Commercial Contracts and Inflation

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Commercial Contracts and Inflation

Global events such as Covid-19 and the war conflicts between Ukraine and Russia have had a domino effect and have started to affect a variety of different industries due to supply chain issues. Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance concurs with this but also claims that the issue goes beyond that of the brief interruptions brought on by Ukraine’s civil war or supply chain bottlenecks. Together, these factors have led to prices rising to nearly 10% within the last year, being the highest rate for 40 years in the UK. This defines inflation; as the gradual increase in the price of something with the governor of the Bank of England stating that recent global affairs are a “major worry”.

Effects of inflation:

  • A particularly big sector affected by inflation is energy bills as gas and oil prices continue to rise. Prices in these sectors increased by between 50-90% when compared to the same period last year (2021).
  • Fuel prices also saw a dramatic surge, increasing to roughly 200.00p per litre on average in the UK when in early May, prices were at 160.31p per litre. Further demonstrating the severe increase, fuel prices were at 130.5 p per litre just a year earlier
  • Another industry that was hit was interest rates. Mortgage payments are now due to higher interest rates making payments more expensive and harder for homeowners to meet.
  • The food sector is also increasing its prices as the Ukraine-Russia war has damaged global grain production. This has also seen the cost of household goods, furniture and so on, increasing. Examples of the dramatic surge are present where; Milk has seen a 15-19% price increase and pasta products have risen by 16.1%.

How Inflation affects Suppliers

This can have various knock-on effects; especially to suppliers who have contracts in place with customers and how because of the price increase for raw materials and such alike, these contracts will result in suppliers losing value as they could potentially become un-profitable.

Does English law offer legal assistance on this matter?

These price increases will make it difficult for suppliers to benefit from their contracts. This forces the question of whether or not such suppliers will be eligible for legal relief concerning their attempts to modify their contract prices in accordance with recent price rises, brought on by the unexpected inflation.

Under UK law, unless there are express clauses found in suppliers’ commercial contracts to allow for variations of prices, then it is unlikely that the law can assist a supplier who is suffering from inflation. The fact that a contract has become unprofitable alone, is not sufficient to obtain legal relief. This is because the courts are not likely to accept an implied term with these contracts that the prices can be increased in synchronisation with inflation. Additionally, the repercussions associated with inflation are denied as a ‘Force Majeure’ event under commercial contract settings. This means that inflation is not deemed as an unforeseeable circumstance that prevents the fulfilment of a contract. This is because even though price increases do make the completion of a contract onerous, it does not make the task impossible to perform in the way that a natural disaster would. 

Are there solutions to the problem?

However, companies and businesses can examine their contracts to search for any express rights to increase their prices. If such express provisions can be found, methods should be sought about how to invoke any possible clauses and how to go about notifying its customers about any intentions to increase prices. 

If no express clause can be found for the supplier to increase their prices, they can approach their customers to attain a variation to its prices in another way. Discussions about extending/renewing current agreements, for example, would be a good opportunity to bring up the point of adjusting prices.

Another solution may be to try and vary the contract. Suppliers must carefully review any clauses addressing variations and adhere to any procedures outlined in the contract. Contracts can be varied orally but this can lead to evidential issues in the case of disputes arising between the supplier and customer business and so it is best to confirm variations in written form. This is because it is a more solid form of evidence. Any new variations should also be checked against existing ones to ensure there are no overlaps and that adjustments can be made accordingly.

Nevertheless, these events could lead to future commercial contracts now including express agreements for suppliers to be able to increase prices in the event of future inflation or such alike, as a standard norm. This will lead to a slight development in the area of commercial law.

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