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Impact of the Contract and Tort Act on M&A agreements

25.03.2002

The new Contract and Tort Act is expected to take effect with separate implementing acts between July 1 2002 and January 1 2003. Previously, contractual deviations from the Soviet Civil Code were permitted only in certain cases (although this interpretation shifted towards freedom of contract in 1991 when Estonia regained its independence).

In contrast, the principle of freedom of contract prevails in the Contract and Tort Act. Accordingly, parties to an M&A contract may agree to deviate from its provisions provided that this:

• is not prohibited under the act;
• is not contrary to public policy or morality; and
• does not prejudice any fundamental rights.

The principle of freedom of contract is closely connected with that of reasonableness. The definition of 'reasonableness' in the act pertains to anything that an individual in the same situation and acting in good faith would ordinarily consider to be reasonable. Thus, in an M&A contractual relationship the following factors are taken into account in evaluating reasonableness:

• the essence of the relationship;
• the purpose of the transaction; and
• the customs and practice prevailing in the M&A field, among other things.

Although the parties are substantially free to agree upon the terms and conditions of their M&A contract, it may transpire that the agreement is unenforceable (eg, because one of the parties finds the performance of its contractual obligations to be unreasonably burdensome).

The Contract and Tort Act appears to apply general provisions to share sale and purchase contracts, with the aim of regulating a varied range of contracts. This could be problematic due to the fact that purchase and sale contracts are a relatively specific type of agreement. However, the explicit recognition of freedom of contract should enable the parties to deviate from the provisions of the law by mutual agreement.

Consequently, the parties' initial M&A agreement may well be subject to change. Initially, this may lead to uncertainty as the parties will lack an unambiguous awareness of the security of their rights, and the development of the assessment of such circumstances through judicial rulings will take some time.

Looking to the future, it is envisaged that the recognition of freedom of contract combined with that of reasonableness may well lead to a decrease in the autonomy of the contractual parties, wherein they resort to the courts more frequently in order to alter the nature or scope of their contractual obligations.

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