The recent price increases on wholesale markets for electricity and gas – caused by the Ukraine war – have led to across-the-board price hikes for existing energy supply contracts. Unsurprisingly, this development has already resulted in legal disputes, and the first lawsuits on the compatibility of price adjustments with price guarantees issued in the B2C sector have already been decided by the regional courts.
In the B2B sector, the number of disputes about the permissibility of contractually agreed price adjustments is also likely to increase. For long-term gas supply contracts, for example, suppliers with agreements to supply customers at prices linked to those for heating oil – a practice previously widespread – are facing particular economic pressure because import prices for heating oil have recently lagged significantly behind producer prices for natural gas. In the electricity sector, the sharp rise in prices is likely to incentivise having the validity of pricing clauses reviewed by (arbitration) courts. This may affect contracts for (virtual) power plant slices (capacity leases) and power purchase agreements (PPAs) concluded for the long-term marketing of renewable power plants.
Starting points for legal action might in particular include the requirements of the Price Clause Act (Preisklauselgesetz, “PrKG”) and – in the case of pre-formulated price clauses – of the law governing general terms and conditions (section 305 et seq. Civil Code (Bürgerliches Gesetzbuch, “BGB”). Price adjustment clauses have been among the most contentious elements of energy supply contracts since the liberalisation of energy markets began. Since 2008, the Federal Court of Justice has handed down around 20 decisions on this issue relating to the supply of gas and electricity – but many practical questions remain unanswered.
Basic types of price adjustment clause
The extent to which a price adjustment clause can be legally challenged depends on its type. A distinction must generally be made between price reservation clauses under section 315 BGB and index clauses:
In price reservation clauses (also referred to as performance reservation clauses), suppliers reserve the right to unilaterally adjust pricing at their reasonable discretion. These clauses typically regulate the reason, the conditions and the scope of a price adjustment in general terms, but not the specific cost factors.
Index clauses, however, are often structured as mathematical formulas and result in automatic price adjustment at regular intervals. Alongside fixed values, the formulae also contain an index component based on the import or spot prices for energy carriers and products, CO2 certificate prices, or the development of wages and salaries. In electricity supply contracts, for example, so-called “coal-wage clauses” were widespread before energy market liberalisation – whereas today, reference is often made to spot market quotations.
Distinction must be made between two different forms of index clause:
- Cost component clauses are used to pass on increases or decreases in the cost of providing the contractual service.
- Reference price clauses are based on a reference price taken as a measure of the value relationship between performance and consideration (for example, the price of heating oil as a measure of the value of the supply of natural gas) – irrespective of cost.
Usually, changes in sovereign costs (taxes, levies, or other charges) and network charges are passed on to the customer in full using a separate price adjustment clause.
Compatibility with the PrKG
The PrKG restricts the ability of market participants to make price adjustments, preventing inflationary spirals and maintaining price stability. It generally prohibits escalation clauses, with some exceptions. According to the prohibition on price clauses – which applies to both individual agreements and pre-formulated clauses – the amount of monetary debts may not be directly and automatically determined by the price or value of other goods or services that are not comparable to the agreed goods or services (section 1(1) PrKG). The prohibition does not apply to the following clauses often used in energy supply contracts:
- Performance reservation clauses, where the party entitled to determine the price can use its reasonable discretion in adjusting this (section 1(2), no. 1 PrKG);
- Price reference clauses, where the linked goods or services are essentially similar or at least comparable (section 1(2), no. 2 PrKG), and
- Cost component clauses, if the changes in price or value taken into account directly influence the costs incurred by the creditor to provide the consideration (section 1(2), no. 3 PrKG).
Price adjustment clauses that violate the prohibition on price clauses are invalid. But the price clause only actually becomes invalid once this has been determined by a court (section 8 PrKG), and the previous legal effects of the price clause are not affected by this.
The parties to an energy supply contract can therefore argue that a price adjustment clause should be invalidated because it violates the prohibition on price clauses, provided that no exceptional circumstances apply:
- The reservation of a right of the energy supplier to specify performance pursuant to section 315 BGB for an electricity or gas price is, however, generally unproblematic under the PrKG, because it allows decisions to be made using reasonable discretion. Doubts about the validity of the clause under the law governing prices could in particular arise if the clause does not make it clear that price adjustments must be made “using reasonable discretion” and that section 315 BGB applies.
- If price reference clauses are used, the similarity/comparability of the reference product must be clearly established in each individual case. The Federal Court of Justice has not yet ruled on whether it is permissible to link the gas price to changes in the price of light heating oil. While the majority of legal commentators agree that these are comparable products based on assumed substitutability, the case law of the higher courts is inconsistent – and the recent differences in how heating oil and gas prices have changed are likely to rekindle the discussion.
- When it comes to cost component clauses, the question is whether the referenced costs are actually incurred in connection with the contractually owed performance. According to Munich Higher Regional Court, this requirement is not met if the electricity price is linked to changes in the average price of imported coal, but the contract does not cover the supply of electricity from a coal-fired power plant.
Is the price adjustment permissible under the law governing general terms and conditions?
The test of fairness and reasonableness under the law governing general terms and conditions is generally carried out independently of the review of the price clause prohibition. Even a contract structure permitted by the PrKG does not prevent a further test of fairness and reasonableness under section 309, no. 1 BGB or section 307(1), sentence 1 BGB given the different legal purposes of the PrKG (monetary policy objectives) and section 305 et seq. BGB (protection of the contracting partner against unreasonable disadvantage). Conversely, a clause that violates the PrKG but whose invalidity has not yet been determined by a court pursuant to section 8 PrKG may withstand a test of fairness and reasonableness under section 307 et seq. BGB.
In the case of price reservation clauses, the reason and the prerequisites for as well as the scope of the price adjustment must be specified in sufficient detail in the clause. The Federal Court of Justice has yet to fully clarify what practical requirements apply in this respect in B2B transactions. Businesses wishing to avoid legal problems have in the past often relied on provisions of the Basic Supply Regulations (section 5(2) Basic Gas Supply Regulation (Gasgrundversorgungsverordnung, “GasGVV”)/Basic Electricity Supply Regulation (Stromgrundversorgungsverordnung, “StromGVV”), but it is doubtful whether these can be used as a model for B2B contracts. In the electricity sector, the Federal Court of Justice’s ruling of 25 November 2015 introduced a “safe option” based on the price reservation clause for private customers approved by the Court, which can usually be readily applied to commercial electricity customers.
Particularly in the case of older contracts, businesses should check whether there is anything in case law indicating that the price adjustment clause is invalid.
As an ancillary price agreement, index clauses are subject to the test of fairness and reasonableness under the law governing general terms and conditions as far as future price changes are concerned. According to section 307(3), sentence 1 BGB, the initial price is not subject to this test, however, even if it is only specified in terms of a formula in the contract. It is also important to make the following distinction:
- According to the law governing general terms and conditions, energy suppliers and their customers have a great deal of leeway when agreeing price reference clauses. While the Federal Court of Justice has ruled that for contracts with consumers, it must be possible to predict that the market price for the performance owed typically undergoes similar changes to the market price for the reference product, it has also held that this does not apply to B2B contracts. Whether, for example, linking the gas price to the market price for light heating oil – as the reference product – is appropriate and acceptable is entirely for the customer to decide using reasonable business judgement.
The prohibition on price clauses (see above) is generally likely to offer a more promising argument when faced with price adjustments based on a price reference clause.
- A cost component clause with a transparent and comprehensible mechanism that applies automatically and covers the main cost factors does not as a rule violate section 307(1), sentence 1 BGB when used between businesses. But even in B2B contracts, such a clause must not allow the supplier to generate additional profit by passing on specific cost increases – ruling out clauses enabling a cost increase with limited impact to be applied to unaffected price components, for example adjusting the price component for investment costs when only the fuel costs have increased. Price adjustment clauses must also ensure that adjustments are made for rising and falling prices alike – so no formulae where the price increases when one cost factor goes up but any decrease in the costs in other areas is ignored.
Companies must therefore check whether the price formula accurately reflects material changes in costs.
In B2B contracts, at least, an index clause can be combined with a separate price adjustment provision to pass on price changes mandated by the German government.
Is the individual price adjustment permissible?
Even if the price adjustment clause is valid, customers can ask the court to review the individual price increase.
- Where price adjustments are based on cost reservation clauses, they must fulfil all contractual requirements in terms of form and content and be made with reasonably exercised discretion within the meaning of section 315 BGB. The supplier may in particular justify its price adjustment by citing increased procurement costs. It must demonstrate and prove that these have gone up, but does not have to disclose how it calculates its total price.
- When it comes to index clauses, the supplier only has to provide evidence of the index components needed for the price formula.
Conclusion
There are various ways for businesses to challenge price adjustment clauses in court based on the PrKG and the law governing general terms and conditions – and this may be especially worthwhile for older contracts. The Federal Court of Justice has however clarified a range of questions about the permissibility of price adjustment clauses in recent years, making it possible to draft new contracts that are legally sound.
But the current situation leaves much to be desired, as the legal requirements for price adjustments are still overly complex and affected companies often have no legal certainty. Simplifying the rules and regulations would be a step in the right direction – starting with abolishing the PrKG, which has been controversial right from the outset. No other country in the euro area has such a law, and its practical impact on price stability is likely to be negligible.
It is hard to say whether a wave of B2B lawsuits is imminent. Many long-term energy supply contracts have been replaced by shorter-term, market-oriented procurement in recent years, with price adjustment clauses generally being less important. How much court time is tied up with this in future will therefore depend on the number of active long-term energy supply contracts that have not yet been brought in line with recent case law
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