In the case of force majeure, it must be assessed whether it is a circumstance which the person could not affect. Amendment of contracts comes into question primarily when, for example, the costs of the undertaking related to the performance of its obligations increase considerably. The respective circumstances must be assessed separately in each case.
Below we have highlighted some bottlenecks which may be relevant with regard to the activities of undertakings.
Hindrances related to the performance of obligations to cooperation partners due to employees who have fallen ill or are in quarantine
Since the Estonian Health Board has advised employees not to go to work for 14 days after returning from a risk area if possible, undertakings may experience hindrances in their everyday economic activities due to temporary labour shortage. The following measures may be applied to overcome that issue:
- An employer may demand that an employee work overtime due to unforeseen circumstances pertaining to the undertaking or activity of the employer, in particular for prevention of damage;
- In the event of an emergency, giving instructions to employees which are not related to their duties of employment is permitted by law. An emergency is presumed in case of possible damage or a threat of such damage to the employer’s property or other amenity caused, above all, by force majeure.
If, as a result of absent employees, there is a setback to economic relations of the undertaking (performance of obligations is hindered), it may be a force majeure event. For example, if due to unexpected absence of employees, the undertaking is not able to reorganise work in such a manner that replacement of employees or preservation of production output would be ensured. It may also be a force majeure event when the object of contract is the organisation of an event which must be postponed or cancelled. However, if such an event cannot be postponed due to its nature (e.g., an outdoor event which must definitely take place in summer), it must be considered that the other party will be entitled to withdraw from the contract, but it will not be possible to claim damages or a contractual penalty in such a case.
In addition, an opportunity may arise for the undertaking to claim amendment of the contract from the other party. It is important to note that even in such a case, the employer should do everything in its power to make sure that the employees of its undertaking would not be affected by the spreading of the virus. If the employer itself is not diligent enough, an opportunity may arise for the other party to submit an objection to the claim for amending the contract stating that the employer could have affected the circumstances sufficiently and avoid changing of circumstances. The employer also incurs the risk of employees’ claims for damages.
Hindrances related to the performance of obligations to cooperation partners due to mandatory restrictions
Based on the current development, it is clear that the virus is spreading largely as a result of people travelling from one country to another and on Wednesday (i.e., 11 March), the WHO declared the coronavirus outbreak a pandemic. An emergency situation has been declared in Estonia until 1 May. Various restrictions will inevitably result in major supply problems, questions whether undertakings subject to restrictions must perform their obligations, etc.
Hindrances upon performance of obligations as a result of closure of state borders and other mandatory restrictions must generally be considered as force majeure events due to their exceptional nature and the fact that they are no longer in the sphere of influence of the undertaking. In that case, it is not possible to claim neither compensation for damage nor a contractual penalty from the undertaking for non-performance of its obligations. However, a force majeure event normally does not justify non-performance of financial obligations. Nevertheless, undertakings may claim amendment of contracts in such a manner that financial obligations would be reduced or terminate contracts altogether.
Upon occurrence of a force majeure event, the non-breaching party does have the right to either withdraw from the contract or reduce the price. In order to avoid the latter, it would be important for the party in delay to demand amendment of the contract due to changed circumstances, which would enable, for example, to postpone the delivery date until recovery of the ordinary course of business of the undertaking. The right to cancel the contract altogether is not precluded either. The existence of such rights must, however, be assessed separately in each case.
Hindrances related to providing work and paying wages to the employees due to decline in or discontinuance of business
By now it is evident in certain sectors that undertakings are not able to provide employees with work to the agreed volume or pay wages to them to the agreed extent. Regarding such cases, the following options are prescribed by law.
One option may be temporary reduction of wages if the following prerequisites are both simultaneously fulfilled:
- an employer, due to unforeseen economic circumstances beyond its control, fails to provide an employee with work to the agreed extent, and
- payment of the agreed wages is unreasonably burdensome for the employer.
It must be considered that unilateral reduction of wages brings about the right of the employee to refuse to perform work in proportion to reduction of the wages or cancel the employment contract, notifying thereof five working days in advance, in which case, the employee must be paid compensation to the extent of one month’s average wages of the employee. Prior to the reduction of wages, it is very important to analyse whether the prerequisites arising from law for the application of this measure are fulfilled in the specific case, and comply with the procedure prescribed by law, incl. the obligation to inform and consult employees. Otherwise, you risk receiving claims for the compensation of wages not received, which can be submitted retroactively within three years, or cancellation of employment contracts due to a breach of the employment contract by the employer, which will result in larger claims for compensation.
Another option is lay-off. An employer may extraordinarily cancel an employment contract if the continuance of the employment relationship on the agreed conditions becomes impossible due to a decrease in the work volume. In accordance with law, lay-off must be notified in advance or the time by which the employee is notified later must be compensated in money. In addition, in the case of lay-off, the employer undertakes to pay redundancy payment to the employee working under an employment contract entered into without a term to the extent of one month’s average wages of the employee. With that regard, there are no specifications provided by law in connection with force majeure circumstances.
What should be done to prevent problems and upon their occurrence?
- Mapping of potential risks and preparation of an activity plan
- Negotiations with cooperation partners and dialogue with employees
- Analysis of each individual case for working out a solution
On behalf of Law Firm TGS Baltic we can assure that we are prepared to contribute ideas and assist in finding the best and quickest solution from a legal point of view. We have already mapped potential threats and analysed various possible solutions from the viewpoint of organisation of both employment relationships and relationships between undertakings.