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CEELM COVID-19 Comparative Legal Guide: Contracts in Estonia

2020-03-24

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

The Government of Estonia declared an emergency situation on March 12th due to the worldwide Covid-19 pandemic and the threat of mass infections. The government has decided to ban public gatherings and implement distance learning at schools, implemented sanitary controls at the border, and closed cultural and entertainment institutions until the 1st of May.

The Covid-19 pandemic certainly has an impact on local businesses. Depending on the economic sector, the adverse effects of the pandemic can vary to a great extent. One of the most severe problems is related to employment issues, considering that by the Government’s orders people are strongly encouraged to work from home, if possible. This, together with the decision to close nearly every establishment (including all cultural and entertainment institutions such as night clubs, casinos, sports halls, sports clubs, gyms, spas, swimming pools, water centers, day centers, and children´s play rooms) other than supermarkets and pharmacies has raised questions as to whether employers are obligated to continue to pay salaries even if distance work is not possible. Furthermore, acute concerns about the need to start making redundancies are inevitable for businesses today.

A lot of sectors have already experienced the negative impact of the current economic situation and businesses are doing everything they can to minimize their losses and ultimately avoid bankruptcy. The current crisis is preventing businesses from making important business and investment decisions due to uncertainty about the future. As a result of the state of emergency and the ban on travel across borders, another obstacle for businesses is the struggle to comply with contractual obligations, mainly due to major disruptions to supply chains.

Overall, businesses are under great pressure to adapt their business models to make them compatible with the unprecedented government-imposed measures and there has already been significant change across industries.

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 Covid-19 pandemic is an external event which is beyond the control of a party, i.e. the current pandemic can be considered a force majeure event. Should it become impossible for a party to perform its contractual obligations due to the Covid-19 pandemic, that party cannot nonetheless terminate its contract nor does the contractual relationship between the parties terminate automatically. Only if the contract itself foresees the possibility to terminate it due to a force majeure event can that party terminate the contract unilaterally.

It is deemed that a force majeure event is something that makes it impossible for a party to fulfill its contractual obligations or obstructs it (at least temporarily). However, such non-performance is excused only for the time period during which the force majeure event impeded performance of the obligation. After the impact of the force majeure event ceases to exist, that party is still expected to perform its obligations.

The possibility to unilaterally terminate the contract in such an event has been given to the creditor, i.e. the non-breaching party. However, even then certain prerequisites have to be fulfilled. Thus, it is possible for the creditor to terminate the contract, if: i) the non-performance constitutes a material breach of the contract, and ii) a declaration of withdrawal has been submitted to the other party.

However, it is possible that a situation in which the breaching party finds itself due to these circumstances provides a basis to rely on the force majeure event and therefore extend the time period foreseen for performing the contractual obligations. On the other hand, the breaching party can try to demonstrate that due to these circumstances, the balance of the contractual obligations has materially changed and therefore, the contract as a whole should be amended in order to restore the original balance of obligations. If the bases for amendment of the contract exist but, due to the circumstances, amendment of the contract is not possible or would be unreasonable with respect to the other party, the party aggrieved by alteration of the balance of the obligations may terminate the contract.

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?

If a party’s performance of its contractual obligations is adversely affected by an external event beyond the control of that party, that party can seek relief from compliance with its obligations to a certain extent. If the adverse effects are due to a force majeure event, the party is released from liability for the performance of an obligation for the time period, during which the force majeure event occurred. However, this does not exempt the party from fulfilling its obligations once the force majeure event and its consequences cease to exist.

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?)

The affected party is required to notify any counter-parties of an impediment to performance by the affected party immediately after becoming aware of the impediment. In addition, the affected party is also required to notify the counter-parties of the effect of such an impediment on the performance of the obligation. The obligation to notify extends to all impediments, irrespective of their cause. It is therefore necessary that the notification take place as soon as reasonably possible, i.e. without delay and at the earliest opportunity.

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

If the affected party wishes to rely on the FM Event the burden of proof lies on the affected party. It must be demonstrated by the affected party that the circumstances of FM Event actually prevent the fulfillment of this specific obligation.

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 affected party is typically expected to take steps to avoid the impact of the force majeure event as far as possible and mitigate any potential losses. One possible way of doing this is also by notifying any counter-parties as soon as possible of the force majeure event, thus allowing them to take measures to also minimize any potential losses.