This week, some thoughts around working with an arrangement where margins have shrunk dramatically, whether by rising on-costs (such as supply of materials etc) or where the underlying prices (predominantly raw materials) increase substantially during the life of the contract.
This seems to be a bit of a theme at the moment with the pinch point being those businesses that have existing contractual obligations at fixed prices with a particular focus on those agreements for supply of goods.
The following are some thoughts to chew through, businesses in this situation should:
- Have a conversation and variation – Sometimes the easiest way to resolve any issues of this type is to have a sensible conversation with the other party. In most agreements, both parties’ benefit, and both will want the arrangement if still beneficial to continue as opposed to the costs of re-tender/re-supply. A good contract should have a variation clause (or similar) that allows and sets out an easy process for a variation to be agreed.
- Look at the other contractual terms of the agreement – Some deal with price rises and have restrictions/obligations around these. If they do, then often there is an obligation on the relying party to provide sufficient evidence and justification in support of the requested price raise. 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.
- Look at force majeure and frustration – Both of these have been dealt with in previous updates but in brief, these are 2 two distinct areas in law. The first, “force majeure” (or “hardship”) being an express contractual variation of obligations in light of prescribed circumstances (usually but not always set out in the contract itself) and the second, “frustration” being a common law process that can set aside contracts where an “unforeseen event” makes performance of the contract impossible.
- Check Dispute Resolution – In my view, a well drafted agreement should really have a process dealing with what happens where any dispute arises. These can include disputes over things such as pricing or arguments over the wording of clauses and may confer duties on the parties to enter dispute resolution to resolve the dispute and avoid proceedings. This could provide an opportunity to re-open negotiations on issues such as pricing.
- Look at an exit – Terminating or looking to terminate could also be a method to bring the question of price increase to the table. The big risks here are whether the baby is thrown out with the bathwater in that the entire agreement then goes, plus the obvious question of whether the contract can be terminated at all.
While some of the above might be relevant or helpful, getting advice on the relevant clauses should be the first step determine whether, and if so how, they can be relied upon.
Regards to all,