COVID-19 and Force Majeure – Estonia
On the evening of 12 March, the Government of Estonia has declared an emergency situation due to the worldwide pandemic of Coronavirus COVID-19 and the threat of mass infections.
Under the emergency situation a number of different measures have been taken at this stage until 1 May, including limiting normal business activities. Additional measures are discussed and adopted as an ongoing process. Information on these measures is available from the website of the Estonian Government (https://www.valitsus.ee/en/emergency-situation-estonia). It is important to note that such measures may be changed or added with short notice. Among other measures, the law enables to impose restrictions on the freedom of movement.
It is clear that such measures and limitations have an effect on the daily business of companies, including the supply of goods, provision of services and on the market in general. In the current situation many companies cannot perform their contractual obligations in the usual agreed manner. This raises the question, which legal exceptions would apply to the performance of contractual obligations in this situation, to what extent the non-performance of the parties to a contract may be excused and to what extent a party may request to change the contract to maintain the previous balance of contractual obligations.
Force Majeure as an Excuse for Non-performance
According to the Estonian Law of Obligations Act, non-performance by an obliged party is excused if it is caused by force majeure. Force majeure means circumstances which are beyond the control of the obliged party and which (at the time the contract was entered into) the obliged party could not reasonably have been expected to take into account, avoid or overcome the impediment or the consequences thereof. Taking into consideration the coronavirus pandemic, the emergency situation declared and the measures taken thereunder, it is clear that for many contractual relationships and obligations this could mean invoking force majeure.
Force majeure excuses the non-performance of only such contractual obligations, the performance of which is hindered by the force majeure circumstances. Whether this is the case in a certain contractual relationship, must be assessed on a case-by-case basis, considering also the following:
- The meaning of force majeure and its effect on the contract is provided by law and therefore parties may rely on it even if the parties have not separately referred to it in their contract. The law however allows the parties to limit or extend cases where non-performance due to force majeure is excused. For this reason, the first thing should always be to check the force majeure regulation in the specific contract. In practice it is very unusual for the parties to rule out the option to rely on force majeure. If the contract is subject to foreign law, the force majeure regulation may differ.
- A party´s non-performance due to force majeure may be excused only for the period and to the extent to which force majeure directly hinders the performance of the party´s respective obligation. Mere difficulties in performing the contract or additional costs related to that are generally not excused.
- Even in cases of force majeure it must be taken into consideration that it may release the party only from damage and default interest claims. Force majeure does not limit the other party’s right to withhold performance of its obligations, withdraw from or cancel the contract or reduce the contract price.
- To invoke force majeure, the party wishing to do so must inform the other party of the circumstances hindering performance and the effect thereof immediately after becoming aware of such circumstances. Specific requirements for such notifications may be provided in the contract between the parties.
Alteration of Balance of Contractual Obligations
Besides force majeure regulation, in certain cases alteration of balance of contractual obligations may be relevant. The Law of Obligations Act provides that 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, the injured party may demand amendment of the contract from the other party in order to restore the original balance of the obligations. Compared to force majeure, which deals with liability limitations regarding a specific contractual obligation, alteration of balance of contractual obligations means the change of the contract as such.
In such a situation the party may demand amendment of the contract in order to restore the original balance of the obligations if all the following pre-conditions are met:
- Due to change of circumstances there is a material change in the balance of the obligations of the parties – 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, decreases significantly.
- The injured party could not have reasonably expected that the circumstances might change at the time of entry into the contract and the injured party cannot influence the change in the circumstances.
- The risk of a change in the circumstances is not borne by the injured party pursuant to the law or the contract.
- The injured party would not have entered into the contract or would have entered into the contract under significantly different terms if the party had known of the change in the circumstances.
If the bases for amendment of a contract exist but, due to the circumstances, amendment of the contract is not possible or would not be reasonable with respect to the other party, that other party may terminate the contract.
In conclusion, even though under normal economic activities invoking force majeure or the alteration of balance of contractual obligations is very rare, under the present emergency situation this might become more relevant. Yet, it should be kept in mind that both are still exceptions, the applicability of which must be assessed on a case-by-case basis. The general rule still is that contractual obligations undertaken by a party must be performed even under more difficult conditions.
Regarding more specific questions related to the above and any other questions, we are ready to assist you in an operative manner.