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CEELM COVID-19 Comparative Legal Guide: Contracts in Latvia

2020-03-20

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

There are two main types of issues that businesses are facing: (i) loss of income, which results in the necessity to reduce the operations and take certain measures with respect to employees; (ii) the need to restructure operations due to quarantine restrictions and employees who may refuse to work in fear of getting infected.

Latvian law is not very flexible in relation to situations where employers have to deal with similar short-term situations. Employer can either agree with the employees on certain solutions like work from home, part time work, use of annual vacation, or unpaid vacation for a certain time. Alternatively, it is possible to terminate certain employees on the basis of redundancy. However, this is not a very viable solution since the termination notice period is 1 month, plus the employer needs to pay severance, which could range from 1-4 monthly salaries depending on the employee’s seniority with the company. If the situation improves after 1-2 months, this would be wasted money. Accordingly, some kind of agreement with the employees is usually the best option.

Employers are not allowed to prohibit the employees from traveling abroad. If an employee has travelled abroad against the employer’s recommendation and the employee is quarantined for 14 days upon return, then the employer is entitled to suspend the employee without pay. There could also be a situation where an employee simply refuses to work in fear of getting infected. It is unlikely that the employer could take serious disciplinary measures against such employees, however, this could be treated as unpaid idle time.

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

The party invoking force majeure is under an obligation to immediately inform the other party thereof. Such obligation derives not only from international contract law, but also from the principle of good faith that applies also to domestic matters. In the event of failure to notify, the party which has failed to fulfill its obligations due to force majeure shall be liable for the loss resulting from the failure to inform the other party.

The occurrence of force majeure typically allows the affected party to postpone the fulfillment of its contractual obligations for the period during which the specific circumstances exist, but does not release the party from the fulfilling its obligations entirely. However, in practice, there may be situations where the delay in the performance of obligations is so significant that the performance of the contract becomes useless.

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

Latvian national law strictly follows the principle pacta sunt servanda and therefore neither the exceptional difficulty of the transaction nor difficulties in performance arising after the conclusion of contract shall give one party the right to withdraw from the contract. The Supreme Court of Latvia has also confirmed the importance of separating force majeure circumstances from cases where, despite difficulties, performance of contract is still possible. Consequently, circumstances where performance, although adversely affected by an external event beyond control, would be still possible, would not qualify as force majeure under Latvian law.

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

Although it is not specifically regulated under Latvian law, the general principle of good faith would require the party invoking force majeure to immediately inform the other counter-parties regarding the respective circumstances.

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

The affected party, as a party seeking relief from liability, would be required to demonstrate that force majeure has been a cause of failure to perform its contractual obligations.

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

The general principle of good faith would require mitigation of loss in any case where liability of the affected party would be discussed. Moreover, parties seeking to justify non-performance based upon force majeure circumstances would be required to demonstrate that those circumstances were unavoidable in order to qualify them as force majeure. 

For further information please contact COBALT Latvia Senior Associate Līga Fjodorova and Partner Toms Šulmanis.