Supply chain contract management blog series #2: Varying pricing and volumes terms in commercial contracts

Step 1: Identify any price variation clauses

Price variation clause should be relatively easy to spot, although come in all shapes and sizes.

Clauses permitting unilateral price variations

The Supplier may, by notice to the Customer, increase the price [or volume] of the Goods to reflect any one or more of the following:

• Any price increase beyond the Supplier’s reasonable control [for example, the price of raw materials, tax or inflation].
• Change in delivery date, quantity of specification [for example, issues arising from supply chain issues and product shortages].

These clauses provide flexibility and security for the supplier, who can increase prices to track external price variations. A buyer may have required a list of the specific factors that affect the contractual price and impost a cap.

Clauses requiring consent to vary

No variation in the price [or volume] shall be accepted by the Buyer unless formally agreed in writing.

These clauses allow only consensual price variations. As explained later in this blog, additional care must be taken to follow any steps specified in the contract as non-compliance may risk those price variations.

Step 2: If you cannot vary a price, do you need to supply at that price

If your contract does not allow you to vary the price, it may not require a buyer to buy (or a seller to sell) a minimum order of goods. Under these contracts, the obligation on the buyer to sell only arises when a purchase order is placed by the buyer and in return, accepted by the seller.

If your contract does not provide a requirement to buy / sell a specific amount of goods, it is typically more sensible for you to refuse any further purchase orders – and try to re-negotiate the price – than to terminate the contract and then re-negotiate (which is likely to introduce legal risk for wrongful termination).

Step 3: Force majeure?

A force majeure is an act, event or circumstance beyond the control of the parties which may excuse a party from performing the contract or suspend all or part of its obligations.

Parties can only seek to rely on force majeure if the contract specifically includes such a clause – it does not arise from general law. Please see our short blog on force majeure clauses, setting out how to identify and read such clauses

Step 4 : Negotiating price changes

Almost without exception, it is in the best interest of your business to discuss and re-negotiate terms with the other side. It preserves commercial relationships and prevents the market forming a negative opinion of your actions.

Here are some tips for negotiating and some things you may want to say:

From the supplier’s perspective

• Be clear and open when explaining your reason for the increase

Whether BREXIT, supply chain issues, inflation or an increase in the price of raw material has resulted in you re-negotiating pricing, we suggest you approach discussions with a clear and open explanation.

You may want to provide a breakdown of your costs, identify specific ‘pain points’ and propose a pricing strategy for each component. To make things more palatable, consider a mechanism to re-consider the varied price at a particular time or event, i.e. when the issues causing the pain are resolved (see also point three below regarding the buyer’s perspective and terms of a review period).

• Consider the buyer’s position and the market

The buyer is also likely to be under pricing pressure and will be more open to a variation that is reasonable and proportionate, and provides them with some upside. Perhaps a decrease in price accompanied by an increase in volume (over a longer period).

From the buyer’s perspective

• Listen to the supplier
  
  Be prepared to acknowledge and consider the supplier’s position. Negotiation can often be difficult and frosty between parties, and you must approach it with an open mind. You will gain a better understanding of the supplier’s position and may be able to reach a mutually beneficial position.
  
  
• Do your research
  
  Explore the current trends, have evidence for the reasons why you may want to alter the price or accept/reject the supplier’s amendments. By providing details on the market conditions and current economic situation, you will be able to justify your points.
  
  
• Include a review period
  
  Is your position likely to change again? If so, you may wish to be open on price variation and leave it under close review to allow for necessary changes moving forward.

Step 5: Can I go elsewhere?

Does your contract restrict you under an exclusivity obligation or are you free to search the market and find an alternative? Does your market include multiple suppliers or are you limited in where you can buy from?

Additionally, it is worth researching the market to ensure there are in fact better deals available to you. You will want to calculate the cost of changing supplier, both from a financial and time perspective, and any ‘hidden’ transitional costs, for example licences or access to other market participants.

Where the terms are so unfavourable and you are unable to reach an alternative agreement, you may wish to terminate the agreement. Please note that termination is a draconian option and there is no going back on this, so you must be certain this option is most beneficial. Additional caution needs to be exercised to ensure that termination is executed properly.

How we can help

We are specialists in advising buyers and suppliers on the availability and exercise of price variation clauses. We can also take you through your rights available under the contract and assist you in drafting the most beneficial terms in your business environment. Should you need detailed or tailored advice, please contact Rob Stewart in our Commercial Dispute Resolution team.