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Inflation and business contracts - how and when can we raise prices?

The prices of raw materials are soaring due to numerous well-reported causes that are unlikely to end soon.  Where does that leave businesses with existing contractual obligations at fixed prices, with margins squeezed or performance unfeasible? In practice, we are seeing this more and more in the context of contracts for supply of goods, and occasionally services, where the underlying prices (predominantly raw materials) increase substantially during the life of the contract.

Price increase terms

The contractual terms are the first place to look. Some contracts contain express provision for price rises, usually placing an obligation on the relying party to provide sufficient evidence and justification in support of the requested price raise as a condition of acceptance or consideration at all. Where the other party then has discretion to accept or refuse that request, there may be an implied restriction to exercise that discretion rationally and in good faith, considering the purpose of the clause itself. There may then be a further implied restriction on reliance to the extent of reasonableness, subject to the provision relied on and the type of contract. The price increase terms should be read alongside the purpose of that clause and any applicable implied duties or restrictions on a case by case basis in order to determine whether that can be relied on in the circumstances.

Force majeure and frustration

As is usually the case with any major socio-economic event, there is much coverage on the above concepts and the possibility of relying on them to suspend contractual duties. It is worth noting here that the two are distinct under the laws of England & Wales - "force majeure" (or "hardship") being an express contractual variation of obligations in light of prescribed circumstances (therefore may not be applicable at all if the contract is silent on it) and "frustration" being a creature of common law that may set aside contracts where an "unforeseen event" makes performance of the contract impossible. The two concepts have significant overlap and are subject to finely balanced restrictions and caveats, to be considered in detail if relied upon.

Dispute resolution clauses

Many contracts contain clauses governing the procedure to be followed by the parties where any dispute arises, which may include pricing disputes or reliance/interpretation of clauses, including those mentioned above. That may confer duties on the parties to enter negotiations or dispute resolution in a good faith effort to resolve the subject of the dispute throughout the process and to avoid proceedings, granting an avenue for the parties to put forward their position for and against a price increase or the mechanism and sum thereof.

Exit and renegotiation 

Bringing the contract to an end and making an offer for a new contract at the price sought may be a convenient method of "forcing" a price increase, however that confers risk of re-supply from elsewhere on the termination of any exclusivity as well as the question of whether the contract can be terminated at all. A close examination of the relevant clauses should be followed to determine whether, and if so how, this option can be relied upon. 

What happens in the meantime? 

Any combination of the above methods can bring about the resolution sought, but there is then the question of what should be supplied and at what price in the meantime. Occasionally, the contract itself contains the answer, ordinarily that those obligations are suspended entirely during the dispute or supply shall continue at the previously agreed price with any balance payable on resolution. Where that isn't set out, the terms themselves for the obligations should be read carefully to determine what triggers performance - is payment subject to supply or supply subject to payment?

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