- Phillipa Mckernan
BECOMING THE BUSINESS OF TOMORROW - COMMERCIAL CONTRACT VARIATION
As a result of the rising costs of goods, services, labour, taxation and a progressively unstable worldwide economy, more businesses are now looking to realign income and expenditure.
One way that your business can look to increase income whilst maintaining expenditure is to increase its pricing structure.
If, like many others, your business operations are based on established commercial agreements, you may be wondering whether you are able to introduce a price increase into those agreements.
Depending on the exact wording of the agreement, you may be able to rely on one or more of the following strategies:
1. INCREASE PRICE IN LINE WITH A ‘PRICE ESCALATION’ CLAUSE
A ‘Price Escalation’ clause, if specifically included in the drafting of an agreement, permits the adjustment of the agreed contract price. This is usually applicable in the event of fluctuations of pre-determined elements of the product or service, such as petrol, energy or raw materials.
Prior to the enforcement of a Price Escalation, notice and evidence of the increased costs is usually required to be provided to the other party. It is important for the notice and evidence requirements in the agreement to be reviewed carefully prior to any increase being implemented. Moreover, it is best for the parties to engage in commercial discussions prior to a Price Escalation being introduced.
The actual amount of the price increase that one party can pass onto the other will usually be based on a formula within the Price Escalation clause. Even where a Price Escalation clause is present, the formula may prohibit the price from being increased to the actual current price.
This might present an issue where a commercial agreement was negotiated and agreed in the past and the current economic climate was not considered. In these circumstances, the Price Escalation clause may not cater for the highly inflated prices present within the current markets.
2. INCREASE THE PRICE IN LINE WITH THE ‘CHANGE ORDER’ PROCEDURE IN THE AGREEMENT
A ‘Change Order’ clause, if specifically included in the agreement, is usually drafted to allow the parties to agree a change to the contractual provisions. While this may appear to offer a solution, in most circumstances the parties are unlikely to be able to agree a price increase as both parties will have competing priorities and objectives.
If the parties are unable to agree between themselves, Change Order provisions are usually drafted to include alternative means of dispute resolution such as arbitration or mediation before the matter is finally resolved by a court. Accordingly, the Change Order procedure will in many cases be financially costly, unduly burdensome and time consuming.
However, where the parties have a strong commercial relationship or one party has greater leverage, the Change Order procedure might enable agreement to be reached on an increase in line with current rising costs.
3. NEGOTIATE A PRICE INCREASE BASED ON COMMERCIAL FACTORS
Preserving commercial relationships is vital to the success of any business. Many business relationships are created, fostered and leveraged on the basis of commercial factors that determine the preeminent party, which in turn determines relative bargaining power and influences the outcome of commercial negotiations.
FG Solicitors can identify your business’ key commercial attributes to enhance your bargaining power and deliver increased commercial leverage. This is likely to result in a more favourable commercial bargain being struck.
Any negotiation must be approached carefully, especially where established business relationships are concerned, as a contentious or hostile approach is unlikely to support the continued commercial relationship of the parties.
4. SEEK TO RELY ON A ‘FORCE MAJEURE’ CLAUSE
A ‘Force Majeure’ clause eliminates liability of the parties for contractual failures which arise as a result of unavoidable or unforeseeable events, such as war, natural disasters and diseases. These events must make it impossible either physically or legally for the contractual obligations to be performed.
The parties will only be able to rely on this removal of liability if the agreement specifically includes a Force Majeure clause. The extent of the clause is entirely dependent on the drafting, meaning that the clause will have to precisely state a particular event, such as a global pandemic or war, in order for the protection and remedy to be applicable to such an event.
In the context of the current economic climate, the parties might seek to argue that the current war in Ukraine and/or the related sanctions imposed on and by Russia have rendered the agreement impossible to perform due to it becoming uneconomical or resulting in a significant delay.
In order to adopt this approach, the agreement would need to include a Force Majeure clause which specifically includes events such as war, armed conflict or actions of government. However, it is not enough to show that the war in Ukraine or the sanctions imposed on and by Russia have resulted in the performance of an agreement becoming merely uneconomical.
In this event, the parties might wish to proceed to terminate the current agreement and enter into a new contractual agreement on more favourable and economical terms.
If you want to discuss your commercial contracts or the concept of Force Majeure clauses further, you should contact our specialist advisors. Legal advice should be sought if you intend to seek to rely on a Force Majeure clause as a basis to renegotiate or terminate a commercial agreement.
DO YOU HAVE MORE QUESTIONS ABOUT HOW TO MANAGE YOUR BUSINESS IN THE CURRENT GLOBAL CLIMATE?
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1. Employment Contract Variation
2. Business Restructures and Reorganisations
3. Corporate International Immigration
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This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.