Law of obligations in Estonia

The law of obligations regulates relations where one party, the debtor, has a duty to perform a certain act or to refrain from performing it for the benefit of another party, the creditor. The creditor, in turn, has the right to demand performance of this obligation.

In addition to the principal obligation, the parties to an obligation are required to act in a manner that takes into account the rights, needs, and interests of the other party. Our law office specializes in resolving complex issues related to the law of obligations and offers you reliable support at every stage.

Central Principles of the Law of Obligations

• Principle of Good Faith: parties must act correctly, honestly, and fairly in their mutual dealings, taking into account the legitimate interests of the other party.
• Principle of Reasonableness: the behavior of the parties is assessed based on how an ordinary, prudent, and professional person would act in the same situation.
• Principle of Dispositivity: as a rule, statutory provisions are advisory guidelines. This means that the parties are free to deviate from the provisions of the law by agreement, unless the law expressly prohibits it.
• Freedom of Contract: persons have the right to independently decide with whom, when, and on what terms they establish relations and enter into contracts.
• Pacta sunt servanda: concluded agreements and contracts are binding on the parties for performance.

Grounds for Termination of Obligations

An obligation and the duties arising from it terminate in the cases prescribed by law. The main methods are as follows:

• Due Performance: an obligation terminates when the debtor performs their promise correctly — at the right time, in the right place, and in the prescribed manner.
• Set-off: if two persons have claims of the same kind, for example monetary claims, against each other, these can be extinguished to the extent of the overlapping amount by a unilateral declaration.
• Merger of Claim and Obligation: an obligation terminates when the debtor and the creditor become the same person, for example through inheritance or merger of companies, unless there is a legitimate interest in continuing the relationship.
• Termination Agreement: the parties may jointly decide to terminate the obligation, including cases where the creditor waives their claim.
• Withdrawal from Contract: if one party fundamentally breaches the contract, the other party has the right to withdraw from the contract. Upon submission of a withdrawal notice, the parties are released from further performance of obligations, and items or money already transferred shall be returned.
• Cancellation of Contract: used primarily for long-term or continuing contracts. Upon submission of a cancellation notice, the obligations terminate prospectively. For good cause, a long-term contract may also be cancelled extraordinarily, without complying with the advance notice period.
• Death: the death of a party who is a natural person terminates the obligation only if it was closely linked to that specific person.
• Other Grounds Arising from Law or Contract: for example, the termination of a partnership or an authorization agreement due to the death of one of the parties.

Types of Obligations

Obligations are divided into two major groups: contractual and non-contractual.

Contractual Obligations

Contractual obligations are based on the free will and agreement of two or more parties to create legal obligations. A contract is deemed to be concluded when the parties have exchanged mutual declarations of intent, namely offer and acceptance, or have otherwise expressed a clear common intention.

Non-Contractual Obligations

Non-contractual obligations arise in situations where there is no prior agreement between the parties, but the law obliges them to act in a certain way.

• Causing of Damage, Law of Tort: unlawfully causing damage to another person creates an obligation to compensate for it.
• Unjust Enrichment: if someone gains a benefit at the expense of another person without a legal or contractual basis, the received benefit must be returned.
• Management of Affairs Without Authority: a situation where a person performs a necessary act in the interest of another without a corresponding obligation or authorization.
• Public Promise of Reward: an obligation to pay the promised reward to a person who fulfills a publicly announced condition, for example finding a lost item.

Contracts and Their Types

A contract is the fundamental basis of the law of obligations, used to create, amend, or terminate legal relationships. Although contracts may also be oral, the law prescribes a mandatory form for certain transactions, for example written or notarized form.

Most Common Types of Contracts

Contract Conclusion Process and Performance

A contract is deemed to be concluded when the parties have reached an agreement on all essential terms.

Stages of Concluding a Contract

1. Offer: a clear and sufficiently defined proposal to enter into a contract, showing the offeror’s intention to be legally bound in case of acceptance.
2. Acceptance: the absolute and unconditional consent of the addressee to the submitted offer.
3. Entry into Force: the contract becomes effective from the moment agreed upon by the parties or upon signing, if the law requires a mandatory form.

What to Pay Attention to When Concluding a Contract?

• Clarity of wording and avoidance of ambiguities.
• Compliance of the terms with the true intent of the parties.
• Precise fixing of important points, such as price, description of the item, and deadlines.
• Distribution of risks and liability between the parties.
• Procedures for amendment, termination, and dispute resolution.

Importance of Deadlines and Consequences of Breach

Deadlines agreed upon in the contract are mandatory. Failure to perform on time is a breach of contract, which may result in:

• a claim for interest for delay or contractual penalty;
• the right to withdraw from or cancel the contract;
• an obligation to compensate the other party for the damage caused.

Force Majeure

Force majeure is a circumstance that exempts the debtor from liability for breach of obligation because the impediment was beyond their control.

• Beyond Control: the party could not influence the occurrence or course of the circumstance in any way.
• Unforeseeability: at the time of concluding the contract, it could not reasonably be expected to take this circumstance into account.
• Unavoidability: the impediment or its consequences could not be overcome.
• Examples: natural disasters, military actions, strikes, sudden state restrictions and prohibitions.

Security and Guarantees in the Law of Obligations

The purpose of security is to mitigate the creditor’s risks and ensure performance of the claim if the debtor ignores their obligations.

• Suretyship: a third person, the surety, undertakes to be liable for the debtor.
  • Simple Suretyship: performance may be demanded from the surety only if it is not possible to collect the debt from the debtor.
  • Joint and Several Suretyship: the creditor may submit the claim directly against either the debtor or the surety.
• Security Deposit: a sum of money that the debtor gives into the possession of the creditor to secure the performance of possible obligations, for example in lease contracts.
• Retention of Title: the seller retains ownership of the item until the purchase price has been paid in full.
• Pledge: gives the creditor the right to satisfy their claim from the amount received from the sale of the pledged property.
  • Possessory Pledge: the item is physically transferred into the possession of the creditor.
  • Registered Pledge: a movable item, for example a vehicle, is pledged on the basis of an entry made in the relevant register.
  • Mortgage: a pledge established on immovable property, where the property remains in the owner’s possession.

Practical Issues and Procedures in the Law of Obligations

Acknowledgement of Debt

An acknowledgement of debt is a document by which the debtor confirms their debt.

• Constitutive Acknowledgement of Debt: creates an entirely new, independent obligation, separated from the original transaction.
• Declaratory Acknowledgement of Debt: confirms and specifies an already existing debt and its amount.

Claims for Compensation for Damage

When damage is caused, whether by breach of contract or by non-contractual tort, the purpose of compensation is to place the injured party in the position they would have been in if the breach had not occurred.

Prerequisites for contractual compensation for damage:

1. Existence of a valid obligation.
2. Breach of an obligation by the other party.
3. Liability of the debtor, where the breach is not excused by force majeure.
4. Existence of damage.
5. A direct causal link between the breach and the damage caused.

Types of damage:

• Material Damage: direct financial damage, including expenses for eliminating the consequences of the breach, and lost income.
• Non-Material Damage: moral damage, emotional or physical suffering.

Hidden Defects

Hidden defects are defects that are not visible during ordinary inspection at the time of delivery of an item or work, but appear later during use. This is a frequent issue, for example, in the purchase of real estate and vehicles.

Our law office helps you, upon discovery of hidden defects, to determine the seller’s liability, prepare claims, and protect your rights, including claims for price reduction, repair, or withdrawal from the contract.

Unjust Enrichment

Unjust enrichment is a legal situation where someone receives a financial benefit at the expense of another person without a legal basis.

• Performance-Based Claim: the benefit was received as a result of a conscious act, for example an erroneous payment.
• Non-Performance-Based Claim: enrichment occurred without a conscious performance by the parties, for example through the use of another person’s property or savings.

Consumer Protection Regulation

Consumer protection regulation includes special rules that protect a private consumer in relations with an entrepreneur acting in the course of economic activity. In the law of obligations, consumers are guaranteed:

• mandatory prior information about the terms of the contract;
• a 14-day right of withdrawal in the case of contracts concluded by means of distance communication or outside business premises;
• protection against unreasonable or unfair terms in standard terms and conditions.

Limitation Periods

A limitation period is the period of time during which it is possible to demand protection of one’s rights through the courts. After expiry of the period, the debtor may refuse to perform the obligation.

• Claims arising from transactions: 3 years.
• Claims arising from law: 10 years.
• Claims for compensation for intentionally caused damage: 10 years.

Financial Sector and Instruments of the Law of Obligations

Financial institutions encounter the law of obligations on a daily basis when offering specific financial services and products.

• Consumer Credit: loans granted to consumers, to which strict protective rules apply, including the obligation to assess creditworthiness, a 14-day right of withdrawal, and the right to repay the loan early.
• Transactions Related to Securities: obligation-law contracts concerning shares, bonds, and other instruments, operating together with special financial market legislation.
• Settlements and Payment Orders: banking services for transferring and performing monetary obligations, regulated by the Law of Obligations Act and legislation concerning payment institutions.

Professional Legal Assistance in the Law of Obligations

Since disputes in the field of the law of obligations and the drafting of contracts require detailed legal precision, our experienced team of lawyers offers you professional assistance. We ensure the protection of your interests and proper legal relations.

Our Consultation Formats

• Express Consultation: prompt answers to urgent legal questions.
• Video Consultation: convenient and detailed consultation online, directly from your home or office.
• Telephone Consultation: quick initial consultation and preparation of an action plan by phone.
• Online Consultation: written legal analyses and consultations by e-mail.

Areas Where Our Lawyers Can Help You

• Drafting contracts, legal analysis, and risk assessment.
• Advice on obligations and finding optimal solutions.
• Preparation of claims and notices of complaint, and management of negotiations.
• Representation in court disputes and out-of-court negotiations.
• Preparation of all necessary documents in the field of the law of obligations.