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ISBN 9985-9146-1-9

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Effect of Harmonisation of European Civil Law on Development of Estonian Law of Obligations

The completion of an efficiently functioning single market in Europe depends largely on the extent to which the substantial rules of private law of the European Economic Area countries can be harmonised. Rules in different fields of private law have already been harmonised by different measures, of which particular importance should be attributed to the establishment of EU regulations and directives having an impact on the national law of the EC countries, preparation of conventions and recommendations, harmonisation of the substantive law (known in the American legal system as ”restatements of law”) and the preparation of recommendatory rules as made by UNIDROIT and the Commission on European Contract Law *1 . In addition to the European legal integration methods that have already been in use, the idea of establishing a European Civil Code *2 has been gaining more and more strength. Preparation of a European Civil Code would mean a wider harmonisation of private law than has been so far attempted in creating the European single economic market and meeting the objectives of the Treaty on European Union. In the opinion of the advocates of the idea, the European Civil Code should definitely contain the matters presently included in the commercial codes of European countries. Such fields as family and succession law are probably the least prepared for harmonisation, although a basis could be found in the European Declaration on Human Rights. *3 In order to ensure legal security in transactions between European countries, importance equal to that of the creation of a single private law has been attributed to the unification of international private law. *4 Certainly, the harmonisation of private law will give rise to problems of principal as well as of a formal nature. For example, it has been found that Article 100A of the EU Treaty is not an appropriate foundation on which to base unification of the whole civil law because not all fields included in the unification are related to competition restrictions. Moreover, there has been concern that dismantling historically developed private law principles by means of directives would prejudice national legal systems. Therefore, it has been suggested that a new EC competence should be found in order to unify the whole private law by codification, that would result in a recommendatory European civil code for Member States. *5 Principal problems with regard to the harmonisation of private law of the EC Member States are primarily associated with the tendency of European law to evolve into a form that remains consistent with the Roman and canon law. Thus, the harmonisation would be aimed at achieving ius commune approved by all countries and lawyers. *6

A further objective of the unification of the European private law is the preparation of a single civil code, which would be based on principles acceptable to all European countries and which should thus diminish the principal differences in the law that nowadays underlie the differentiation between legal systems. Amendment of adopted laws and the adoption of new laws is going on in all European countries. The Netherlands have taken a very important step in developing the legal system, by adopting a new civil code (1992), thereby giving a lead to other countries who are planning a codification or a modification of obsolete fundamental principles in their legal systems. The rapid legal development and re-codification of private law in Eastern Europe may also be of interest and in a certain sense even edifying for the Western European countries – as re-codification is often aimed at unifying the best solutions of different legal systems, taking into account the overall tendencies of legal development in European countries and following the requirements provided to the national law by the EC legislation. All these factors have given cause to believe that in order to start the preparation of a European civil code, it is necessary to have knowledge of, and to be aware of the lessons to be learnt from East-European codification. *7

During the last five years, Estonian private law has been developing very rapidly. Changes in the social organisation have given rise to the need to reassess the whole body of private law and adopt laws in accordance with the development of civil law in the rest of the world and with the actual needs of the society. Changes in private law have taken place not only in the form of adopting new laws, but the fields of legal regulation and the principles of regulation have also changed substantially. The adoption of so many new Acts during such a short time has not been conducive to legislative stability. However, the rapid adoption of legislation has made a positive impact on the development of the economy and indeed the whole society.

Presently, codification of private law is taking place in Estonia, aimed at drawing up a five-book civil code, as in the German Civil Code (Bürgerliches Gesetzbuch). Estonian private law is traditionally based on codified law. In 1992, the Riigikogu decided to use pre-1940 Estonian legislation as a basis for creating the Estonian legal system. The preparation of the civil code has been based on the draft Civil Code, which could not be adopted due to the occupation of Estonia in 1940. By now, four of the five volumes of the future Civil Code have been adopted in the form of Acts. The Law of Property Act was completed first (passed on 9 June 1993 and coming into force on 1 December 1993). *8 The next proposed was the Family Act, passed on 12 October 1994 and coming into force on 1 January 1995. *9 The General Principles of the Civil Code Act was passed on 12 June 1994 (and came into force on 1 September 1994) *10 , and the Law of Succession Act was passed on 15 May 1996 (and came into force on 1 January 1997). *11 The Law of Obligations Act is currently being prepared and should be completed by the end of 1998. Obligation relationships are currently regulated under the Estonian S.S.R. Civil Code (which entered into force in 1965) Part III, which is also the last remaining part of the civil code based on the Soviet civil legislation. In principal matters, obligation relationships are unregulated at the level of law since the civil code of Soviet origin does not cover the complete area of obligation relationships and lacks appropriate and adequate regulation.

The preparation of the Law of Obligations Act started in 1994. The planned preparation of a new draft Act under the 1940 draft Civil Code failed because the 50-year-old original could not feasibly be revised to bring it into line with the present stage of development of the European civil law and, in particular, the law of obligations. Thus, the preparation of the draft Law of Obligations Act was based not only on the 1940 Civil Code but also on the civil codes and corresponding laws of several countries of Continental Europe (the Federal Republic of Germany, the Netherlands, Switzerland, Italy, etc.), the civil codes of Louisiana and Quebec, the UN Convention on International Sale of Goods (CISG) of 1980 ratified by the Riigikogu, the Principles of International Commercial Contracts (PICC) drawn up by UNIDROIT, the Principles of European Contract Law (PECL) drawn up and published in 1995 by the Commission of the European Communities. *12 In the selection of specific sources, particular importance was attributed to their legal system of origin and to the fundamental principles underlying the legal regulation contained therein. In preparing the draft Law of Obligations Act, account had to be taken of the established Estonian legal system, legal traditions and the stage of development of the legal culture. To a certain extent, its provisions were also influenced by the level of legal education, which has a substantial impact on future implementation of the Act. *13 In spite of extensive preparation and the collaboration of both Estonian and foreign experts in the composition of the draft, both theoretical and practical legal problems may arise in the future implementation of the Act. These problems would probably be interesting even in wider circles, particularly from the aspect of drawing up the European Civil Code.

The idea of a European civil code has forced jurists to search for commonalities with legal systems of different countries. Regardless of the legal system to which the law of a specific country belongs, the legal fields of any legal system may be found to contain general principles which underlie the legal systems. The preparation of the Estonian civil law was based on such principles as the dominant status of socialist ownership, the principle of accord between social and individual interests, the principle of lawfulness, contractual discipline, etc. Today, most of the principles applicable during the preparation of the Civil Code have lost their meaning, and their application is impossible. Thus, until the adoption of the new law of obligations, Estonia is in a situation where new principles, recognised in the West-European law of obligations, have to be adapted to the old law. *14 In the following paragraphs, I would like to give an overview of the principles which are intended to be established by the new Law of Obligations Act and which are not provided in the applicable law or which in fact can not be applied due to deficient regulation.

1. Principle of ”Negative Mandatory”

Each field of law is based on principles characteristic to that field. A number of the principles are provided in the law as legal rules, while others proceed from theoretical legal thinking, which enables us to construe and thereafter apply certain provisions. One such generally accepted principle in the law of obligations is the negative mandatory capacity of law. The Civil Code applicable in Estonia was drawn up in circumstances where the negative aspect of a legal rule had to be directly expressed in the provision of law or where the wording of a provision could give rise to the conclusion that subjects might have agreed otherwise than anticipated by the law. As a general rule, the provisions of the Civil Code were construed as mandatory. The principle that ”anything not prohibited is allowed” was applicable. To date, however, interpretations of the applicable Civil Code have mainly proceeded from the contrary principle, namely that the imperativeness of a legal provision must directly arise out of the law or be mandatory by its wording and nature.

The preparation of the Law of Obligations Act has been based on the principle of the validity of implied negative imperatives, although the principle used in the German Civil Code (BGB) to differentiate between implied negative and mandatory provisions has not always been followed. In case of certain provisions, emphasis on the implied negativity of the provision has been considered necessary. For example, some provisions contain such expressions as ”any different agreement shall be void”, ”contrary shall not be allowed”, ”must (shall be obliged to)”, etc. Intrinsic imperativeness was known as well in the Soviet civil law theory and therefore, no practical problems should arise in assessing the implied negativity of individual provisions.

Certainly, one could pose the question why a principle that is comprehensible to any person educated in law should be provided in the law. The principle is provided in the law because of, first of all, the need to provide a legal basis for the principle, which is new for the whole legal system. According to the draft Law of Obligations Act, the provisions thereof may be derogated from unless the Act directly provides or the nature of the Act implies that derogation from the Act is not allowed. In assessing the permissibility of a derogation, courts must take into account whether the derogation is in conflict with public order or good practice, or whether such derogation would violate individual rights. The Principles of European Contract Law provide for the principle in Article 1.102. *15 Mandatory rules include those that oblige a person to act in good faith, that give the right to demand equitable contractual conditions, that do not allow limitation of liability in case of deliberate non-performance of contract and those giving to the court the right to reduce unfairly severe penalties for breach of the contract. In the draft of the Estonian new Law of Obligations Act, the above referred rules are provided as mandatory in order to ensure the protection of Parties against unfair contract conditions.

2. Good Faith and Fair Dealing

Regulation of conduct between parties is a pre-requisite to achieve secure contractual relationships. The general principle of conduct in good faith (“Treu und Glaube”, “good faith and fair dealing”), recognised in most European legal systems, is known in the applicable Estonian law. The General Principles of the Civil Code Act, which entered into force on 1 September 1994, incorporates the principle, in stating that the exercise of civil rights and performance of civil obligations must be acted in good faith (Section 108(1)). The new law of obligations specifies the principle of act in good faith from the aspect of assessing the conduct between the debtor and the creditor. According to the provisions of the new draft Law of Obligations Act, debtor and creditor must act in relations with each other in accordance with the principle of good faith. Thus, the provision in the new Estonian draft Law of Obligations Act regulating act in good faith is, with regard to its contents, similar to the corresponding provision of PECL (Article 1.106). The assessment of the conduct of subjects is based on the requirement of good faith as a subjective criterion expressed through human intrinsic honesty and sense of justice. *16

Fair dealing as an objective criterion means honesty in specific relations. The requirement of fair dealing is not directly provided for in all legal systems, as the requirement to act in good faith often includes fair dealing, which in fact is a narrower general principle by definition. The Estonian draft Law of Obligations Act does not provide the principle of fair dealing and, apparently, there is no need for it. The applicability of the requirement to act in good faith as a general principle in all stages of the relationship between creditor and debtor enables its inclusion even in those cases which could be subject to a requirement for fair dealing. In practice, both principles of act depend on the rules of conduct approved by the society and on the judges’ understanding on what can be considered fair dealing or act in good faith in certain circumstances.

The new draft Law of Obligations Act provides a requirement, under which the parties to an agreement must proceed from good faith during the preliminary negotiations, performance and termination of the agreement, in using possible remedies in case of violation and in case of disputes with regard to the interpretation of the agreement. Thus, the conduct in good faith should extend to the pre-agreement relations as well as those relations which may exist between the parties after the termination of a contractual relationship. The requirement of conduct in good faith should offer to the parties an opportunity to lawfully justify their conduct, which was based on a statement or conduct by the other party.

Act in good faith during a contractual relationship is an obligation extending to the parties indirectly, through a general provision. Therefore the parties can not preclude it under an arrangement or preclude the extension of this rule to the concluded agreement. Thus, the maximum scope of the requirement of conduct in good faith with regard to a contractual relationship should be applicable in the Estonian law, just like in the German law (BGB § 242). *17

The Estonian new draft Law of Obligations Act also provides for the principle directly motivated by the Art. 6: 2(2) Netherlands Civil Code, under which a rule which binds the parties by virtue of law, usage or legal act does not apply to the extent that under the circumstances this would be unacceptable under the standards of reasonableness and eguity. *18 Under the said provision, the court may also derogate from the requirement of law where fulfilment of that requirement would result in an unjust solution.

3. Principle of Co-operation

Co-operation between the parties in order to achieve the objective of concluding the agreement is a general principle, which must be observed by the parties to an obligation in their performance. In accordance with Subsection 173(2) of the Civil Code applicable in Estonia, both parties must perform their obligations in most reasonable manner and offer to the counter-party any assistance in the performance of the counter-party’s obligations. That general principle was attributed a socialist meaning, which does not permit its use to achieve the objectives usually envisaged in promoting co-operation between the parties in today’s contract law.

Under the new Estonian draft Law of Obligations Act, each party must offer to the counter-party any co-operation necessary for performance of the latter’s obligations. The duty to co-operate is also fixed in Article 1.107 of PECL. That duty primarily arises out of the common objective and thus, the achievement of the contractual objective is also envisaged in the said Act as the objective of co-operation. Any breach of that duty constitutes a non-performance. Depending on the specific circumstances, assistance by a party may mean certain steps before or during performance by the debtor (e.g. communication of projects or materials, authorisation to use certain equipment, communication of information, etc.). In that respect, it should be noted that the duty to co-operate regulated by PECL is, in its meaning, wider than the duty to co-operate provided in the Estonian new draft Law of Obligations Act. Co-operation must seek to achieve the common objective, and therefore, under the said principle, active conduct, for example accepting a tender of performance of the agreement, can be demanded from the counter-party. The principle of co-operation arises out of the principle of good faith and fair dealing, and specifies which conduct may be lawfully required from the counter-party.

The duty to co-operate with the counter-party directly proceeds from the law. According to the new draft Law of Obligations Act, obligations of a party may, in addition to the law, arise from the nature and objective of the agreement, established practice between the parties, usales agreed by the parties or applicable in their field of business, good faith or the principle of reasonableness. The Estonian draft Law of Obligations Act provides for the duty to co-operate in connection with making impossible the performance of the obligations of the counter-party, and that allows a restriction on the use of that Section in presenting demands in the court, nevertheless leaving the option to use the general principle of good faith in presenting demands.

4. Principle of Reasonableness

The Law of Obligations Act provides for the principle of reasonableness with regard to performance of civil obligations. ”Reasonableness” in an obligation relationship is something usually considered reasonable by persons acting in good faith in a same situation. The wording of the provision is similar to that of Article 1.108 of PECL. In assessing reasonableness, account is taken of the nature of the obligation relationship and the purpose of the transaction as well as usales and practices of the trades or professions involved, and other circumstances. For example, the period of time granted to the aggrieved party for notsee of termination depends upon whether the contract required to quick action by the aggrieved party. Quick action may be required, for example, where the aggrieved party takes advantage of market price fluctuations, by delaying the notice of termination. In accordance with the provisions of the draft Law of Obligations Act, determination of the price and other contractual conditions, evaluation of efforts, determination of period of time, etc. must also be based on the principle of reasonableness. However, the assessment of reasonableness will certainly bring about problems, as the former legal system did not allow the courts to apply categories which did not have a specific meaning formulated in the law. Reasonableness as an objective category must be defined by a judge, who is not accustomed to formulating his or her subjective principles of value as objective categories.

5. Principle of Freedom of Contract

The draft Law of Obligations Act formulates the principle of freedom of contract as a principle, under which the provisions of the General Principles of the Law of Obligations Act shall be applied to all agreements specified in the Law of Obligations Act or other Acts and to other multilateral transactions as well as to the agreements unspecified in the law but not in conflict with its spirit and meaning, as well as to obligation relationships that do not arise out of any agreement. Thus, different kinds of agreements may be concluded regardless of whether the agreement category concerned is specifically regulated by the law or not. The enactment of the freedom of contract as a basic principle in contract law based on individual autonomy and voluntary agreement proceeds, in particular, from the fact that in the Soviet civil law, this principle did not have any content or meaning for participants in civil relationships. The freedom of contract, which under the said provision means the freedom to choose the category and contents of an agreement, is, however, substantially restricted in the Law of Obligations Act as a whole. In particular, restrictions exist to protect the weaker party. The new draft Law of Obligations Act also provides other measures for restricting the freedom of contract in fields where that is considered necessary in the present European contract law.

In the title of my article, I have referred to the effect of harmonisation of the European civil law on the codification of the Estonian civil law. In this article, I have not exhausted all influences, which can be seen in the new draft Law of Obligations Act. However, this was not the objective. In my opinion, the influence of the idea of a European civil code has been most important in the transposition of its general principles. These are the principles whereunder we can define the nature of our legal system, develop it and thereby participate in the process of harmonisation of the European civil law. I judge that Estonian experience in the codification of civil law, and particularly the law of obligations, could be of interest to the supporters of the idea of a European civil code – as the Estonian new draft Law of Obligations Act already incorporates some of the ideas and principles contained in the Principles of European Contract Law.