ukraine have reshaped commercial and compliance environments across industries. Switzerland, which has largely aligned itself with EU measures, now applies a framework that freezes assets, prohibits making funds or economic resources available to designated persons and to entities they own or control, and imposes licensing and reporting obligations that significantly influence how value may move in international commerce.

Predictably, this landscape has generated a surge in litigation in and outside Switzerland in which counterparties seek to avoid contractual performance by invoking legal impossibility. The argument is increasingly familiar: because sanctions prohibit payments or other forms of performance that could benefit a designated person, the obligation itself is said to have lapsed.

While superficially plausible, this reasoning misunderstands the architecture of modern sanctions regimes, including Switzerland’s. Asset freezes are conservatory in nature. They restrict access to assets and limit disposal rights, but they do not per se invalidate private-law claims. The payment obligation arguably remains intact; only the manner of performance is affected. In Switzerland, however, two recent cantonal decisions have cast doubt on this understanding by suggesting that sanctions may render payment performance permanently impossible under Article 119 of the Swiss Code of Obligations (CO), thereby extinguishing the debt. These rulings have created uncertainty and are now under appeal before the Swiss Federal Tribunal. The forthcoming decision is expected to have significant implications not only for sanctions-related disputes, but also for the broader doctrine of legal impossibility in Swiss commercial law.

The conservatory nature of sanctions: freezing value, preserving rights

Contemporary sanctions frameworks share a common logic: while they freeze assets, restrict transfers, and condition value flows, they do not purport to invalidate underlying civil obligations. The critical analytical task for courts is therefore to separate the continued existence of a contractual duty from the legality of any proposed performance channel. This distinction has gained particular prominence as ownership-and-control tests have widened the reach of freezes to non-listed persons and entities, often based on allegations of indirect control by a designated person.

In this context, control attribution must be a present-tense, evidence-driven determination. Swiss administrative practice, in line with EU guidance, examines the actual influence exerted at the time of assessment, focusing on governance dynamics, operational independence, proximity of relationships and adherence to arm’s-length principles. Historical associations or structural features that no longer reflect the current state of affairs should not suffice. Where control is established, the result is a freeze.

Swiss law: a high bar for claiming “impossibility”

Under Swiss law, a contractual obligation is extinguished under Article 119 of the CO only if performance becomes permanently impossible for reasons not attributable to the debtor. Although legal impossibility is encompassed by the provision, the threshold is stringent. Temporary impediments do not relieve the debtor; nor does uncertainty. For monetary obligations, the bar is even higher. Because money is fungible, lawful performance is generally attainable through alternative intermediaries or structures that allow the debtor to discharge the obligation without granting the creditor free disposal of the funds.

This principle is reflected in doctrine and case law. Swiss courts have repeatedly held that permanent impossibility requires a definitive and enduring barrier to performance. Where the duration of a restriction is subject to periodic review, modulation, licensing or potential delisting, permanence cannot be assumed. Swiss law also offers practical mechanisms to reconcile performance with sanctions. A debtor may discharge a monetary obligation by depositing the funds with a court-designated depository under Article 96 of the CO. Banks may credit frozen accounts, including payments arising from contracts, judgments or arbitral awards, provided that funds are immediately blocked and reported. These mechanisms allow debtors to perform without granting sanctioned creditors access to value, thereby complying with prohibitions on making funds available.

A further distinction must be drawn between monetary obligations and other types of contractual performance. Certain non-monetary obligations — such as specific deliveries or services — may indeed be directly prohibited by sanctions, making an impossibility defence in principle conceivable. Yet even in those cases, the requirement of permanence under Article 119 of the CO remains difficult to satisfy. Sanctions regimes are fluid: listings are regularly reviewed, licences may be granted, and restrictions evolve over time.

Against this backdrop, the argument that a sanctions-related payment prohibition extinguishes a contractual payment obligation misconceives both Article 119 of the CO and the structure of Swiss sanctions law. The fact that payment may require adjusted routing does not alter the obligation’s subsistence.

Two controversial cantonal judgments and two pending appeals

Two recent decisions by a cantonal appeal court denying enforcement of a costs award have brought these issues to the fore. The court denied enforcement of a costs award based on the theory that sanctions rendered payment legally impossible, thereby extinguishing the debt under Article 119 of the CO. It reached this conclusion by inferring indirect control based on historical shareholdings and board composition, by asserting that any payment — even to the cantonal debt-enforcement office as is permissible under statutory law — would unlawfully make funds available, and by treating the uncertain duration of sanctions as equivalent to permanence.

The basis for this reasoning is vulnerable. Control can arguably not be inferred from historical ownership snapshots or generic governance linkages; it is a present‑tense determination requiring concrete evidence that a designated person exercises effective control now. More importantly, sanctions-compliant avenues for payment plainly exist: payment to a court‑designated depository under Article 96 of the CO, credits to a blocked account with immediate freezing and reporting, escrow arrangements that preserve the freeze, and licensed channels for deliveries or services all provide lawful routes that neither confer free disposal nor violate prohibitions on making funds available. The Swiss sanctions regulator’s guidance expressly foresees the crediting of frozen accounts with proceeds such as dividends, coupons or third-party payments, provided reporting and blocking obligations are observed. If a “payout claim” against a bank or a public office were enough to constitute an indirect making available under the Swiss sanctions regime, the crediting of any funds to a frozen account would become per se unlawful — an outcome flatly inconsistent with the regime’s design and the Swiss sanctions authority’s guidance text.

The cantonal court’s treatment of permanence is likewise problematic. The sanctions landscape is inherently dynamic. Listings change, licences are issued and reviewed, and political developments prompt reassessments. A restriction of uncertain duration is not a permanent one.

Both decisions are subject to pending appeals before the Swiss Federal Tribunal, directly challenging both the control finding and the legal conclusion. This highlights the present-tense nature of control attribution, the availability of lawful performance channels, and the impermissibility of equating uncertainty with permanence. The Swiss Federal Tribunal’s decisions will arguably have system-wide importance, as the Tribunal is likely to clarify: what it means to “make funds available” in a freeze context; whether blocked credits — by design, devoid of free disposal — breach that prohibition; and how courts should assess permanence where sanctions are adjustable and revisable.

Practical implications for litigation and contract management

The practical consequences for commercial litigation are significant. For monetary obligations, impossibility under Article 119 of the CO should remain an exceptional outcome. Blocked credits, court‑designated deposits, escrow arrangements, licensing, and neutral intermediaries generally provide lawful performance routes. Where debtors forego these channels, they invite findings of delay rather than impossibility. For non‑monetary obligations, sanctions may necessitate substitutions, modified delivery routes, sequencing, or timing adjustments, but those adaptations speak to performance logistics, not to the extinction of the duty to perform. Control disputes demand contemporaneous evidence of governance and decision-making, and parties should expect courts to examine current governance, decision‑making, and financial dependencies rather than infer control from historical or generalised linkages. Permanence must finally be assessed against a sanctions environment that is inherently dynamic, considering that indeterminacy does not amount to permanence.

Conclusion: sanctions as channels, not erasers

The core proposition is simple and regime‑agnostic: asset freezes are designed to restrict disposal and to condition the movement of value; they are not instruments for cancelling contractual obligations. They reconfigure the pathways through which value may flow but do not alter the basic architecture of private law. Under Swiss law, Article 119 of the CO does not extinguish obligations where performance can be routed to a blocked account with immediate freezing and reporting, discharged by court‑ordered deposit, or achieved via licensed or neutral channels for non‑monetary performance. The pending Swiss Federal Tribunal decisions offer an important opportunity to clarify that control must be proven in the present tense, that blocked credits do not “make funds available”, and that permanence means truly permanent. Properly framed, the law preserves both the integrity of sanctions and the predictability of commercial enforcement: performance is rechannelled, not erased.