Price Increases in Commercial Contracts in Germany

German statutory law permits the supplier to adjust the agreed prices unilaterally and retrospectively only to a very limited extent. As a general rule, the supplier is legally bound to its agreed prices.  

The German Civil Code (“BGB”) allows for the terms of a B2B agreement to be altered (e.g. to increase prices) for reasons of hardship if all of the following conditions are met: 

1. circumstances that formed the basis of the contract have undergone serious change since the contract was concluded, or circumstances assumed by both parties are found to be incorrect;  
2. the parties would not have concluded the contract, or would have concluded it on different terms, had they foreseen this change; and 
3. one of the parties cannot reasonably be required to uphold the contract without alteration, taking account of all the circumstances of the specific case and in particular the contractual or statutory distribution of risk.  

If cost increases occur after conclusion of the contract (e.g. as a result of inflation, increased wages and raw material prices, or the occurrence of special events such as war or pandemics), the supplier may only demand a price adjustment under the hardship conditions set out above. 

However, these conditions are interpreted very restrictively by the courts, so that in practice a price adjustment based on hardship is only possible in very limited cases and depends on many factors / the circumstances of the individual case. 

As a general rule, the supplier cannot ask for a price adjustment if the contract provides that the risk of a cost increase in the performance of the contract falls within the supplier’s sole sphere of risk. Accordingly, in these circumstances the commitment to a fixed price agreement remains a contractual obligation of the supplier, even if its expenses increase significantly.  

As an example, the German Federal Court of Justice (“BGH”) rejected an adjustment to an oil supply agreement caused by an oil price increase of significantly more than 100%. The court ruled that the supplier demanding the price increase could have prevented such a situation, e.g. by stocking up. The court also ruled that a price adjustment cannot be demanded for reasons only that the supplier could no longer supply oil at a level that covers its costs.  

When determining hardship cases, the courts pay strict attention to whether the sphere of risk of the contract has been exceeded.  

Even if the hardship conditions described above are met in an individual case, the supplier may not necessarily be able to impose 100% of their increased costs on the customer. As a rule, the courts seek a fair distribution of the risk incurred. This may, for example, result in a 50/50% cost split so that the additional costs incurred by the supplier cannot be mandatorily imposed on the customer to the fullest extent. Furthermore, the price adjustment may be exercised only to such extent that the cost increase may be endured by the supplier.

As a general rule, no. The disadvantaged party's right to terminate the contract is only possible if a contract adjustment is not possible or a party cannot reasonably be expected to accept it. Contract adjustment always takes precedence over contract termination. The mere refusal of the other party to agree to a change in the contract (e.g., the supplier's refusal to deliver on changed terms) is not sufficient for the customer to invoke the right of termination instead. In this case, the customer would have to either: (i) sue for a price adjustment in court. However, instead of adjusting the contract, the customer could also (ii) seek termination of the contract by mutual agreement if it would be unreasonable for the customer to continue to fulfill the lawfully adjusted contract. Contract adjustment always takes precedence over contract termination, so terminations are usually only possible in the event of mutual agreement. 

Under German law it is important to distinguish between whether the price adjustment clause is individually negotiated or based on a standard template.  

In the former case, the parties are fairly free to choose the type and scope of the price adjustment clause.  

However, in the case of standard contracts, very strict requirements apply to such price adjustment clauses, even for B2B agreements, in order for them to be agreed in an effective and enforceable manner.  

Typical price adjustment clauses are as follows: 

• Indexation clauses: These clauses link the adjustment of the contract price to the price changes of another good or service that is essentially the same or at least comparable. This requires a forecast that the market price for the product or service sold under the contract will typically develop similarly to the market price for the referenced product or service. In this case, the price adjustment is automatic and the price thus corresponds to the market price in each case. However, this approach is not very suitable for complex goods. 
• Cost element clauses: These clauses are more complex. The contract price is adjusted in proportion to the change in the prime costs of a cost element. The BGH also sets very strict requirements for the validity of such clauses under standard contract law due to the automatic nature of the price increase; the individual cost elements as well as their weighting must be set out in the clause itself. Moreover, the disclosure of the supplier´s calculation of their cost elements is required which makes these clauses less appealing to suppliers.  
• Price reservation clauses: These clauses allow one of the parties to unilaterally adjust the agreed price if certain conditions are met. The extent of the change is not specified by the clause. Rather, the party entitled to make the determination has the discretion to adjust the price according to equitable principles. If the other party considers the exercise to be inequitable in an individual case, it can have this reviewed in court. Therefore, the clause does not lead to an automatic adjustment, but is also less relevant in practice. 
• Negotiation clauses on price adjustments: These clauses are common as they are often accepted by the customer. Under these clauses, one party may demand price negotiations from the other party at certain intervals; however, the actual adjustment depends on mutual agreement. 

It is important that the type of price adjustment clause is appropriate to the circumstances of the individual case and considers the individual economic interests of each party, so the above-mentioned clauses are only suggestions for a possible solution not a blueprint.

The general legal framework for price adjustment clauses is provided by the Price Adjustment Clause Act (PrKlG), which stipulates that, among other things, it is generally prohibited in price adjustment clauses to determine the amount of monetary debts directly by the price or value of other goods or services that are not comparable with the agreed goods or services. A clause which violates the Price Adjustment Clause Act will be invalid. However, the clause will only be held to be invalid upon a legally binding court decision. As a consequence, the Price Adjustment Clause Act is not considered to be very relevant as a legal framework in practice. 

Recent case law of the BGH on the permissibility of price adjustment clauses in standard contracts is far more relevant. Many criteria have been developed regarding the effectiveness of price adjustment clauses in standard contracts. However, since these criteria have been developed by the courts over the course of many years, and the BGH has always ruled only for the individual case in question (and has always expressly emphasized this), there remains considerable legal uncertainty as to how price adjustment clauses should be worded in order to be valid and enforceable.  

In past court decisions, for example, the following criteria have been deemed necessary:  

• both sides of the price adjustment option should be included, i.e., a price adjustment mechanism should allow for both cost increases and cost reductions; 
• once a certain threshold has been reached, the customer should alternatively be given the option to withdraw from the contract;  
• the various reasons for a price adjustment (the change in price factors) should be defined as precisely as possible (e.g. adjustment due to increased wages, increased energy costs, raw material prices, etc.); 
• as a rule, the price adjustment clause should provide that such an adjustment can only be made in the event of “material” increases or decreases, with “materiality” usually being defined as a certain percentage; and 
• a “grace period” should be included after conclusion of the contract/order placement, etc., until the end of which no price adjustment should be demanded; such period is usually 4 weeks. 

In addition, any particularities of the individual case, in particular industry-specific characteristics, must also be taken into account.

For public sector contracts, there are special requirements for price adjustments due to raw material price increases. Please refer to our CMS Expert Guide on rising raw material prices. 

The requirements for the permissibility of price adjustment clauses in B2C agreements are quite strict, especially for standard contracts.  

The BGH has defined the basic requirements for the validity of price adjustment clauses. In principle, the price adjustment clause must not permit the user (i.e. the supplier) to increase the initially fixed price without any limitation, beyond passing on specific cost increases, and thus not only to avoid a reduction in profits, but also to achieve an additional margin. On this basis, the Federal Court of Justice has developed criteria which, if not met, should render the clause invalid in any case: 

• The price adjustment must be linked to cost elements that the customer knows or can at least find out by reasonable means, such as collective wages or stock exchange prices, but not internal cost factors. 
• The cost factors must be weighted with regard to their significance for the calculation of the total price, so that the customer can foresee the extent to which the change in a cost element affects the total price. 
• It must be possible to compensate for an increase in one cost factor by decreasing costs in other areas, thus ensuring that the price factors are balanced.