Inflation and Price Increases in Commercial Contracts
You don’t have to go very far to encounter inflation at the moment, with everything from the cost of fuel to raw materials increasing at a noticeable rate.
Supply issues and subsequent cost pressures are compounding the problem – leading many businesses to consider putting their own prices up – if they have not already.
Here, Callum Dalloway looks at some of the issues for businesses when considering implementing price increases for their goods/services.
The right of a supplier to vary a contract depends, in the first instance, on the type of contract that is in place.
Fixed-term contracts will not usually make allowances for price increases within the duration of the agreement.
Long-term contracts, on the other hand, may include a clause referencing price increases caused by external influences. The clause may make reference to price increases in line with CPI, although typically, a clause will allow a price increase in line with CPI to occur no more than once in a 12 month period. As an alternative, contracts may make reference to the RPI, or include a fall-back mechanism for price increases, such as a set percentage.
Contracts that do not have a fixed term can usually be cancelled by either party by way of giving the required notice. Customers that feel aggrieved by any price increases may give notice under the terms of the contract and attempt to re-negotiate a deal, or find an alternative provider. It is therefore worth being open and honest with customers regarding price increases, communicating the reasons for doing so and providing notice of the changes. You may also want to bear in mind the need to be reasonable with any price increases that are implemented, so customers don’t consider you to be taking unfair advantage of the situation.
Of course, failing to have a contract in place regarding the supply of goods or services places a business at a disadvantage – not only when it comes to adjusting prices, but also in respect of other variations to the supply of goods/services such as cancellation, payment terms, non-payment, to name but a few issues. This does not mean to say that prices cannot be increased, but there would be no automatic right to do so. Any increase would need to be clearly communicated by the supplier and agreed to in writing. The same would apply if a contract was in place but did not make reference to price increases. Should the increase not be agreed, the supplier may have to continue to supply the goods/services at a loss, or risk losing the client.
In the current climate, suppliers may not be able to commit to fixed prices, especially where raw materials are required or there is a long lead time between the order being placed and suppliers being able to fulfil the order. It may therefore be prudent to consider including a price variation clause in the contract to enable any increases in the cost of supplying the goods and services to be passed on to customers. The clause may enable the supplier to increase prices generally, or in line with increased costs, or by reference to a formula or price index.
Having the flexibility to increase prices is a key aspect for any business to consider, as it may ultimately influence its ability to be able to maintain profitability. A well drafted set of terms of conditions and supply of goods contract can go a long way to smoothing the process for businesses, allowing them to operate efficiently and effectively regardless of the economic environment.
Where a contractual variation is required, it is best to take legal advice from a commercial solicitor on any proposed amendments to the contract’s enforceability.
For any advice in relation to commercial contracts or supply of goods contracts, get in touch with Callum Dalloway, Commercial Solicitor, on 01457 761 320 or email callum@odonnellsolicitors.co.uk.
