Legal Policy Decisions and Choices in the Creation of New Private Law in Estonia

• Author: Paul Varul
• Pages: 104-118

Paul Varul

Legal Policy Decisions and Choices in the Creation of New Private Law in Estonia

1. Periods of Development of Estonian New Private Law

Estonia regained its independence in August 1991; the Constitution was passed in June 1992 by referendum. A precondition for the survival and functioning of an independent state is the existence of an effective legal system. At the time Estonia became independent in 1991, the Soviet legal system was valid, but it was no longer possible to actually apply a large part of it due to the changed conditions, because both state administration and economic principles were radically changed. The drafting and establishment of all the necessary new laws was a primary task. The task was the largest and most complicated in the creation of new private law. It was also the most urgent task, because the former norms either conflicted new principles ¹ , or there was no regulation or regulation was incomplete in many areas. ² The drafting of new private law can be divided into the following periods: 1. 1988-1991: preparatory period for the creation of Estonia's own legal system. The goal toward restoration of an independent state and law was set, but account had to be taken of restrictions due to the fact that Estonia was still a Soviet Republic.
2. 1992-1993: period of decisions and choices. This was the most important period in choosing the private law system and model - legal policy decisions could be taken independently without potential interference by Moscow. The main choices were made in this period. The passing of the Law of Property Act ³ and its entry into force on 1 December 1993 was the cornerstone.
3. 1994-2000: this is a period of implementation of earlier decisions and choices, during which the majority of private law legislation was drafted and passed.

We can thus speak of three periods in the creation of Estonian private law - preparatory period (1988-1991), choosing period (1992-1993) and implementation period (1994-2000). Of course, this division as any division in time is conditional, since the periods are not clearly distinguishable. For example, the preparatory period did not only cover preparations, but also actual decisions and drafting, and implementation of choices, i.e. intensive legislative drafting was already going on in the choosing period, and continuous deciding and choosing in single issues also characterise the implementation period when the drafting of new laws was primary.

Decisions have been made and implemented in all three periods, but the periods are distinguished according to which the primary task was at the time.

The following is a description and analysis of the development of Estonian private law in the three periods - why and due to which circumstances the particular legal policy decisions were taken in the development of private law.

2. Preparatory Period (1988-1991)

Preparation of the so-called Self-Sustained Estonia (Isemajandav Eesti, IME) concept ⁴ began in 1988. The objective and content of the concept was to search how Estonia could organise its state and social development independently of the central Soviet power. The IME concept also provided for the creation of a legal system independent of the USSR legal system. In private law, it meant the passing of legislation that would allow for the development of market economy. As the freedom to act was also limited as regards legal drafting since Estonia was a Soviet Republic, the task was not yet set at the changing of the entire civil law system. Only amendments were planned to be made in the applicable civil code to enable market economy regulation.

The period 1988-1991 can thus be characterised from the aspect of development of private law as a period of orientation to the drafting of single new laws to enable the development of market economy, but systematic reorganisation of the entire private law was not a reality yet. The main code of private law remained to be the civil code of the Estonian SSR.

However, many important legal policy decisions that affected private law were already taken during this period to create preconditions for private law reform.

The main legal policy decisions during this period were the passing of the Principles of Ownership Reform Act ⁵ (hereinafter: PORA) and its entry into force on 20 June 1991, and the passing of the Land Reform Act ⁶ and its entry into force on 1 November 1991. It was understood by this time that the transition to market economy principles and the restoration of the independence of the country were not possible without major reforms in the society. The main owner during the Soviet period was the state - the state was the sole owner of all land and owned most production means (buildings, facilities, equipment, machinery, transport, etc.) through state enterprises. The Enterprise Act ⁷ passed on 17 November 1989 established the freedom of enterprise and provided legal basis for the establishment of enterprises based on private property. The founding of public limited companies began after establishment of the "Statutes of Public Limited Company" ⁸ in autumn 1989, but the main production means were still owned by the state and it was not easy for the new public limited companies to compete with state enterprises. There were two options of giving new enterprises an actual possibility to operate: to privatise state enterprises and to attract as much as possible foreign investments to Estonia.

A major problem was that of the land. One of the new laws was the Farm Act ⁹ passed on 6 December 1989. The Farm Act was rather radical at the time - it was the first law in the Soviet Union that allowed private traders (farmers) to employ labour other than themselves. Land was granted for perpetual use under the Farm Act, which enabled private farms to be set up side by side with the former collective farms.

The return of lands nationalised in 1940 also became topical in the beginning of the 1990s but the Farm Act was not sufficient to solve this issue.

Two main questions required legal solutions in the beginning of the 1990s: 1) to provide legal bases for new forms of enterprise (public limited companies, private limited companies) and to allow people to act as sole proprietors;
2) to create legal bases for privatisation of state property and decide the restitution matters, to return land to the former owners insofar as possible.

Solving of these issues enabled to create a basis for freedom of contract and private autonomy, which were the source principles of new private law.

As mentioned above, the Enterprise Act and the Statutes of Public Limited Company created the legal basis for new forms of enterprise besides cooperatives - public limited companies and private limited companies, but also "experimental" intermediate forms such as collective enterprises and leased enterprises, which had only temporary importance.

The second one of the above problems was basically solved by the passing of PORA in 1991. The following principal decisions arose from PORA: 1) it was determined which unlawfully expropriated property (mainly land and buildings) was to be returned or compensated for and under which conditions;
2) it was decided to carry out a large-scale privatisation of state property and to leave to the state only the property necessary for performing its functions.

The decisions related to the ownership reform were radical - it was decided to return or compensate for unlawfully expropriated property to a wide circle of entitled subjects, and state property was decided to be privatised on a very large scale.

The passing of PORA and the Land Reform Act was logically followed by the addition of the Agricultural Reform Act ¹⁰ in 1992 and the Privatisation Act in 1993. ¹¹ These and all other reform acts are based on the ideology and decisions of PORA. PORA and the other reform acts based on it also opened up the possibility for foreign investments to Estonia. Foreign investors were further reassured by the Foreign Investments Act ¹² passed in September 1991.

In conclusion for the first period in the development of Estonian private law: the preparation of laws necessary for reforms and hence the creation of preconditions for a new private law were primary. ¹³ Choice of the private law model was not yet topical and the old civil code applied. The laws that ensured freedom of enterprise and regulated various forms of enterprise were relatively simple and were passed mainly for the practical purpose of enabling alternative forms of enterprise besides state enterprise. If we assess the reform laws that reflected the legal policy decisions of the time, they can be regarded as successful. Implementation of these laws was successful and made civil use of property, which is a characteristic feature of market economy, possible for Estonia. The civil use of land is especially important because it enabled collaterals through mortgage and greatly helped to develop the credit system. Preconditions were created for a significant widening of the circle of owners.

3. Period of Decisions and Choices (1992-1993)

At least two important circumstances became decisive for the development of Estonian private law since 1992, or even the end of 1991: 1) Estonia's regaining her independence in August 1991;
2) the passing of PORA in June 1991 and the...