The last few months have seen a sharp reduction in gas supplies from Russia, which at times have ceased altogether. The resulting fight for energy is on everyone’s lips, and the subject of numerous political and regulatory measures. Inevitably, the ensuing substantial rise in energy costs has led to discussions on how this impacts contractual relationships along company supply chains, in particular in the form of price increases, adjustments to contracts, or rights to refuse performance.
This article looks at possible consequences for civil law and litigation in Germany under the country’s Civil Code (Bürgerliches Gesetzbuch, “BGB”) and Code of Civil Procedure (Zivilprozessordnung, “ZPO”). Special rules apply to specific industries in Germany, one example being the current approval requirement in section 27 of the Energy Security Act (Energiesicherungsgesetz, “EnSiG”) for gas suppliers’ rights to refuse performance because gas supplies have ceased or been reduced. Such rules, however, fall outside this article’s scope.
I. Price adjustments
1. Price increases as grounds for requesting a contract adjustment under section 313 BGB
Legally, a price increase owing to a sharp rise in energy prices may constitute legitimate grounds for a request to adjust a contract under section 313(1) BGB. For a contract or price to be successfully adjusted on this basis, there needs to have been a change to the contractual basis of sufficient gravity that the parties would not have concluded the contract in that form or at all if they had been able to predict this change, and that adhering to the contract would be unreasonable.
A key criterion for such a request to be successful is that the threshold of risk that the obligated party can be expected to tolerate has been exceeded. In general, section 313 BGB is not applicable where frustration of the contract results in a risk that the party seeking an adjustment to the contract is in fact obliged to bear, given how risks are allocated between the contracting parties. As a general rule, the seller or supplier of tangible goods must bear the risks of procurement and the entailing risk of rising production costs (including price increases in raw, primary, auxiliary or operating materials, as well as a rise in manufacturing and logistics costs). In particular, this applies where the contract includes a fixed price that is to be understood as a price guarantee in the relationship with the customer. An example of this is a recently published decision by Düsseldorf Regional Court on an injunction sought by a regional consumer rights association (Verbraucherzentrale NRW) in a B2C context (Düsseldorf Regional Court, decision of 26 August 2022, case no. 12 O 247/22). The same generally applies where parties have included index clauses in their contract. Such a clause is evidence that the parties have recognised the issue of increasing production costs and may in fact have settled the matter once and for all. In this context, a further criterion for courts is whether the parties have hedged against the risk of increasing production costs or whether such hedging would at least have been customary in business. Should this be the case, there will generally be little scope for application of section 313 BGB. This applies as well where the circumstances increasing the prices already existed when the contract was concluded (for example after the start of the war in Ukraine). An exception to these principles may apply where the party seeking the adjustment faces a threat to its existence. The individual circumstances must be reviewed in each case.
Even if a request to adjust a contract is justified in an individual case, the adjustment must not overcompensate for the losses incurred. On the contrary, the contract may only be adjusted up to the point where rendering performance just becomes reasonable again. In most cases, therefore, the extra costs will not be fully compensated for.
Litigation-wise, an action can be brought for the adjusted performance directly. The court then reviews the adjustment under section 313 BGB accordingly.
2. Price adjustment rights in contracts – unilateral rights to specify performance under section 315 BGB
Depending on how an adjustment clause is designed in the contract, another mechanism for adjusting prices may be to specify performance unilaterally under section 315 BGB. This is the case where there is a corresponding contractual agreement to the supplier’s benefit and such agreement is permissible (e.g. under the law on general terms and conditions, where applicable). In this scenario, a party may specify performance at its reasonably exercised discretion (section 315(1) BGB). Increasing prices under a supply agreement because procurement costs have risen may be equitable insofar as falling costs elsewhere do not compensate for this. In any event, the equitable limit is probably exceeded where the unilaterally set price exceeds the increase in procurement costs (i.e. in these cases the rise in energy prices).
If the obligee (i.e. the supplier in these cases) exercises its right to unilaterally specify prices, and the obligor finds grounds to argue that this constitutes an unreasonable price increase, the obligor can wait for the obligee to take legal action for performance. In the course of such legal action, the court will be checking whether a price increase is equitable under section 315(3) BGB. However, the obligor can itself bring an action for a judicial modification of contract (Gestaltungsklage) under section 315(3), sentence 2 BGB, i.e. for the court to itself specify an equitable performance (section 315(3), 1st half of sentence BGB). This may be the case, for example, where the obligor considers that the level of the price increase is excessive, while recognizing that a price increase owing to the rise in energy prices is generally permissible.
II. Rights to refuse performance vis-à-vis contracting partners
Rights to refuse performance are an option in particular where a request to adjust a price is denied (see 1.), or where the Bundesnetzagentur for Electricity, Gas, Telecommunications, Post and Railway (“Bundesnetzagentur”) orders that certain consumption points be disconnected (see 2.).
1. Where a request to adjust prices is made
Alongside such requests to adjust prices, there is also the issue of rights to refuse performance vis-à-vis contracting partners, given the energy crisis. Supplier and customer perspectives need to be differentiated here:
From the supplier’s perspective, the first issue is how to handle deliveries under a contract where, for example, the contracting partner does not agree to the supplier’s request (justified in its view) to adjust prices under section 313(1) BGB or rejects a unilateral specification of prices under section 315(1) BGB. The supplier may now consider stopping deliveries, but only in a few cases is there going to be a reliable legal basis for this. Increased production costs due to a rise in energy prices do not allow the supplier to refuse performance under section 275 BGB on the grounds that such performance is (economically) impossible. Except where relevant contractual provisions have been made, these cases must be resolved according to the principles of ceased basis of the transaction under section 313(1) BGB (see above). If the contractual provisions stipulate that the supplier has to perform in advance of payment, then refusing performance under section 321 BGB is an option if it is evident that the supplier’s claim to payment is at risk because the customer lacks the means to pay. Where there are grounds to deem a customer insolvent under section 17 et seq. Insolvency Code (Insolvenzordnung, “InsO”), this criterion will frequently be met. With regard to overindebtedness as grounds for insolvency (section 19 InsO), it should also be noted here that legislators wish to reduce the timeframe of the going concern forecast from twelve to four months. Irrespective of the forecast’s timeframe, however, the customer’s ability to satisfy the claim when it becomes due, and to do so with sufficient likelihood, is likely to be crucial to the right to refuse performance under section 321 BGB.
Generally, therefore, litigation will be the only way to enforce the price increase asserted should the parties fail to reach agreement. Only in narrowly defined cases will interim relief be possible by way of a preliminary injunction for continued performance (Leistungsverfügung) under section 940 ZPO. Under section 1033 ZPO, this is also possible where the parties have agreed an arbitration clause. For the matter to have the requisite urgency (known as grounds for the injunction), the supplier must be reliant on its claim to payment being immediately satisfied, the payment must be due in the near future, and the negative consequences of non-payment must be severe and disproportionate to the loss incurred by the customer. Generally speaking, it will be possible to meet these criteria only where a company is in an existential economic plight.
From the customer’s perspective, a preliminary injunction under section 940 ZPO for continued deliveries may be appropriate where the supplier stops deliveries (unjustifiably so in the customer’s view). Here too, the grounds for the injunction are subject to strict requirements. As a whole, however, they will be slightly easier to substantiate than those from the supplier’s perspective. Where there is a threat of a production stoppage, for example, the grounds for the injunction may only result from such stoppage likely entailing economic consequences severe enough that the customer cannot be expected to sue the supplier in court and/or later assert claims for damages. In weighing up these interests, another factor is the legal position regarding the claim to an injunction and how clear that position is.
2. Where the Bundesnetzagentur orders disconnection
If the supply situation worsens, Germany’s Federal Government can trigger the emergency level as the final level of the country’s gas emergency plan. The Bundesnetzagentur would then assume the role of “federal load distributor”, allowing it to order the partial or complete disconnection of the gas supply to certain consumption points. Should the supplier (e.g. an energy-intensive company) be affected by such a Bundesnetzagentur order and have to stop production, objective impossibility under section 275(1) BGB is likely to be given. In principle, therefore, the supplier would be entitled to refuse to supply its customer for as long as the disconnection lasts; in return, the supplier would have no claim to payment over this period under section 326(1) BGB.
It is possible that the supplier can still supply some of its contracting partners (e.g. because the Bundesnetzagentur only partially reduces energy quantities over a certain period, or because the supplier can produce its own electricity from other fuel and this suffices for part of the production, or because stocks exist, or for some other reason). The question that then immediately arises is which customers may or even must be supplied primarily. The Bundesnetzagentur may itself have included a condition in its disconnection order whereby with the remaining capacity only customers may be supplied which in turn contribute to maintaining essential sectors. We will need to wait and see how specifically the Bundesnetzagentur structures individual orders or a general order, should such orders be issued. If the Bundesnetzagentur does not make any stipulations, in general a multiple obligation does not mean that performance is legally impossible (section 275(1) BGB). Impossibility arises only when the quantity of supplies an obligor provides to one of the obligees, for example, is such that it can indeed no longer supply the other obligees. Based on the principle of privity of contract, the supplier is fundamentally free to decide which obligee to supply. But there is a risk that obligees who receive no deliveries will claim damages from the supplier (see below). Accordingly, which customer to supply is also a matter for the supplier’s risk assessment.
III. Claims for damages due to non-delivery or default
In cases of non-delivery or default on the supplier’s part, the customer may also bring claims for damages owing to impossibility of performance, non-delivery although delivery was possible, or default (section 280(1) and (3), 281, 283 or section 280(4) and 286 BGB). If the supplier has wrongly relied on a right to refuse performance, for example, this may constitute a breach of duty and entail responsibility. The customer would then have to be compensated for the losses it incurred owing to non-delivery. Such losses can be considerable, for example where the customer’s production line stops, and may put the supplier’s existence at risk where it has unjustifiably refused performance. It is therefore crucial to carefully check the risk of damages should deliveries be stopped unjustifiably.
The situation is different where a supplier fails to deliver because the Bundesnetzagentur issued a disconnection order and the supplier itself had no electricity available for production, for example. Although this would constitute impossibility of performance under section 275(1) BGB, the supplier will not usually need to bear responsibility for this. There is a possible exception to this if the supplier had been able to take precautions against this scenario. And the situation may be different again if the supplier makes deliveries to only one of several customers. In this case, a claim for damages is an option for the customers who did not receive deliveries. Our comments above apply to the scope of possible losses.
IV. Conclusion and recommended action
As a result of the energy crisis, companies are already facing a multitude of challenges, which will only increase in future. These challenges range from internal “supply chain screenings” of numerous contractual provisions, to finding the strategically correct communication with contracting partners, through to what are likely to be major disputes regarding the essential resource of energy. Companies should now be reviewing their contractual provisions to see whether price adjustment mechanisms are possible, and if so which ones, clustering them according to whether the company may face requests to adjust prices or itself wishes to assert such requests, should it need to pass on price increases to its customers, for example. Given the sharp rise in energy prices and the fraught prospects for the coming winter, one thing appears to be clear: further energy disputes are on their way.
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