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Legal solutions to the problem of escalating energy prices

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Legal solutions to the problem of escalating energy prices

Soluciones jurídicas al problema de la escalada de precios de la energía
Legal solutions to the problem of escalating energy prices

Legal solutions for businesses and entrepreneurs to the problem of escalating energy prices.

Progressive and sustained increase in the price of gas since the end of 2020

The conflict between Russia and Ukraine has aggravated, even more if possible, the serious crisis in energy prices that Spain has been going through for more than a year now

We can remember how, at the end of 2020, coinciding with the arrival of the Filomena storm and the Christmas vacation period, the price of gas and, therefore, of electricity, suffered an exponential increase that the war in Ukraine and Russia’s blockade of gas exports has only increased. As published by the Association for a Competitive Industrial Gas (Gas Industrial) in their January 2021 newsletter:

during the period from December 12, 2020 to January 8, 2021, the spot prices of the European hubs rose by 19.8% on average, reaching €18.15/MWh, 3.00 €/MWh more than the previous period”.

Such a situation, which has only worsened throughout 2021 and so far in 2022, has caused a multitude of businesses and companies from different sectors to find themselves in an extreme situation which makes it necessary to adopt measures that allow their survival beyond the present crisis scenario.

Need to rebalance the benefits and contractually assumed obligations to allow the survival of the contracts: application of the “rebus sic stantibus” clause

It cannot be denied that the consequences that the outbreak of a war in Eastern Europe may have on the national energy market would fall within the category of “supervening circumstances” whose concurrence is usually made to depend on the applicability of the well-known “rebus sic stantibus” clause, a legal mechanism but without positive regulation that allows one of the contractual parties to request the modification of the pacts and agreements reached in order to restore the balance of the benefits.

This is a mechanism that seeks to maintain the validity and conservation of contracts, whose application, however, must be carried out with caution so as not to collide with another fundamental principle of private law such as that of the binding nature of contracts, enshrined in arts. 1,278, 1,089 and 1,254 of the Civil Code, among others.

For the application of the “rebus sic stantibus” the concurrence of the following requirements would be necessary:

  1. The concurrence of an extraordinary alteration of the circumstances that were taken into account when formalizing the contract whose modification is intended must be verified.
  2. Such alteration must be of such a caliber that it causes an exorbitant disproportion between the obligations and benefits of both contracting parties, to the point that the so-called “balance of benefits” is broken.
  3. Finally, it will be essential that such extraordinary and disproportionate alteration be considered unexpected and unforeseeable.

Although the specific case and the specific clauses of each business link must be followed, it cannot be denied that for a multitude of contracts formalized before the outbreak of the conflict between Russia and Ukraine, an increase such as the one we are experiencing in the price of energy can place the party obliged to provide a service or the delivery of products in a situation of serious difficulty in complying with the services entrusted to the agreed price, and not only when the energy input constitutes a direct cost of production but also in cases where it is an indirect cost but essential for the development of the activity.

Before incurring in a definitive breach of the assumed commitments that could motivate the accrual of penalties or, even, the termination of the contract at the request of the counterparty (putting with it the viability of the company is at risk) it is necessary that, given the verification by one of the parties of its impossibility to fulfill the obligations assumed in the agreed terms, it must step forward before incurring in a situation of irreversible non-compliance and inste the modification of the contractual obligations to rebalance the benefits and, with this, allow the survival of the business relationship, removing the shadow of the non-compliance that, definitively, can ruin the formalized business.

Termination of contract due to force majeure

Sometimes, energy inputs make up the bulk of the structural costs of a mercantile company in such a way that, given the unbridled increase of the same, it is absolutely impossible to give continuity to the assumed obligations.

In these cases, it would be possible to categorize such an increase in the price of energy as an external, unforeseeable and unavoidable circumstance that affects compliance with obligations, that is, as a cause of force greater than allows to urge the resolution of the contractual relationship as provided for in art. 1,105 of the Civil Code, and in any case must comply with the regulation that the parties have given in the formalized contract on force majeure.

Insolvency law as a support network for companies in crisis situations

In addition to the possibility of rebalancing the economic benefits of the contracts through the rebus sic stantibus or urge its resolution on the understanding that there are causes of force majeure that prevent its compliance, commercial law or company law offers a wide variety of measures that allow companies and freelancers to overcome a transitory situation of difficulty and guarantee the survival of the business.

Out-of-court payment agreements, refinancing agreements (essentially, for companies of a certain size) and debt restructuring are pre-bankruptcy mechanisms that are increasingly pervasive in the Spanish business fabric that, Used well, they allow difficult situations to be overcome and ensure the continuity of companies.

Ultimately, given the increase in energy costs to levels that make the continuity of the activity unfeasible and cause the definitive cessation of the same, the administrators will have the option (and the obligation) to submit an application for bankruptcy to, in this way, avoid derivations of responsibility and, with this, save your personal assets. In this regard, remember that public administrations (TGSS, AEAT, local administrations, etc.) have their own legal mechanisms to derive liability against the administrators of commercial companies, much faster than those available to private law creditors that, necessarily, they must resort to the help of the Courts and Tribunals.

It may interest you: “Formulation of the Rebus Clause in the execution of leases

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