Rising inflation and CPI are pushing prices ever higher for buyers under long-term contracts where price indexation is agreed. What can be done?
Agreeing to index prices based on the Consumer Price Index (CPI) or a similar indicator has become the norm for long-term agreements in supply and, in particular, commercial lease transactions. At first glance, this is a proportionate and efficient method to protect the interests of the parties in the long term. And it works effectively under normal market conditions. However, in a market facing unprecedented inflation, indexation can destabilize the balance of the parties’ interests. In some cases, indexation leads to the contract price becoming significantly higher than the market dictates. How to protect against this?
– When concluding a contract, assess whether national CPI is the most objective and effective indicator for price adjustment.
– Set a “ceiling” on price increases in the contract.
– Agree on the possibility to terminate the contract if the price exceeds certain values.
What if the contract is already concluded? Notwithstanding the general principle of pacta sunt servanda, the Lithuanian Civil Code provides for the possibility for an aggrieved party to request modification of the contract in the event of a material change of circumstances (Art. 6.204). If, because of indexation, the price is clearly no longer in line with market conditions and the increase in the seller’s or lessor’s costs, this may be grounds for reviewing and modifying the contract. Each case must be assessed individually.
Civil Code of the Republic of Lithuania