Can a service provider index its rates in a contract already in force?

Only if the contract itself provides for it. Article 6.720(1) of the Civil Code of the Republic of Lithuania (CK) provides that the remuneration for services is set by agreement of the parties and, after the contract is concluded, may be changed only in the manner and in the cases set out in the contract. If the contract contains an indexation clause, in our view no separate supplementary agreement is needed to apply it: a notice given in the way the clause provides is enough, including by e-mail if that is what was agreed. If there is no such clause, a notice of new rates is only an offer, and the contract changes only if the client agrees. Where the client is a consumer, the rules on unfair terms give additional protection.

How an amendment to a contract is made, and whether it must be signed in writing, we covered in the article “Amending a contract: annex or new agreement, and must it be in writing”. Whether terms agreed by e-mail are as binding as a signed contract, we answered in the FAQ on contracts (in Lithuanian). Rent indexation in leases is covered in the article on premises leases. This article is about services contracts.

These rules (CK Articles 6.720 and 6.721) apply to contracts for paid services under Chapter XXXV of the Civil Code. They do not apply to services governed by the chapters of the Code listed in Article 6.716(3), such as works contracts (ranga), mandate, commission, carriage, freight forwarding, storage, and bank account and bank deposit contracts (Article 6.716(3) of the Civil Code, CK). Nor do they apply where an employment or other subordination relationship arises between the provider and the client (CK Article 6.716(2)). For example, in a works contract an increase in the remuneration for the works is governed by a separate article (Article 6.653 of the Civil Code, CK). Other laws may set additional requirements for particular types of services (CK Article 6.716(5)). So in regulated sectors, check the specific law as well.

When the contract has no indexation clause

A lawfully concluded and valid contract has the force of law for its parties (Article 6.189(1) of the Civil Code, CK). A contract may be amended by agreement of the parties (Article 6.223(1) of the Civil Code, CK). So a letter saying “our rates go up from next year” does not change the contract without the client’s consent. It becomes an amendment only when the client agrees. Silence or inaction does not in itself amount to acceptance of the offer (Article 6.173(1) of the Civil Code, CK). But other conduct of the offeree expressing acceptance of the offer does count as acceptance (CK Article 6.173(1)). So, in our view, a client’s conduct, such as paying invoices at the new rates without reservation, may sometimes be treated as consent. But relying on it is risky, especially where the contract says it may be amended only in writing.

If the client agrees, the amendment must be in the same form in which the contract had to be concluded, except in cases set by law or by the contract (Article 6.192(4) of the Civil Code, CK). If a written contract contains a clause that it may be amended only in writing, it cannot be amended in any other way (Article 6.183(1) of the Civil Code, CK). However, a party may lose the right to rely on such a clause through its own conduct, if the other party acted in reliance on that conduct (CK Article 6.183(2)).

The law provides an exception. The client must pay increased remuneration above the amount set when the contract was concluded only if the service provider proves that the increase was unavoidable in order to perform the contract properly and that it could not have been foreseen when the contract was concluded (CK Article 6.720(2)). The burden of proof is on the provider. In our view, ordinary inflation or a yearly rise in overheads rarely meets this test, because they can be foreseen. Also in our view, where the contract contains a clear recalculation formula, the remuneration agreed when the contract was concluded includes that formula. So this rule applies only to an increase that the contract does not provide for. That is one more reason to describe the recalculation method precisely.

The practical conclusion is simple. If you want to index contracts that are already running, you need to agree it with each client. In new contracts, put the clause in from the start.

When circumstances have changed fundamentally

Article 6.204 of the Civil Code (CK Article 6.204) governs performance of a contract when circumstances change. Hardship means circumstances that fundamentally alter the balance of the contractual obligations: either performance becomes fundamentally more expensive, or the value of what is received falls fundamentally. It applies only if all of the following conditions are met (CK Article 6.204(2)):

• the circumstances arise, or become known to the disadvantaged party, after the contract is concluded;
• that party could not reasonably have foreseen them when concluding the contract;
• that party cannot control them;
• that party had not assumed the risk of those circumstances.

The disadvantaged party may then ask the other party to amend the contract. The request must be justified and made immediately after the hardship arises. The request alone does not entitle that party to suspend performance. If the parties do not agree within a reasonable time, either of them may go to court. The court may terminate the contract and set the date and terms of termination, or amend the terms of the contract to restore the balance of the obligations (CK Article 6.204(3)).

In our view, this route should not be planned as an ordinary way of changing rates. It takes time, and the court decides the outcome.

When the contract has an indexation clause

The parties may freely set their mutual rights and obligations, provided this does not contravene the law (Article 6.156(1) of the Civil Code, CK). An indexation clause is exactly the kind of “manner set out in the contract” that CK Article 6.720(1) refers to. In our view, applying it is performance of the contract, not an amendment. So no annex is needed, and the form of the notice depends on what the clause says. If the clause says that recalculation is notified by e-mail to a stated address, that is enough. If no form is stated, send the notice to the contact person named in the contract and keep proof.

When we revised a client’s standard contracts, we added a rate adjustment clause to each of them. At the same time, we removed the earlier clause saying that rates may be changed only by agreement of the parties. In our view this is necessary, because contradictory clauses create doubt. And where there is doubt about the terms of a contract, they are interpreted against the party that proposed them (Article 6.193(4) of the Civil Code, CK). Also, if standard terms conflict with individually negotiated terms, the individually negotiated terms prevail (Article 6.187 of the Civil Code, CK). If you individually agreed with a particular client that rates are fixed or change in a different way, a general standard indexation clause will not prevail over that agreement.

In our practice, a good indexation clause answers these questions:

• which officially published index is used, and who publishes it;
• how often and from which date the new rates apply;
• what the base period is and exactly how the calculation is done;
• how, to which address and how far in advance the client is notified;
• whether rates can also go down;
• what happens if the index is no longer published;
• whether a client who disagrees with the recalculation may terminate the contract, and how accounts are then settled.

The index question also has a statutory answer. If remuneration is to be set by reference to criteria that do not exist, have ceased to exist or cannot be determined, it is set by reference to the criteria closest in meaning (Article 6.198(4) of the Civil Code, CK). Even so, it is safer to write a fallback index into the contract itself.

Be careful with a clause saying “the provider may change its rates unilaterally”. If the remuneration is to be set by one party and the amount so set clearly does not meet the criteria of reasonableness, it must, notwithstanding the parties’ agreement, be replaced by an amount that does (CK Article 6.198(2)). An objective index and a clear formula reduce the risk of a dispute.

Standard terms in business contracts

If the indexation clause is in your general terms and conditions, it matters whether the client was properly made aware of them. Standard terms are terms prepared in advance by one party for general, repeated use and applied without negotiation in the contracts concluded (Article 6.185(1) of the Civil Code, CK). They bind the other party only if it was given a proper opportunity to become acquainted with them (CK Article 6.185(2)). Where both parties are businesses, the law sets out when this duty is deemed properly performed: the party that prepared the standard terms hands them to the other party in writing before or at signing; before signing, it tells the other party that the contract will be concluded on standard terms, which the other party can consult at a place indicated by the party that prepared them; it offers to send a copy of those terms if the other party wishes (CK Article 6.185(3)).

Unexpected (“surprise”) standard terms, meaning terms the other party could not reasonably have expected to find in the contract, are invalid. Terms that the party expressly accepted after they were properly disclosed to it are not treated as surprise terms (Article 6.186(1) of the Civil Code, CK). So our advice is to put the indexation clause in the body of the contract, next to the rates, not deep in the annexes.

What if the client does not agree?

If there is no indexation clause, the client is entitled to refuse, and the contract continues on the old terms. At one party’s request, a court may amend a contract only if the other party has fundamentally breached it, or in other cases set by the contract or by law (CK Article 6.223(2)). A claim may be filed only after the other party refuses to amend the contract, or fails to reply to the proposal within thirty days, unless the contract or the law sets a different procedure for amendment (CK Article 6.223(3)).

Can the provider simply terminate the contract? A service provider may terminate the contract unilaterally only for important reasons, and in that case must compensate the client’s losses in full (Article 6.721(2) of the Civil Code, CK). In our view, a client’s refusal to pay more will not necessarily be recognised as an important reason. So it is worth writing a termination right into the contract: a contract may be terminated unilaterally in the cases it provides for (Article 6.217(5) of the Civil Code, CK). In our view, it is safer to frame such a clause as an important reason agreed by the parties. But even where the provider terminates for an important reason, the law requires it to compensate the client’s losses in full (CK Article 6.721(2)), so also set out clearly in the contract how accounts are settled.

The client has a wider right. The client may terminate a services contract unilaterally even after the provider has started performing it. The client then pays the part of the remuneration proportionate to the services provided and reimburses other reasonable expenses the provider incurred before receiving the notice of termination (CK Article 6.721(1)). So under this rule a client who is unhappy with the new rates can leave even where the contract has an indexation clause.

If there is an indexation clause, the client’s disagreement does not stop the agreed recalculation, because the contract has the force of law for the parties (CK Article 6.189(1)). But if the clause gives the client the right to terminate the contract in that situation, that clause applies.

If the client is a consumer

A consumer is a natural person who concludes contracts for purposes unrelated to their business, trade, craft or profession (Article 6.2281(2) of the Civil Code, CK). Consumer services contracts are governed by the rules on consumer contracts (CK Article 6.716(4)).

A consumer is entitled to ask a court to declare unfair terms of the contract invalid (Article 6.2284(1) of the Civil Code, CK). Unfair terms are terms that were not individually negotiated and that, contrary to the requirement of good faith, cause a significant imbalance in the parties’ rights and obligations to the detriment of the consumer. For rate changes, the following terms presumed to be unfair matter (CK Article 6.2284(2)):

• terms giving the business the right to change the terms of the contract unilaterally without a ground stated in the contract or a sufficient ground (point 10);
• terms giving the business the right to set the remuneration unilaterally at the time the services are provided, or to increase it unilaterally without the consumer having the right to withdraw from the contract, if the final amount is higher than the one agreed in the contract (point 12).

Point 12 has an exception: among others, it does not apply to contracts for the provision of services where the remuneration is linked to fluctuations in stock exchange rates or indices and the business does not control it (CK Article 6.2284(2)(12)). The exception removes only the point 12 presumption. The term is still assessed under point 10 and the general test in paragraph 2. In our view, it is not self-evident that an inflation index falls within this exception. So it is worth leaving the consumer a right to withdraw from the contract. The burden of proving that a term listed in paragraph 2 is not unfair lies with the business (CK Article 6.2284(3)). The business must also prove that the term was individually negotiated (CK Article 6.2284(4)).

Every written term of a consumer contract must be expressed clearly and intelligibly. Terms that do not meet this requirement are deemed unfair, and in case of doubt terms are interpreted in favour of consumers (CK Article 6.2284(6)). Terms relating to the adequacy of the services provided and the remuneration paid for them are not assessed for unfairness if they are expressed clearly and intelligibly (CK Article 6.2284(7)). In our view, this covers the agreed remuneration itself, not the mechanism for changing it unilaterally.

If a court finds a term unfair, it is invalid from the conclusion of the contract, and the other terms remain binding on the parties if the contract can still be performed (CK Article 6.2284(8)). The court assesses these terms of its own motion (CK Article 6.2284(9)).

In our view, an indexation clause in a consumer contract should rely on an objective index that the business does not control, contain a clear formula, and give the consumer the right to withdraw from the contract.

How to start

Send us your standard contract or general terms and conditions, and tell us whether you want to index new contracts or ones already running. We will draft the indexation clause, or assess what you can do if a client does not agree.

Phone +370 5 212 1506, email info@linden.lt

More about this service: contractual disputes.