The Effects of COVID-19 on International Contracts

How to handle the case in which a supplier or customer within an international supply chain defaults on a contract? When can Force Majeure be invoked? What are the consequences on contracts? How to minimize risks to the company’s business?

To answer these questions, it is necessary to analyze the content of the contracts and understand what the law applicable to the individual agreements provides for.

Our experts explain how to manage the effects of the Covid-19 pandemic on industrial and commercial activities and share operational advice for managing international contracts during the emergency.

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Estonia

How is Force Majeure defined in the Estonian law?

Force Majeure is defined in the Estonian law as circumstances which are beyond the control of the obligor and which, at the time the contract was entered into or the noncontractual obligation arose, the obligor could not reasonably have been expected to take into account, avoid or overcome the impediment or the consequences thereof which the obligor could not reasonably have been expected to overcome.

Force Majeure pursuant to Estonian law can be divided into four parts:

  • the existence of an impediment;
  • the impediment must not have been caused by the debtor’s own conduct or inactivity;
  • the unforseeability of the circumstance; and
  • the inevitability and insurmountability of the circumstance.

The existence of an impediment – the first criteria which shall be met for a person to be exempted from a contractual liability. The impediment should actually prevent the fulfillment of a specific obligation.

The impediment must not have been caused by the debtor’s own conduct or inactivity – only such circumstance which was beyond the control of the obligor may be considered as Force Majeure. Thus, the occurrence of the circumstance shall be objective, i.e. the obligor has not caused it by its own conduct or inactivity.

The unforeseeability of a circumstance – not every circumstance impeding the performance of an obligation and which is beyond the control of an obligor may be considered as Force Majeure. The occurrence of the circumstance needs to be unexpected and it cannot be reasonably expected from the obligor to have taken the circumstance into account. The circumstance which was reasonably foreseeable by the obligor cannot be considered as Force Majeure

The inevitability and insurmountability of the circumstance – the obligor cannot be reasonably expected to be able to avoid the influence of the circumstance on the performance of an obligation or surpass the circumstance or its consequence.

As such, the spread of Coronavirus and the emergency situation followed can be considered as an impediment (the impediment should actually prevent the fulfillment of a specific obligation). The coronavirus outbreak by itself checks also all of the other prerequisites of the Force Majeure e clause pursuant to the Estonian law. As Force Majeure comes from the law, a separate clause regarding Force Majeure does not have to be added to the agreement.

Hardship is not a term that is used in the Law of Obligations Act of Estonia but it resembles under Estonian law the possibility of “Alteration of balance of contractual obligations”. Due to the mentioned possibility of alteration, the amendment of the agreement may be demanded if:

  • at the time of entry into the contract, the injured party could not have reasonably expected that the circumstances might change; and
  • the injured party could not influence the change in the circumstances; and
  • the risk of a change in the circumstances is not borne by the injured party pursuant to the law or the contract; and
  • 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, the party aggrieved by alteration of the balance of the obligations may withdraw from the contract or, in the case of a long-term contract, cancel the contract.

What are the criteria to invoke circumstances related to Coronavirus as Force Majeure?

In the case of a written agreement, the parties shall firstly review their contract as it may contain specific clauses that exclude or explicitly define the application of Force Majeure. In addition to the Force Majeure clauses in the agreement, e.g. the provisions relating to circumstances allowing extraordinary cancellation shall be analyzed as well.

The other party shall be notified immediately of the occurred impediment after the impediment becomes known. In addition, it must be kept in mind, that the party invoking the Force Majeure clause must have the possibility to prove that the impediment actually prevents the fulfillment of a specific obligation.

Thus, the party should also gather as much evidence as possible about the impediment restraining the fulfillment of an obligation, as proof will be needed in the case of a dispute.

What are the consequences of Force Majeure under Estonian law?

Pursuant to the Estonian law the non-performance could be excused in the case of Force Majeure thus not considering the infringer liable for the breach of its obligations.

In the case the infringer invokes the Force Majeure clause, the legal remedies available to the other party are being limited, i.e. the other party cannot demand the compensation for the caused damages, the performance of the obligation and interest. The injured party still has the possibility to withdraw from or cancel the agreement, to refuse to perform its obligations or demand the reduction of price.

Though it should be kept in mind that at least as of now, the Estonian court practice has deemed that the non-performance of a monetary obligation is not excused even in the case of a Force Majeure. This may change considering the COVID-19 outbreak at hand, if the companies cannot sell their products or services and therefore are not able to pay due to the recession that the virus may cause.

Nevertheless, for a person to be able to invoke the Force Majeure clause in the agreement, the concluded agreement shall have been conducted before the occurrence of the Force Majeure. The obligor cannot rely on a Force Majeure clause in the case the contract has been concluded within the timeframe when the circumstance considered as Force Majeure was already present.
In addition, in the case the effect of the Force Majeure is temporary, the non-performance of the obligation under the agreement is excused only for the period during which Force Majeure impeded the performance of the obligation.

How to prove that the coronavirus outbreak can be deemed as an event of Force Majeure?

Pursuant to Estonian law it is presumed that an obligor is liable for the non-performance of a contractual obligation. Thus, the obligor shall be the one who has the obligation to prove that the non-performance of a contractual obligation is excused due to Force Majeure due to the  Coronavirus outbreak. The obligor may collect and present all possible proof in regard to the fact that the non-performance of the obligation shall be excused due to coronavirus.

What is the best course of actions recommended in case of notice of Force Majeure?

Firstly, collect and keep any and all evidence in regard to the fact that the impediment prevents the fulfillment of a specific obligation.

Secondly, inform the other party about the event of Force Majeure as soon as possible and within the deadlines agreed upon in the agreement. If possible and if needed, try to agree upon an amendment of the agreement.

Thirdly, consider any possible alternatives and try to mitigate the damages from occurring, in addition, try to invoke any available remedies in due time.

In regard to future agreements, make sure that the Force Majeure clause specifies that the outbreak of COVID-19 is covered as well. In addition, conclude an insurance coverage which would in the future cover the risks involved with similar outbreaks as of COVID-19.

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