Issues surrounding electricity price adjustments, or how a supplier can avoid becoming a defendant in a prosecutor's lawsuit.

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It has been over four years since the new electricity market model and retail market were introduced in Ukraine in 2019, yet it is hard to say that the market's evolution is complete.

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Ensuring the security of electricity supply to consumers and protecting their rights and interests are declared by the legislature as core principles of the electricity market's operation.

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The fundamental rights and obligations of consumers and energy suppliers, as well as the requirements for supply contracts and the procedures for their conclusion and amendment, are defined by the Law of Ukraine "On the Electricity Market."

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However, for certain entities defined by the Law of Ukraine "On Public Procurement" (hereinafter – the Procurement Law), specific rules apply to electricity supply and the conclusion or amendment of contracts. In practice, this has led to a number of disputes regarding the possibility of changing the price of electricity after a supply contract has already been signed with such a consumer.

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Based on inquiries we receive from our clients—the suppliers—we can identify the following most pressing and problematic issues:

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1. Is market fluctuation in electricity prices sufficient grounds to initiate an increase in the unit price and amend the contract accordingly?

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2. Is the information published by JSC "Market Operator" on the website https://www.oree.com.ua/considered valid proof of price fluctuation?

3. Does the 10 percent cap apply as a maximum limit on changes to the initial price specified in the contract, regardless of how often such changes occur (the number of supplementary agreements signed), or is it possible to repeatedly increase the unit price by up to 10 percent compared to the previous price established by a supplementary agreement?

4. What are the specific requirements for concluding and amending contracts during martial law?

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Let's examine the problematic aspects of each of these questions in more detail.

1. Is market fluctuation in electricity prices a sufficient circumstance to initiate an increase in the unit price and make corresponding changes to the contract?

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As a general rule, the essential terms of a procurement contract (which include the price of the goods) cannot be changed after signing until the parties have fully fulfilled their obligations.

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At the same time, the legislature has provided for certain exceptions to this rule (Clause 2, Part 5, Article 41 of the Procurement Law), which include, in particular, increasing the unit price by up to 10 percent in proportion to the increase in the market price of such goods in the event of market fluctuations, provided that such a change does not lead to an increase in the total amount specified in the procurement contract.

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An analysis of this provision suggests that the mere fact of an increase in the market price of goods allows the parties to increase the unit price by up to 10 percent, provided that such a change does not lead to an increase in the total amount specified in the procurement contract.

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Until recently, there were no particular problems in the practical application of this rule, and the possibility of a price increase was limited to the supplier's need to prove that the price of electricity on the day-ahead market had increased.

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However, since 2022, prosecutors have been actively filing and, more importantly, winning lawsuits in the public interest against energy suppliers to declare supplementary agreements invalid and recover funds.

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When reviewing the decisions of the courts of first and appellate instance in these cases, the Supreme Court expressed legal conclusions that are worth noting.

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Yes, the Supreme Court, in its ruling of February 16, 2023, in case No. 903/366/22, noted that "The purpose of the regulation provided for in Article 41 of the Law of Ukraine 'On Public Procurement,' specifically establishing the possibility for parties to amend the terms of a concluded contract by increasing the unit price by up to 10%, is to prevent situations where, due to a significant change in circumstances, the concluded contract becomes clearly disadvantageous for the supplier.

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Article 652 of the Civil Code of Ukraine stipulates that in the event of a significant change in the circumstances by which the parties were guided when concluding the contract, the contract may be amended or terminated by mutual agreement, unless otherwise established by the contract or implied by the nature of the obligation. A change in circumstances is considered significant if they have changed to such an extent that, had the parties been able to foresee this, they would not have concluded the contract or would have concluded it on different terms. Due to a change in significant circumstances, a contract may be amended by a court decision at the request of an interested party if the following conditions are met simultaneously: 1) at the time of concluding the contract, the parties assumed that such a change in circumstances would not occur; 2) the change in circumstances is caused by reasons that the interested party could not eliminate after they arose, despite all the care and diligence required of them; 3) performance of the contract would violate the balance of the parties' property interests and deprive the interested party of what they expected when concluding the contract; 4) it does not follow from the nature of the contract or trade customs that the risk of a change in circumstances is borne by the interested party.

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In other words, the provision stipulated by public procurement legislation applies if there is a significant fluctuation (increase) in the market price that makes the performance of the contract clearly disadvantageous and loss-making for one of the parties. To ensure that an already concluded contract is not terminated and to avoid conducting a new tender under such circumstances, the law provides the possibility to increase the price, but by no more than 10%." (Similar conclusions are set out in the Supreme Court rulings of April 13, 2023, in case No. 908/653/22; September 7, 2022, in case No. 927/1058/21; June 22, 2022, in case No. 917/1062/21; and December 7, 2022, in case No. 927/189/22).

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Thus, according to the Supreme Court's conclusions, it is not enough for a supplier to prove the fact of electricity price fluctuations in the market to initiate amendments to the contract. To justify such changes, the supplier must prove that performing the contract under the previous terms makes it clearly disadvantageous and loss-making.

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At the same time, the court of cassation does not specify which documents can be used to prove these circumstances; therefore, the supplier is not limited in their ability to prove the relevant fact using any documents, contracts, or calculations of the economic unfeasibility of supplying electricity at the previous price specified in the procurement contract.

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However, we are convinced that this position of the Supreme Court is flawed, and here is why.

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In accordance with Article 650 of the Civil Code of Ukraine, the specifics of concluding contracts in organized capital markets, organized commodity markets, auctions (public tenders), competitions, etc., are established by the relevant legislative acts.

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A similar provision is contained in Article 185 of the Commercial Code of Ukraine, according to which the conclusion of commercial contracts in organized capital markets, organized commodity markets, wholesale fairs, public tenders The general rules for concluding contracts based on free will apply, subject to the regulations governing the activities of the relevant organized capital markets, organized commodity markets, trade fairs, and public auctions.

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This provision corresponds to Article 3, Part 4 of the Procurement Law, according to which relations related to the sphere of public procurement are regulated exclusively by this Law and cannot be regulated by other laws, except in cases established by this Law.

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As stated in Article 41, Part 1 of the Procurement Law, a procurement contract is concluded in accordance with the norms of the Civil and Commercial Codes of Ukraine taking into account the specific features defined by this Law.

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Thus, in disputes arising during the conclusion or amendment of a public procurement contract, one should be guided primarily by the provisions of the special law, which is the Procurement Law.

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Indeed, this law establishes certain specific requirements for amending a procurement contract; specifically, in accordance with Article 41, Part 5, Clause 2 of the Procurement Law: "essential terms of a procurement contract may not be changed after its signing until the obligations have been fully performed by the parties, except in the case of an increase in the unit price of goods by up to 10 percent, proportional to the increase in the market price of such goods in the event of market price fluctuations, provided that such change does not lead to an increase in the total amount specified in the procurement contract, and provided that such changes are made no more than once every 90 days from the moment of signing the procurement contract or the last amendment regarding the unit price increase. The time restrictions on changing the unit price do not apply to cases involving changes to the terms of contracts for the procurement of gasoline, diesel fuel, natural gas, and electricity.".

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Clearly, the cited provision of the special law contains no requirements that, in addition to proving the fact of market price fluctuations, a supplier must prove that such a fluctuation constitutes a material change in circumstances under the Civil Code or that performing the contract under the original terms would make it obviously unprofitable or loss-making.

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In reaching its decision, the court of cassation applied the provisions of Article 652 of the Civil Code of Ukraine, which establishes only one of the grounds for contract termination, and failed to take into account the specific features of amending procurement contracts established by the special Procurement Law.

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Furthermore, the court's application of Article 652, Part 2 of the Civil Code of Ukraine is unclear, as this provision establishes conditions for amending a contract exclusively through judicial proceedings in cases where the parties have failed to reach an agreement on such amendments.

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However, firstly, in the aforementioned Supreme Court cases, the contract amendments occurred as a result of the free will of both parties to the procurement contract, and secondly, the subject of those disputes was the invalidation of contracts, rather than claims for judicial modification of contract terms.

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In effect, the court of cassation applied a provision of law that was not applicable, leading to an erroneous conclusion regarding the existence of additional grounds for modifying contract terms beyond those provided for in Article 41, Part 5, Clause 2 of the Law on Public Procurement.

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It should also be noted that applying the approach proposed by the Supreme Court to determine the grounds for modifying contract terms effectively creates a situation where parties need only refer to the provisions of Article 652 of the Civil Code of Ukraine to make such changes.

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However, this approach undermines the very legal purpose of not only Article 41, Part 5, Clause 2 of the Law on Public Procurement but also Part 5 as a whole, which lists seven other grounds for amending a procurement contract.

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Clearly, this does not align with the principle of legal effectiveness, as its existence fails to achieve the specific regulatory objectives intended by the legislator during its drafting.

2. Is information published by JSC Market Operator on the website https://www.oree.com.ua/ sufficient proof of price fluctuations?

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The second most common issue that arises when initiating amendments to electricity procurement contracts is proving the fact of price fluctuations.

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The wording of Article 41, Part 2 of the Law on Public Procurement plays a significant role here, as the legislator refers to the need to establish the fact of a price increase "on the market."

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However, the specific nature of the electricity market involves a segmented structure, divided into organized segments: the day-ahead market, the intraday market, and the balancing market.

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The logical question arises: which specific market did the legislator have in mind?

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Currently, the practice in Ukraine's electricity market is to use the Day-Ahead Market (DAM) price as the primary indicator.

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As stated in the Ministry of Economic Development and Trade's clarification letter dated 14.08.2019 No. 3304-04/33869-06, "the publication of trading results on the day-ahead and intraday markets in accordance with Law No. 2019 is provided by the State Enterprise "Market Operator" on its website (https://www.oree.com.ua). Therefore, to document the fluctuation of electricity prices in the market, parties may use information from the aforementioned website."

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At the same time, the Supreme Court in its ruling of May 11, 2023, in case No. 910/17520/21 noted that "the panel of judges rejects the references made by the lower courts and the defendant in the response to the cassation appeal to the content of the clarification letter from the Ministry of Economic Development and Trade of Ukraine "Regarding the amendment of essential terms of a procurement contract," as the right to interpret a legal norm belongs exclusively to the court; clarifications from state bodies (letters, recommendations) are not legal norms and have no legal significance."

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The court simultaneously noted that certificates and expert opinions from the Chamber of Commerce and Industry of Ukraine may be used to confirm market price fluctuations. However, they must specify the current market price of the goods and compare it with the market price as of the date when the price fluctuations began, whether increasing or decreasing (i.e., the existence of a fluctuation). The necessity of including such information is also due to the fact that in the event of price fluctuations, amendments to the procurement contract are made taking into account the price fluctuation indicators that served as the basis for previous contract amendments. Each amendment to the contract must contain separate documentary evidence. A document regarding a price change must contain proper substantiation of the data presented therein, the market fluctuation research conducted, sources of information, etc.

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Therefore, to prove the fact of a price fluctuation, it is not sufficient to rely solely on information posted by JSC "Market Operator" on the website https://www.oree.com.ua/.

3. Does the 10 percent cap apply as a maximum limit on changes to the initial price set out in the contract, regardless of how often such changes occur (the number of supplementary agreements signed), or is it possible to repeatedly increase the unit price by up to 10 percent compared to the previous price established by a supplementary agreement?

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As previously noted, the provisions of Clause 2, Part 5 of Article 41 of the Law on Public Procurement allow for increasing the unit price by up to 10 percent, provided this is proportional to the market price increase for such goods in the event of market fluctuations.

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Parties to procurement contracts often interpret this provision as granting the right to repeatedly increase the unit price by up to 10 percent relative to the price previously defined in the contract.

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However, an analysis of current case law shows that courts take a different view.

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Indeed, the Supreme Court has repeatedly issued legal conclusions (Supreme Court rulings of April 13, 2023, in case No. 908/653/22; September 7, 2022, in case No. 927/1058/21; June 22, 2022, in case No. 917/1062/21; and December 7, 2022, in case No. 927/189/22), according to which the 10 percent restriction applies as a maximum limit on changes to the price defined in the contract, regardless of the frequency of such changes (the number of supplementary agreements signed).

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At the same time, there is a conflicting decision from the court of cassation.

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Specifically, the Administrative Cassation Court of the Supreme Court, in its ruling of April 5, 2023, in case No. 420/17618/21, effectively concluded that it is possible to amend procurement contracts for gasoline, diesel fuel, gas, and electricity an unlimited number of times to increase the unit price, provided that each individual increase does not exceed 10 percent, is proportional to the market price increase, and does not result in an increase to the total contract value.

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Due to these conflicting conclusions from the courts of cassation, the matter is currently under review by the Grand Chamber of the Supreme Court, which is expected to provide a final ruling on whether the unit price can be repeatedly increased by 10 percent.

4. What are the specific requirements for concluding and amending contracts during martial law?

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Following the military aggression of the Russian Federation against Ukraine and in accordance with the Decree of the President of Ukraine No. 64 of February 24, 2022, "On the Imposition of Martial Law in Ukraine," martial law was introduced in Ukraine starting at 5:30 a.m. on February 24, 2022. This necessitated measures to ensure the rapid execution of defense and public procurement to adequately meet needs related to national defense and the fulfillment of state tasks during the full-scale war of aggression being waged by Russia on Ukrainian territory.

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Given the factors mentioned above, as well as the urgent need for the timely execution of defense and public procurement during the period of martial law, certain amendments have been made to the Law on Public Procurement.

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Specifically, the Final and Transitional Provisions of the Law have been supplemented with Clause 3-7, which stipulates that for the duration of martial law in Ukraine and for 90 days following its termination or cancellation, the specific procedures for procuring goods, works, and services for contracting authorities covered by this Law shall be determined by the Cabinet of Ministers of Ukraine, ensuring the protection of such authorities against wartime threats.

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In implementation of this clause, Cabinet of Ministers of Ukraine Resolution No. 1178 of October 12, 2022, approved the Specifics of Public Procurement of Goods, Works, and Services for Contracting Authorities under the Law of Ukraine "On Public Procurement" for the period of martial law in Ukraine and for 90 days following its termination or cancellation (hereinafter referred to as the "Specifics").

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Clause 19 of the Specifics stipulates that the essential terms of a procurement contract concluded in accordance with these rules may not be changed after signing until the parties have fully fulfilled their obligations, except for cases where an agreement is reached to change the unit price of goods due to market fluctuations occurring after the contract was signed or after the last amendment regarding the unit price. Changes to the unit price must be proportional to market fluctuations (the percentage increase in the unit price may not exceed the percentage of the market price fluctuation/increase), provided that such fluctuation is documented and does not result in an increase to the total contract value established at the time of signing.

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Therefore, during the period of martial law, the rules in effect do not limit the ability to change the unit price to 10 percent; instead, such changes must be proportional to market fluctuations (the percentage increase in the unit price may not exceed the percentage of the market price fluctuation/increase).

Conclusions.

In summary, the questions posed in the introduction can be answered as follows.

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1) Is a fluctuation in the market price of electricity a sufficient circumstance to initiate an increase in the unit price and make corresponding changes to the contract?

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A fluctuation in the market price of electricity is NOT a sufficient circumstance on its own to initiate an increase in the unit price and make corresponding changes to the contract.

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According to current judicial practice, to justify such changes, the supplier must prove that fulfilling the contract under the original terms would be clearly disadvantageous and loss-making.

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Furthermore, the legislation does not specify which documents must be used to prove these circumstances, meaning the supplier is not restricted in their ability to provide any documentation to substantiate the facts.

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To minimize the risk of attracting the attention of the prosecutor's office and being named as a defendant in lawsuits to invalidate agreements, we advise our clients to be as thorough as possible in justifying the need for price changes under a contract. Do not hesitate to provide any supporting documentation, such as contracts, calculations demonstrating the economic unfeasibility of supplying electricity at the previous price, and so on.

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It should be noted, however, that even with a properly justified need for a price change, the consumer is not obligated to agree to such changes, and the supplier will be required to continue supplying electricity under the previously agreed terms.

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To avoid this situation, it is advisable to include a provision in the procurement contract at the time of signing, stating that if the consumer does not agree to the proposed contract amendments, this shall constitute grounds for termination of the contract.

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Please note that another negative consequence of failing to follow these recommendations—and subsequently losing a lawsuit to invalidate supplementary agreements—is the energy supplier's obligation to refund the consumer, resulting from the recalculation of the cost of electricity supplied at the price specified in the original contract.

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2) Is the information published on the Market Operator JSC website sufficient proof of price fluctuations? https://www.oree.com.ua/?

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As a general rule, simply referencing information published on the Market Operator JSC website is NOT sufficient to prove price fluctuations. https://www.oree.com.ua/.

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It is also recommended to provide a certificate from the Chamber of Commerce and Industry that includes a proper justification for the price fluctuation.

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To avoid future disputes, we also recommend explicitly stating in the supply contract that the parties may confirm price fluctuations by referencing information published on the website https://www.oree.com.ua/.

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3) Does the 10 percent cap apply as a maximum limit on changing the initial price defined in the contract, regardless of how often such changes occur (the number of additional agreements signed), or is it possible to repeatedly increase the unit price by up to 10 percent compared to the previous price established by an additional agreement to the contract regarding the price change?

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The issue is currently under consideration by the Grand Chamber of the Supreme Court, which is expected to provide a final answer regarding the possibility of repeatedly increasing the unit price by up to 10 percent.

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4) What are the specifics of concluding and amending contracts during martial law?

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During the period of martial law, the restrictions on increasing the unit price by up to 10 percent do not apply.

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These specific provisions will remain in effect throughout the period of martial law and for 90 days from the date of its termination or cancellation.

The legal consulting firm FEDOTOV & PARTNERS specializes in providing services to participants in the electricity and natural gas markets. Our experience in supporting energy companies allows us to say that we not only know what is written in energy laws, but we also understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most optimal solutions to your problems.