Contract reviews and price increases: what do you need to look for?

We have recently seen the response of the global market to the UK’s economic changes. But how best do we control prices in our contracts so as to ensure we aren’t left out of pocket?

Price variation

There are many adaptations of price variation clauses – some are linked to indexes such as the Consumer Price Index or the Retail Price Index, while others are fixed annual increases.

In any event, price variation clauses are very useful in changing the agreed prices and charges for goods and services in a contract. When reviewing contractual provisions, it is important to see if such clauses are automatic or flexible.

Some clauses can be relied upon if they grant a contractual right to increase the prices in the contract. This can sometimes be done without the risk of the contract coming to an end or the counterparty rejecting such increases. However, care must always be taken when exercising such clauses so as not to damage the commercial relationship between the parties.

Change control clauses

In essence, change control clauses set out the mechanism which parties can use to propose amendments. These changes are often initiated to alter something which is central to the contract, such as details of the goods or services to be provided, along with the costs associated with the contract.

Therefore, if your contract contains a change control provision, it would be worth reviewing whether the mechanisms allow you to propose a change of pricing in the contract.

However, a downside of relying on this method is that it is not a unilateral change and, as such, will usually require acceptance by the other contracting party. Depending on your relationship with the other side, and how the market is impacting them, getting consent may not be easy.

Benchmarking

Often useful in service agreements, ‘benchmarking’ clauses can allow a holistic review of pricing from alternative suppliers in the market. In the event the pricing in question isn’t deemed to be competitive or good value, then this clause can prescribe what happens next. It may allow for automatic price increases or act as ‘trigger’ for renegotiation to allow for the contract to best reflect market practices.

Termination

Even with all the usual protections in place, unpredictable events can still occur which could impact on prices in the supply chain.

To best protect your business in this situation, you may wish to rely on termination provisions on the basis that the contract is no longer commercially viable.

However, it is worth considering the impact on other contracts such as supply contracts and customer contracts. It is highly advisable to align notice periods so that you are not tied into a contract which you can no longer fulfil.

If your contract does not have a specific no-fault termination clause, it is worth undertaking a specialist review of the contract to see what clauses could be used in the event the contract is no longer best serving your business.