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Effects of the Energy Crisis on Commercial Contracts

17.08.2022

On 5 August 2022, to increase the EU's security of energy supply, the European Council adopted COUNCIL REGULATION (EU) 2022/1369 on coordinated demand reduction measures, aimed at reducing gas demand by 15% ahead of the 2022-23 winter season (the "Regulation"). The purpose of the Regulation is to contribute to the filling of storage capacities, help ensure adequate supply and drive energy prices down. The Regulation was published in the Official Journal on 8 August 2022 and entered into force on the following day.

Whilst the Regulation calls for a voluntary reduction, it also foresees the possibility for the Council to trigger a so-called "Union alert" on security of supply, in which case the gas consumption reduction would become mandatory. The Regulation will apply for one year; the Commission will carry out a review to consider its extension in light of the general EU gas supply situation, by May 2023.

EU member states have agreed to implement the Regulation with reduction measures of their own choice and to consider prioritizing measures that do not affect protected customers such as households and essential services for the functioning of society. Member states are yet to announce exactly which measures they will adopt (and when), and measures are likely to differ quite significantly between member states, but it cannot be excluded that at least in some jurisdictions measures may go beyond reducing heating temperatures in offices or plants and switching of illuminated advertising, and will negatively affect an array of industries in a significant way.

The Swiss government has not (yet) announced any concrete energy-reduction plans, however one member of government has called the EU's 15% reduction target "surely reasonable".

The spike in energy prices has already caused significant uncertainty in the industry, with players considering measures going as far as temporarily closing down production facilities or re-routing supply chains elsewhere. This situation will only get more complex with the implementation of the Regulation and anticipated measures and bring ever more uncertainty. This is likely to have a substantial impact on ongoing contractual obligations. Where contracts do not expressly provide for the consequence of increased energy prices or facility shutdowns (even if only temporary) to comply with measures adopted by the state (on a voluntary or mandatory basis), legal concepts such as impossibility, hardship and force majeure are likely to come into play, along with complex questions of the power of courts and tribunals to interfere with parties' agreed contract terms if an agreement cannot be found.

This legal uncertainty is exacerbated by some member states apparently announcing their intention to interfere with legal concepts such as force majeure, seeking to make it more difficult for parties to rely on these potentially important corrective measures (see, e.g., "Berlin plans to limit claims of 'force majeure' in bid to stabilise energy markets"). At the same time, possible protective measures ordered by member states to counterbalance the burden of reduction measures or of the crisis more generally, may also impact on parties' possibility to rely on force majeure or hardship.

Whilst it is still too early to comprehensively advise on the steps parties can take to protect themselves, we continue to closely monitor the situation in Switzerland and beyond, working with our clients to prepare them for the possible legal scenarios that may play out, and to put in place the best possible strategy.

 

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