Price adjustments in electricity supply contracts. The Supreme Court has had the final say.

On January 24, 2024, the Grand Chamber of the Supreme Court issued a ruling in case No. 922/2321/22 regarding a prosecutor's lawsuit against an energy supplier to invalidate supplementary agreements to an electricity supply contract concluded following a public procurement process on the Prozorro website.

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In this overview, we examine the consequences of this ruling and its impact on the electricity supply market for customers who are required to purchase electricity in accordance with the Law of Ukraine "On Public Procurement" (hereinafter – the Procurement Law, Law No. 922-VIII).

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It should be noted immediately that the entire decision is based on the analysis and interpretation of the provision in Clause 2, Part 5, Article 41 of the Procurement Law. This provision states that the essential terms of a procurement contract cannot be changed after signing until the obligations are fully performed by the parties, except in cases where the unit price of the goods is increased by up to 10% in proportion to the market price increase, provided that such a change does not increase the total contract amount and occurs no more than once every 90 days from the date of signing. The restrictions regarding the timing of unit price changes do not apply to contracts for the procurement of gasoline, diesel fuel, gas, or electricity.

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In this ruling, the Grand Chamber of the Supreme Court reached two key legal conclusions:

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         - Increasing the price of goods before they are transferred to the buyer under a procurement contract is possible if the market price of such goods has risen, provided the parties have agreed to this condition. If the parties have not agreed to such a condition, an increase in the price of goods due to a rise in market prices is only possible if it results in a fundamental change of circumstances under Article 652 of the Civil Code of Ukraine, where circumstances have changed to such an extent that, had the parties been able to foresee them, they would not have concluded the contract or would have concluded it on different terms..

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- In any case, the unit price of the goods cannot be increased by more than 10% of the price originally determined by the parties in the contract following the procurement procedure, regardless of the number or timing of price changes during the contract term. This means that while the procurement contract is in effect, the parties may change the price of the goods upwards multiple times, provided the conditions set out in Article 652 of the Civil Code of Ukraine and Clause 2, Part 5, Article 41 of Law No. 922-VIII are met, however, the total cumulative increase in such price must not exceed 10% of the price determined by the parties when the contract was concluded following the procurement procedure..

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By reaching these conclusions, the Grand Chamber of the Supreme Court departed from the legal findings of the Administrative Cassation Court within the Supreme Court, as set out in the ruling of April 5, 2023, in case No. 420/17618/21. In that case, the court had effectively concluded that it was possible to amend contracts for the procurement of gasoline, diesel fuel, gas, and electricity an unlimited number of times to increase the unit price, provided that each individual increase did not exceed 10% in proportion to the market price increase and that the change did not lead to an increase in the total contract amount.

While acknowledging the binding nature of this court decision and with all due respect to the Court of Cassation, we would like to share some thoughts regarding the positions adopted.

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1. Regarding the grounds for changing the price of goods

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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 it has been signed until the parties have fully fulfilled their obligations.

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However, the legislature has provided for certain exceptions to this rule (Clause 2, Part 5, Article 41 of the Law on Public Procurement). These include, in particular, increasing the unit price of goods by up to 10 percent in proportion to the increase in the market price of such goods in the event of market price 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 indicates 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 result in an increase in the total amount specified in the procurement contract.

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In accordance with Article 650 of the Civil Code of Ukraine, the specifics of concluding contracts on 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, which states that the general rules for concluding contracts based on free will apply to the conclusion of commercial contracts on organized capital markets, organized commodity markets, wholesale fairs, and public tenders, taking into account the regulatory acts governing the activities of the respective organized capital markets, organized commodity markets, fairs, and public tenders.

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This provision corresponds to Part 4 of Article 3 of the Law on Public Procurement, which states that 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 Part 1 of Article 41 of the Law on Public Procurement, a procurement contract is concluded in accordance with the norms of the Civil and Commercial Codes of Ukraine, taking into account the specifics defined by this Law.

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Thus, in disputed matters 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 Law on Public Procurement.

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Indeed, this law establishes specific features for amending a procurement contract. Specifically, in accordance with Clause 2, Part 5, Article 41 of the Law on Public Procurement, the essential terms of a procurement contract cannot be changed after signing until the parties have fully fulfilled their obligations, except for the case of increasing the unit price of goods by up to 10 percent in proportion to the increase in the market price of such goods in the event of market price fluctuations, provided that such a change does not lead to an increase in the total amount specified in the procurement contract, and provided that this occurs no more than once every 90 days from the moment of signing the procurement contract or amending it to increase the unit price. The time limit for changing the unit price does not apply to cases involving changes to the terms of procurement contracts for gasoline, diesel fuel, natural gas, and electricity.

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Clearly, the cited provision of the special law contains no requirement that, in addition to proving market price fluctuations, a supplier must also demonstrate that such fluctuations constitute a fundamental change of circumstances under the Civil Code, or that performing the contract under the original terms would render it manifestly disadvantageous or loss-making.

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In reaching its decision, the court of cassation applied Article 652 of the Civil Code of Ukraine, which sets out only one ground for contract termination, while failing to account for the specific requirements for amending procurement contracts established by the special Law on Public Procurement.

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It should also be noted that the approach proposed by the Supreme Court for determining the grounds for contract amendments effectively creates a situation where parties need only refer to Article 652 of the Civil Code to justify such changes.

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

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Evidently, this does not align with the principle of legal effectiveness, as its application fails to achieve the specific regulatory objectives intended by the legislator.

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2. Regarding the possibility of increasing the price of electricity by more than 10% of the contract price

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In paragraph 56 of the Resolution, the Court states that, in any event, the unit price of goods cannot be increased by more than 10% of the price originally determined by the parties in the contract following the procurement procedure, regardless of the number or timing of price adjustments during the contract term. In other words, while the contract is in effect, the parties may increase the price of goods multiple times, provided the conditions set out in Article 652 of the Civil Code and paragraph 2 of part five of Article 41 of Law No. 922-VIII are met; however, the total cumulative increase must not exceed 10% of the price established at the time of contract conclusion.

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In justifying this conclusion, the Grand Chamber of the Supreme Court notes that

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"otherwise, the purpose of Law No. 922-VIII—to ensure efficient and transparent procurement, create a competitive environment, prevent corruption, and foster fair competition—would not be achieved, as sellers could offer below-market prices to win a tender and subsequently demand price increases after the contract is signed, citing market fluctuations."

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Thus, the Court’s interpretation of the provision is based on the assumption that any alternative interpretation would lead to sellers abusing their rights by artificially lowering prices to win procurement contracts.

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However, firstly, the doctrine of modern national law does not permit the interpretation of a rule by simulating the hypothetical actions of subjects whose behavior the rule is intended to regulate, and secondly, public procurement legislation provides for appropriate safeguards against such bad-faith actions by sellers.

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The Court then proceeds to a historical interpretation of the provisions of paragraph 2 of part five of Article 41 of Law No. 922-VIII and notes:

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"In this Law, as in effect prior to April 19, 2020, the provision of paragraph 2 of part five of Article 41 was set out in Article 36 and read as follows: '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 a change in the unit price of goods by no more than 10 percent due to market fluctuations in the price of such goods, provided that such change does not lead to an increase in the total amount specified in the contract.'"

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Thus, the specified provision of Law No. 922-VIII, as in effect prior to April 19, 2020, did not allow for a change in the unit price of goods by more than 10% of the price determined by the parties at the time of concluding the procurement contract, but it did not restrict the parties' ability to change such price multiple times (there were no restrictions regarding the timing of price changes) during the term of the contract within the established 10% limit in the event of market price fluctuations for such goods."

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Based on the above, the Court concluded that:

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"Therefore, in the new version, the provision of paragraph 2 of part five of Article 41 of Law No. 922-VIII did not change its substance regarding the extent of the unit price change (no more than 10% of the price determined by the parties at the time of concluding the procurement contract), but it was supplemented with a condition that limited the timing of such price changes, namely, no more than once every 90 days."

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However, we are convinced that a grammatical and logical interpretation of the rule indicates that the conclusions of the Supreme Court, composed of a panel of judges of the Administrative Cassation Court, were correct and that the Grand Chamber had no grounds to depart from the legal conclusions of the administrative court.

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Indeed, the disputed provision explicitly provides for the possibility of multiple increases in the unit price by up to 10%, as evidenced by the wording "no more than once every 90 days from the moment of signing the procurement contract/making amendments to such contract regarding an increase in the unit price," yet even this limitation regarding the timing of price changes does not apply in cases of changing the terms of an electricity procurement contract.

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If we turn to the historical interpretation of the rule applied by the court of cassation, we can see that prior to April 19, 2020, the disputed provision did not contain the condition that a price increase could not occur more than once every 90 days, except for the procurement of gasoline, diesel fuel, gas, and electricity.

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In other words, applying the interpretation provided by the Grand Chamber, it follows that for energy suppliers, the cited version of the rule changed nothing in practice, as they remain unrestricted in the timing of price increases, just as they were before.

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Furthermore, the Court justifies its conclusion by stating that:

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"As stated in the explanatory note to Draft Law No. 114-IX, its purpose was to improve the public procurement system by fostering a competitive environment and fair competition, as well as ensuring compliance with Ukraine's international obligations in public procurement. This includes countering 'price dumping,' where a bidder offers a significantly undervalued price to win a contract, only to later use supplementary agreements to substantially increase the price and reduce the volume of goods, thereby undermining the results of the public procurement process."

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Given this objective, it is evident that the amendments introduced by the legislature via Law No. 114-IX to the aforementioned provision of paragraph 2, part five of Article 41 of Law No. 922-VIII, were not intended to allow public procurement participants to engage in 'price dumping' followed by increasing the unit price by more than 10% of the price established by the parties at the conclusion of the procurement contract."

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In this context, it is impossible to disagree that the legislature must provide effective legal safeguards against any potential abuse and manipulation, particularly against the widely recognized phenomenon of 'price dumping' across various markets.

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However, the explanatory note to Draft Law No. 114-IX, cited by the Grand Chamber, lacks any justification for the amendments regarding the timeframes for increasing the price by 10% of the goods' value.

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Instead, while citing the need to counter 'price dumping,' the authors of the draft law in the explanatory note focus on the necessity of implementing a new tool in the electronic procurement system that is widely used in European procurement practice: the 'abnormally low tender price.'

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In other words, as noted above, public procurement legislation must include appropriate safeguards against such unfair practices by sellers ('price dumping'), and the aforementioned law implemented exactly that.

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It should be noted that in the version of Law No. 114-IX prior to April 19, 2020, the tool of an 'abnormally low tender price' did not exist.

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According to part fourteen of Article 29 of the current Procurement Law, a participant who has submitted the most economically advantageous tender that is abnormally low must, within one business day of being identified as such, provide a justification in any form regarding the prices or costs of the relevant goods, works, or services. The contracting authority may reject an abnormally low tender if the participant fails to provide a proper justification for the price or cost, and must reject it if such justification is not received within the timeframe specified in the first paragraph of this part.

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Therefore, Law No. 114-IX, cited by the Grand Chamber, introduced amendments to Article 29 of the Procurement Law that provided effective tools and mechanisms to counter the unfair practice of bidders offering prices below market value in order to win an auction.

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Therefore, the Grand Chamber's reliance on the following is unfounded: "otherwise, the purpose of Law No. 922-VIII, which is to ensure efficient and transparent procurement, create a competitive environment in public procurement, prevent corruption, and foster fair competition, will not be achieved, as sellers may offer below-market prices during the procurement process to win, and subsequently, after the contract is signed, demand price increases citing market fluctuations." This is because the Law provides a clear and effective mechanism to prevent such abuses, and the interpretation of the provision in Clause 2, Part 5, Article 41 of Law No. 922-VIII has no impact on that possibility.

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However, without delving into whether the Grand Chamber should rely on explanatory notes to draft laws, it is noteworthy that the Court, in attempting to further justify its interpretation of the disputed provision, effectively took the bill authors' reference to "price dumping" out of context. They did not cite this as a reason to introduce the requirement that price increases cannot occur more than once every 90 days, except for the procurement of gasoline, diesel fuel, gas, and electricity.

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3. What could be the consequences of this decision?

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Undoubtedly, this approach to interpreting a provision that is critical to the execution of thousands of transactions daily is, at the very least, surprising and confusing.

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Clearly, the Grand Chamber's decision fails to account for the specifics of the electricity market and the nature of the commodity.

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It is common knowledge that electricity supply prices for consumers are "floating prices" that depend directly on the prices established in the "day-ahead market" (DAM).

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However, the DAM is a highly volatile market where prices can fluctuate by tens of percentage points within a month, making it extremely difficult for suppliers to predict price movements.

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In this situation, changing the price in an electricity supply contract is essentially the only way for a supplier to protect its economic interests, and this is precisely the tool provided (or previously provided) by the provision in Clause 2, Part 5, Article 41 of the Public Procurement Law.

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Consequently, the Grand Chamber's decision could lead to the destruction of the electricity supply market for public sector customers, as it would be more economically viable for suppliers to avoid participating in these auctions altogether rather than incur losses from an inability to respond promptly to market trends and adjust electricity prices.

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* This decision covers the period BEFORE the introduction of martial law. During martial law, this matter is governed by the Specifics of Public Procurement of Goods, Works, and Services for Customers provided for by the Law of Ukraine "On Public Procurement" (approved by Resolution of the Cabinet of Ministers of Ukraine No. 1178 dated October 12, 2022), under which the 10 percent limit on increasing the price per unit of goods does not apply.

90 days after the termination or cancellation of martial law, and provided there are no changes to the regulatory framework regarding price adjustments, the legal conclusions set out in this decision must be taken into account when concluding new contracts.

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