07.05.2020

Effects of the corona pandemic on energy supply contracts - Contract adjustment due to force majeure or hardship?

Background

The COVID 19 pandemic is having a drastic impact on the energy industry. Crisis-related plant closures and restrictions on production are leading to lower electricity consumption of the industry. The wholesale prices for electricity have already fallen significantly. For example, the Phelix D for June 2020 is now only quoted at around 24 €/MWh[1]. Overall, consumption and price levels have plummeted by up to 30%. As the prices of globally traded energy commodities such as natural gas and oil have also collapsed, in some cases to negative prices, a short-term recovery of the electricity price is not to be expected. The extent to which these developments will result in adjustment claims by energy buyers is being discussed in different ways. In the end, the circumstances of the individual case decide.

Commercial energy buyers require large amounts of energy. For this reason, their energy supply contracts with energy traders usually include fixed purchase quantities at a fixed price. This represents both a considerable price- and a corresponding volume risk. These now materialize such that the quantities ordered before the crisis for own consumption or for resale can now no longer be used or marketed as planned. If a resale on the market is at all possible, only prices significantly below the original purchase price may be achieved. When assessing the distribution of risk and possible contract adjustments, a distinction must be made between the electricity purchased by an industrial end-consumer under a long-term contract on the one hand and that of a reseller on the basis of a standard trading contract (e.g. EFET) on the other.

 


[1]http://www.eex.com/de/marktdaten/strom/futures/phelix-de-futures, 07th March 2020.

“Force Majeure/Hardship”

Many energy supply contracts contain "force majeure" clauses, according to which the parties are released from their performance obligations if the performance of the contract becomes at least temporarily impossible by circumstances beyond their control. "Force majeure" means an event coming from outside, not having any operational connection, which cannot be averted even by extreme care, and which is not supposed to be tolerated due to its normal frequent occurrence (e.g. a pandemic as opposed to frequent flu waves). A case-by-case assessment based on the respective contractual clauses is necessary.

At least for travel law cases the SARS crisis of 2002/03 was viewed as such Force Majeure event[1]. A similar approach could be taken towards Covid-19. However, the necessary individual case examination for the contractual relationships concerned in the energy industry is not dispensable and requires a careful distinction. For example, it will be more promising for companies to invoke "force majeure" in the event of officially ordered plant closures or if all employees would be ill, than for companies that restrict their production without a corresponding order, for example because supply chains have broken down. It is also more likely that force majeure events occur with regard to final consumers as opposed to retailers (energy traders or municipal utilities), whose business operations are usually only indirectly affected and who can legally and factually resell the energy quantities on the market.

A still possible performance of the contract may, however, place an excessive economic burden on one of the contracting parties. Such unreasonable hardship shall be deemed to exist if by an unchanged performance of the contract one contracting party would be - due to the change in external circumstances - seriously economically impacted, provided, however, it is not accountable for those changes in the first place. International trade contracts for this purpose usually contain so-called "hardship" clauses, according to which a contract must be renegotiated or adapted in such cases. However, "Hardship" regularly only intervenes if the execution of the contract leads to disadvantages which threaten the very existence of the company. The mere lossmaking, let alone the loss of an economic advantage, is in any case not sufficient. Under a hardship claim for adjustment, a court can rule to agree to a specific adjustment of the contract. If an adjustment in line with the interests of the companies is not possible, the ultima ratio usually is termination. The relief of one party by placing a similar hardship on the other party is not possible.

 


[1] AG Augsburg v. 9.11.2004 – 14 C 4608/03, BeckRS 2004, 16212; vgl. auch BGH v. 16.05.2017-X ZR142/15, NJW 2017, 2677).

Statutory provisions

Absent specific contractual provisions discussed above, the statutory provisions shall apply.

A case of objective inability to perform which according to § 275 BGB would render such obligation void, does not occur as long as the energy delivery or acceptance remains factually possible. However, if the acceptance of electricity has to take place at the customer's site and this site is out of operation due to an official order, the ability to take off electricity would usually be impaired as electricity cannot be stored on a large scale basis. This would be different in the case of a retailer on wholesale level, as the respective obligations are to be fulfilled at balancing group level. Balancing groups have been and are still managed and no official orders have been issued in this respect. Acceptance of deliveries are therefore possible, irrespective of the retailer losing his original sales customers because the energy can be passed on to third parties or the market, irrespective of this presumably becoming loss making transactions.

Whether a contracting party can invoke interference with the basis of the transaction (Wegfall der Geschäftsgrundlage) in accordance with § 313 BGB depends on the extent to which a certain circumstance, which has become the basis of the contract according to the mutual understanding of both parties, has significantly changed after the conclusion of the contract. The change of one-sided expectations is not sufficient. Additionally, the contractual distribution of risk must be taken into account. Interference with the basis of the transaction cannot be invoked by those who are contractually designated to bear the concrete risk themselves. Due to the fundamental assumption of the risk of market price changes evidenced by the agreement of the fixed price, losses due to price differentials are in general to be borne by the buyer[1]. Hence, case law demands such a fundamental change in circumstances that adherence to the previous contractual regulation would lead to an intolerable result[2].

In that respect, according to the case law of the Federal Court of Justice (BGH), the parties must accept a certain tolerance of price changes, also in order to avoid frequent contract adjustments[3]. With regard to the state of emergency prevailing due to Covid-19, it could be argued on the one hand that the effects of the Corona pandemic cannot be attributed to the risk area of one of the parties to the contract, because they hit both sides equally and the current extent of the pandemic was not and could not have been foreseen even a few months ago. On the other hand, depending on the individual case, it could be argued that specific operating restrictions in particular without official order were excessive and thus again fall within the area of risk and accountability of the respective party. Here, too, a careful examination of each individual case regarding the changed circumstance and its concretes effects is once again required.

In addition, under § 314 (1) BGB, each party to a long term contract may terminate the contract without notice period in the presence of a compelling reason. A compelling reason shall be deemed to exist if, taking into account all circumstances of the individual case and weighing the interests of both parties, the terminating party cannot reasonably be expected to continue the contractual relationship until expiry of the agreed contractual tenure or the expiry of a notice period for ordinary termination if such provision exists under the contract. Here, again, a distinction is required. Firstly, it will depend on the extent to which the economic balance of the contract is affected and, secondly and above all, on the duration of such financial burden in relation to the remaining term of the contract. In that respect the loss of economic benefits alone cannot justify an adjustment or termination. A currently possible, significantly cheaper energy procurement going forward pursued in order to achieve competitive advantages, is therefore, in the absence of economic hardship at the same time, not a reason for termination.

 


[1] OLG München: Zum Anspruch auf (Preis-)Anpassung eines Energieliefervertrages (EnWZ 2020, 21).

[2] Schneider/Theobald, Recht der Energiewirtschaft, § 11. Recht der Energielieferverträge Rn. 398 - 407, beck-online.

[3] BGH, Urt. v. 4. Juli 1979, Az. VIII ZR 245/78

Conclusion

Affected companies are therefore required to seek legal advice at an early stage when asserting or confronted with any claims for adjustment, as the overall circumstances of the individual case always matter. If a contractual provision has been made, this must be given priority and its applicability to the specific case must be carefully examined. Moreover, appropriate clauses for the future drafting of contracts should be formulated now at the latest in order to make these cases as legally secure as possible. Cases of epidemics or pandemics should – depending on the interest of the party - be explicitly either listed or excluded in these clauses.

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