ExEcutivE REPORt
Dealing with spiralling costs
In a fast-moving world where prices are rising at a pace
not seen in decades, firms are struggling to keep pace and, worryingly, stay in business. Adam Bernstein reports…
T
he natural reaction to rising prices is usually to pass on costs directly to
customers. However, that’s not always possible – especially when dealing with commercial customers.
James Crayton, partner, and head of commercial at Walker Morris, says that firms should initially assess their current commercial arrangements to get a fix on the current position. He says that “while the simplest mechanism is a fixed price, often more detailed mechanisms to determine price are included in longer term agreements and you should assess if this price is broken down into components which may be able to be changed.”
But if the contract specifies a fixed price, then he advises considering if the contract contains provisions with regard to price indexation. “With such a clause,” says Crayton, “the contract will provide for the price to increase in relation to an index, such RPI or CPI.”
And with general price reviews or adjustments, there needs to be an express clause in the agreement that provides the right to do so. Here Crayton says that the contract may contain provisions for an annual price review, but “these tend to be about setting a framework for prices to be agreed, rather than a unilateral right to increase.”
Force Majeure Next is the force majeure clause. It is not a ‘get out of jail free’ card but may, in some circumstances, suspend a party’s obligations when they are prevented from completing an agreement by events outside of their control.
Crayton says that these events are often listed within the clause or definition. He notes, however, that “the supplier would need to demonstrate that circumstances beyond its control prohibit it from complying. A general change in the economic climate or market conditions affecting profitability is not likely to be a force majeure event.”
And where there is no force majeure clause, Crayton says that a supplier “may have to rely on the doctrine of frustration, which is notoriously limited in its application.” In essence, this can set aside a contract where an unforeseen event either renders contractual obligations impossible, or radically changes the principal purpose for entering into the contract.
More contractual terms to examine Other elements of the contract that Crayton advises looking at are “the basis of the
agreement, and whether you are bound to supply, or whether it acts as a framework under which call-off
orders/purchase orders are issued and subject to your acceptance.”
Then there’s a material adverse change, which Crayton defines as “an event or circumstances which have a material adverse effect on the ability of the parties to perform their obligations.” He says that while this is not something typically seen in short- form standard terms and conditions, “it may be included in a long form agreement and may allow for termination or suspension of obligations and a renegotiation of the contract.”
The fall-back position is termination of the agreement altogether. But care should be taken; firms may need to continue to supply up to the expiry of any notice period.
The absence of contractual provisions There are other options that can be considered if there’s nothing documented. Here, Crayton says that the obvious approach is to maintain an open dialogue with customers. He says that “they are unlikely to be surprised by requests for price increases.” He continues: “Where the request is genuine, rather than exploitative, and particularly where it can be backed up by evidence, there may be an opportunity to vary your agreement without the need to terminate. Customers may be willing to accept this in order to guarantee continuity of supply, or there are limited alternative suppliers.”
Where a firm is able to renegotiate, and certainly for any new agreements entered into, as Crayton emphasises, “you should ensure your contractual provisions provide adequate protection for any ongoing or new challenges faced due to cost price increases.”
Consider also wording for quotes which reserves the right to amend prices in circumstances where there are material increases in input costs, including energy, labour and fuel. Another tack is to add wording that states that quotes only remain open for acceptance for a short time period, and future supply will be subject to updated quotes.
Looking to the future, Crayton recommends potentially linking pricing mechanisms to inflation, or at least having price reviews at certain points throughout the contractual period where the parties can renegotiate. He adds that “we are seeing a trend towards indexes or pre-agreed price rises linked to certain commodities and a move away from the price being fixed for the term of the agreement.”
His last suggestion is to “consider working on a purchase order basis. With the cost-of- living crisis, the economic climate being unpredictable, a more flexible agreement may be more beneficial.” n
18 Executive Hire News - May 2023
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