The cost of living is increasing! Several reports are stating that UK inflation is rising at its fastest rate for 30 years as fuel, energy and foods costs surge and wages across the UK reportedly now falling at their fastest rate since 2014, due to inflation outpacing rises in pay packets.
Not only is this rise affecting individuals, but also businesses. Since the onset of the pandemic, material prices have continued to soar, and it is reported that it is unlikely to end any time soon. Businesses and individuals alike are having to navigate the path to keep reaching the next step in the world we’re living in.
Businesses that are tied into fixed price contracts are facing difficulties in keeping up with the pace by potentially being unable to filter down the increase in pricing down to their customer. In this scenario, the contractual terms that govern the relationship of the parties are the first place to look.
Check your contracts
Some contracts will contain express provisions for price rises, such as providing a requirement that a written notice must be provided, within a certain time period, of the intention to increase the price. Additionally, sometimes an obligation is placed on the relying party to provide sufficient evidence and justification in support of the requested price increase. Furthermore, the other party may have discretion on whether to accept or refuse the price increase. Where this is the case, there may be an implied restriction to exercise such discretion in good faith and act with reasonableness, whilst considering the purpose of the clause itself.
Review your contracts
Each contract would require review on an individual, case by case basis ensuring any price increase terms are read alongside the purpose of the clause as there is no ‘one size fits all’ in advising upon the same due to contracts varying from one another.
If the other party is provided with the discretion as to whether to accept or refuse the price increase under the contract and they use such discretion to refuse such price increase or, for example, do not agree that they have been provided with sufficient evidence (if the contract requires the same) to justify the price increase, it is likely that a dispute between parties will arise.
Many contracts contain clauses governing the procedure to be followed by parties where any dispute arises (which may include pricing disputes or reliance and interpretation of clauses). The clause may impose duties on the parties to enter negotiations or a dispute resolution procedure in a good faith effort to resolve the dispute and to avoid legal proceedings, which grants an avenue for the parties to put forward their position for and against a price increase or an agreed sum thereof.
If an agreement cannot be reached between the parties, 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, this comes with the risk that the customer could re-supply from elsewhere on the termination and any exclusivity held within the contract will end. Additionally, the contract would need an initial review as to whether the contract can indeed be terminated at all and if there is a set procedure required to be followed, such as including providing notice within a certain period of time, to terminate the contract. A close examination of the relevant clauses should be followed to determine whether, and if so how, this avenue could be relied upon.
It is important that the contract is reviewed prior to taking any action in relation to rising prices, to ensure the business is able to do so and to check if there are any obligations which they must comply with prior to increasing the price to ensure they are not in breach of contract for doing so.
The above should highlight to businesses the importance of having a written contract in place with customers, so that the obligations of each party are clearly set out. If your business does have written contracts in place, these should be regularly reviewed. This is to ensure the terms align with how the business works, including a provision to increase pricing if so desired.
If you need assistance with your business contracts, please contact one of our Corporate and Commercial team or call 01642 356500.
