Exercising a break clause in the wake of the continuing gas crisis – can it be done?

The recent months have seen an increase in the wholesale price of gas, which has had an inevitable knock-on effect amongst suppliers and the price of resale. This, coupled with the unprecedented territory that the UK finds itself in following Brexit, makes for a very turbulent environment.

Ofgem has stated that it is extremely difficult to predict the future of gas prices, and noted that we are indeed in unprecedented territory.

With no end in sight, and no certainty as to the future of the market, suppliers may begin to think about their options to ensure they can limit any loss where possible.

It is common within the energy industry for suppliers to offer fixed price contracts for a number of years. However, with the current circumstances, contractual obligations under fixed tariff prices could be a cause of frustration for suppliers, and may result in them supplying the contracted services at a loss. These contracts are often fixed for up to three years and given Ofgem’s reported increase of wholesale cost of over 250% in the last 9 months, this will undoubtedly cause concern for many suppliers and their future profit margins. We have seen several smaller suppliers succumb to the tough market conditions recently, and it does not appear to be stabilising any time soon.

Fixed tariff contracts were initially introduced to protect a customer from fluctuating market conditions, and also provided the supplier with certainty of a long-term supply. However, in light of the current circumstances, the mutual benefit of these tariffs is somewhat questionable, and suppliers will be asking the question:

‘What can we do when a fixed tariff contract is losing us money?’

The answer would be for the supplier to look at their terms and conditions, as some suppliers have a break clause in the contract. Depending on the criteria of the terms set out, the break clause will operate to release them and the customer from their obligations under the fixed tariff contract. This can be mutually beneficial in that the supplier is no longer required to provide a supply at a rate that is not profitable or even sustainable, and the customer is free to explore their options with other suppliers. Once a break clause is exercised and the fixed tariff contract terminated, the customer will be placed onto a deemed contract under Schedule 2B paragraph 8(1) of the Gas Act, which allows the supplier to bill any subsequent usage at a wholesale price.

There are commercial considerations to be made when deciding whether to exercise a break clause. One consideration will be whether it will be more cost effective to continue to supply on a lower tariff with the likelihood of wholesale prices rising, or potentially losing a customer altogether. It will not be an easy decision either way and it would be worth considering if your customer is likely to engage in a renegotiation of the fixed tariff contract before an election is made to exercise the break clause, as this would provide the supplier with a continued stream of revenue. In addition, it should be considered whether there are any potential criteria that needs to be satisfied in order for the break clause to be exercised. If there are and these are not met but the break clause is exercised, this could lead to an argument of breach of contract and leave the supplier liable for damages.

Every business, both supplier and customer, has a shared goal of continuing to trade. Suppliers may benefit from approaching their customers if they do find themselves in a position where they are considering exercising a break clause to establish if there is any possibility for mutual agreement to review the fixed tariff contract. If no agreement can be made, however, the supplier still has the assurance that they are protected by the ability to exercise the break clause in their terms and conditions should it become necessary.

If you are unsure whether your contracts and/or terms and conditions include a break clause or are unsure of your rights to exercise a break clause, one of our specialists will be happy to review your contractual documents to advise if you do have the required break clause, how to exercise the break clause and if not, advise you on incorporating a break clause into your contractual documents.

For more information or to arrange a review of your contracts/terms and conditions, contact our Dispute Resolution team on 01332 226 104.