About contracts in the crisis in the light of Estonian law

Business Legal Agreements

The situation of war and the sanctions imposed because of it have a significant effect on economic activities, primarily on the delivery and price of goods, the provision of services, and the market in general. In this situation, many companies cannot fulfil their contractual obligations in the agreed manner. This raises the question of which legal specifications apply to the fulfilment of obligations in this situation, in which extent can the contract parties be released from liability for the violation of the contract and to what degree can they request the amendment and adjustment of concluded contracts to match the changed circumstances. It is probably possible to negotiate and find solutions with a reasonable contract partner, but what can you rely on if the other party is not particularly willing to cooperate?

Contracts and the temporary effect of force majeure

For contracts, the law stipulates the principle that a violation of contractual obligations is excusable in the context of force majeure. This means that it cannot be demanded that the other party fulfils its obligations during force majeure circumstances. However, not any situation constitutes force majeure. It must be an obstructing circumstance which is not caused by the obligor’s own activities, and which was unforeseeable and unpreventable. Thus, although often thought differently, force majeure is not a miracle cure that would allow a contract party to be released from a contract without consequences simply by notifying the other party. In reality, reliance on force majeure requires a thorough analysis, gathering evidence and actively seeking solutions.

All the above must among other things be construed in the context of the content of the relevant contract and the obligations arising therefrom, i.e., first, look at the contract and perform an analysis of the things in which the parties have agreed on.

The contract partner should also be immediately notified of force majeure circumstances, even if all the circumstances are not yet clear at that moment. A preliminary notice of a possible force majeure situation gives the counterparty a reasonable amount of time for shaping its position.

After sending the preliminary notice, do not idly wait what happens next. You should actively seek and propose solutions, as force majeure can only be relied on if its consequences are unavoidable, i.e., the obligation cannot be fulfilled in any other manner. In practice, this means obtaining alternative offers, increasing the number of employees, reorganising schedules and other such, etc. All of this should definitely be documented to prove your actions, if necessary.

You also have to be prepared to assess and justify the impact of force majeure. If justifications are scarce, it is very easy for the other party to dispute the force majeure claim. A mere generally worded notification and the establishment of, say, a new final term is not enough, as terms can be extended upon the occurrence of force majeure only in the extent of its actual impact. It should therefore be very carefully contemplated for which works and period the extension of terms is justified. The more specific and relevant the justifications, the easier it is to explain your position to the contract partner. In short – present examples, comparisons, add references, etc.

You also must take into account the temporary impact of force majeure. The impact of force majeure on a contract lasts for exactly as long as it obstructs the fulfilment of the particular obligation. As soon as the obstruction has passed, the fulfilment of the contract must be resumed, and the parties are liable for their obligations. The obstruction should obviously also be considered to have passed when the specific problem remains, but other solutions can be reasonably found (e.g., materials can be replaced with something else).

Force majeure does not generally give grounds for terminating the contract or definitively refusing to fulfil obligations, i.e., if the obstruction to the fulfilment of the contract is more extensive than the impacts of the force majeure circumstances (including, for instance, if a project has become loss-making due to a general increase in prices), the parties should still consider other solutions.

It is also important to emphasise that force majeure cannot be an obstructing circumstance in the fulfilment of financial obligations, i.e., the failure to fulfil financial obligations (e.g., the failure to pay rental fees) cannot unfortunately be justified by a force majeure situation.

Change in the balance of contractual obligations

Besides the limitation of liability due to force majeure, the regulation of changes in the balance of contractual obligations may be relevant in the context of a specific contract.

The law establishes the principle that a contract party has the right to request the amendment of a contract if the circumstances under which a contract is entered into change after the entry into the contract and this results in a material change in the balance of the obligations of the parties due to which the costs of one party for the performance of an obligation increase significantly or the value of that which is to be received from the other party under the contract decreases significantly (§ 97 of the Law of Obligations Act). This constitutes a situation where a contract that has so far been fulfilled and has been in conformity with market conditions becomes unreasonably burdensome for one contract party due to an unexpected event.

General preconditions to this are similar to force majeure: the obliged party (1) could not have known it at the time of concluding the contract, (2) could not have influenced the circumstances, (3) does not bear the risk of changes in circumstances, and (4) would not have concluded the contract if it had known the particular circumstance.

A significant difference from force majeure is that if force majeure affects the contract only during the occurrence of the relevant obstruction, a change in the balance of obligations gives the opportunity to amend the contract or withdraw from the contract, i.e., the whole relationship between the parties’ changes.

This provision grants the right to request the amendment of the contract in the first instance, i.e., if the preconditions exist, negotiations can be requested to amend the contract terms and conditions. If negotiations fail, the party may turn to court. The court has the right to amend the contract terms and conditions as requested by the party or establish a respective new contract provision itself. Upon the amendment of contract terms and conditions, consideration must among other thing be given to the essence of the contract, the obligations that have been fulfilled, the revenue to be received from the thing delivered under the contract and reasonably the interests of both parties. The amended contract must restore the original balance of the parties’ obligations.

If the contract terms and conditions cannot be amended, the obliged party may exercise the right to terminate the contract by way of withdrawal or cancellation.

Considering the existing case-law, it must be said that these would rather have to be very exceptional circumstances. Disputes arising from the situation of war have not yet reached the courts, but it could be presumed that the situation of war and the entailed sanctions cannot be considered reasonably foreseeable circumstances that are in the sphere of influence of the contract parties, i.e., while in ordinary economic activities reliance on force majeure or the need to change the balance of contractual obligations is very rare, it may be more real in the current crisis.

New contracts

It is important to keep in mind that the situation of war and its possible developments are no longer unforeseeable in the case of contracts concluded today and therefore force majeure cannot be relied on. Thus, if you are planning to conclude a contract in the near future, the fulfilment of the obligations arising from which may be affected by the situation of war, you should definitely consider the current situations and its foreseeable consequences when preparing the contract.

In conclusion: although the fulfilment of concluded contracts is, as a rule, mandatory, the principle may become doubtful upon the occurrence of certain preconditions in a crisis. Every specific situation must be separately assessed in order to ascertain whether the situation of war and/or the sanctions have a direct impact on the fulfilment of the contract.

If You have any questions or need consultation on Your contracts, feel free to contact us at estonia@fondia.com.