Damages caused by a supplier or subcontractor: how to recover through legal action

Damages caused by a supplier or subcontractor: how to recover through legal action

Introduction

For an SME, damage caused by a supplier or subcontractor can disrupt operations, generate unplanned costs, and strain cash flow. Faced with this situation, the crucial question is not simply whether these losses can be recovered, but how to structure an effective, legally sound, documented, and managed recovery process. This practical guide helps you make informed decisions at every stage, from initial documentation to potential legal recourse (direct or through insurance), providing arbitration criteria for executives, CFOs, and HR managers.

1. Key concepts: liability, recourse and insurance

1.1 What is a legal recourse?

In Swiss law, recourse refers to the action by which a person or institution, after having compensated for damages, seeks redress or reimbursement from a liable third party. This applies both between insurers and private parties and between companies themselves.

1.2 Contractual and tortious liability

Damage caused by a supplier or subcontractor may fall under two legal regimes in Switzerland:

Contractual liability

It arises directly from the contract between your company and the supplier/subcontractor. The Swiss Code of Obligations (CO) stipulates that anyone who fails to fulfill their contractual obligations may be held liable for the resulting damages.

Tort liability (or extra-contractual liability)

Regardless of a contract, the perpetrator of damage caused to another may be required to compensate for the harm if a causal link and fault exist.

1.3 Civil liability insurance

In practice, companies often use their liability insurance to cover damages caused by third parties. In Switzerland, the Insurance Contract Act (ICA) stipulates that the injured third party has a direct right of action against the liability insurer of the at-fault party (where coverage exists), subject to any exceptions in the contract or by law.

Key takeaway : You are not simply a creditor in a benefits dispute; you are also a risk manager and a claims handler. Your ability to align contractual responsibilities, adequate insurance coverage, and strong evidence will determine the effectiveness of your claim.

2. Before the damage occurs: anticipate and formalize in contracts

2.1 Essential Contractual Clauses

Establishing clear clauses with your suppliers or subcontractors is the first line of defense:

Liability clauses and limitations

Specify the obligations of result or means, the levels of responsibility, and the exclusions of guarantee, in compliance with Swiss law (the limitation clauses must be adapted to the legal framework).

Mandatory insurance

Require proof of professional and/or site liability insurance, with minimum coverage defined according to the project risk. Group liability insurance (wrap-up) often includes all stakeholders involved in the project.

Penalty clauses and financial guarantees

Providing for contractual penalties (under art. 160 et seq. CO) and retention of guarantee can deter risky behavior and financially secure a recourse.

2.2 Systematic document verification

Before working with a subcontractor:

• Valid certificate of civil liability insurance

• Certificate of payment of social security contributions (AVS, LPP) and accident insurance (SUVA)

• Legal status and social security of the subcontractor (self-employed vs. employee)

Documenting these items before damage occurs is an essential prerequisite for an effective legal recourse.

3. After damage has been assessed: managing the claim

3.1 Observe and document

Damage can be tangible, intangible, or a loss of business. At the first sign of trouble:

Document as early as possible

• Photos, videos, expert or technical reports

• Written testimonies

• Copies of all relevant contracts and appendices

What needs to be documented

• Detailed description of the event

• Identification of parties and contractual responsibilities

• Evidence of causality between fault and damage

• Estimation of direct and indirect costs (invoices, quotes, production stoppage, etc.)

Box: List of documents to collect for an effective appeal

• Contracts and appendices signed

• Supplier/subcontractor insurance certificates

• Bailiff's report or expert report

• Time-stamped photographs

• Correspondence exchanged (emails, registered letters)

• Detailed quotes and invoices

3.2 Declaration to the insurance company

As soon as the initial evidence is gathered:

1. Report the claim to your own insurer (if you have applicable operating liability or product liability insurance).

2. Report the incident to the insurer of the responsible party if you have the information.

3. Clearly state in the statement the intention to take legal action against the person responsible , attaching the evidence collected.

A clear and documented statement increases the chances of the coverage being recognized and reduces unnecessary discussions.

3.3 Constructive dialogue with the other party

Before initiating formal proceedings, a structured exchange can sometimes resolve the dispute at a lower cost:

• Present the facts with your documentation

• Propose a schedule for repairs or compensation

• Clearly define what is negotiable and what is not.

This proactive management limits blockages and shows that your company is managing the disaster operationally.

4. Practical recourse scenarios

4.1 Case study: material damage caused by a subcontractor

A small service company (SME) saw a crucial IT installation damaged during maintenance work carried out by an external subcontractor. The SME:

1. Observe and photograph the damage.

2. Gather contracts, insurance certificates and evidence of non-compliance with procedures.

3. Report the incident to your own business liability insurer as soon as possible.

4. Informs the subcontractor's insurer of its intention to take legal action.

After conducting an expert assessment, the insurance company enters into discussions with the subcontractor's insurer regarding the allocation of responsibilities and compensation according to the contractual clauses.

4.2 Case study: Operational interruption due to a defaulting supplier

A supplier delivers a defective part that brings a production line to a standstill. The SME:

• Document precisely the origin of the failure (internal reports, quality feedback).

• Examine the supply contract for product liability clauses and warranties.

• Reports a claim to his product liability insurance company.

• Engage in discussions with the supplier regarding repair, replacement, or compensation.

Depending on the contractual terms and proof of causation, the insurer may exercise recourse against the supplier or its own indemnity may cover the net loss after deductible.

5. Guidelines and checklist for managing an appeal

Stage	Action	Objective
Prevention	Check insurance and documents	Avoid surprises
Contractualization	Include clear clauses regarding liability insurance and guarantees.	Clarify responsibilities
Initial observation	Photos, expert reports	Anchor the evidence
Statement	To your insurer + that of the responsible party	Position the cover
Dialogue	Structured negotiation	Reduce litigation
Appeal	Legal formalization	Get repaired

6. Common mistakes and how to avoid them

Error 1: No documented evidence

Without solid evidence, the insurer or the court will minimize your claim. Solution : document everything systematically from the first sign of trouble.

Error 2: Vague contractual clauses

Vague clause = dispute over liability. Solution : standardize your contracts with liability, penalty, and insurance clauses.

Error 3: Declaration deadline not met

Insurance contracts impose strict deadlines. Solution : integrate an internal procedure for immediate notification.

Error 4: lack of technical expert

Underestimating technical damage weakens your legal position. Solution : hire independent experts.

7. Questions to ask your insurer or broker

1. Does my liability insurance cover damages caused by a subcontractor or supplier?

2. What are the specific exclusions for these risks?

3. What are the reporting deadlines to be met?

4. What documentation is required to optimize my application?

5. Can the insurer exercise a subrogation right of recourse against the responsible party?

6. Is there business interruption coverage related to this damage?

7. What are the relevant deductible amounts and limits?

8. Do I also need to notify the supplier's/subcontractor's insurer?

9. Are technical experts recommended?

10. How does your firm handle cross-border litigation (if applicable)?

Conclusion

Recovering from damages caused by a supplier or subcontractor is not a matter of luck but of method: defining responsibilities in contracts, documenting the facts, managing the claim, utilizing relevant insurance policies, and, if necessary, initiating a structured legal action. By following a clear procedure, any executive, CFO, or HR manager can transform a potentially contentious situation into a measured decision with measurable results.

The next step is to formalize your standard contracts to incorporate these liability principles and establish an internal claims management procedure. The management tools you implement today will prevent losses of time and money tomorrow.