With the recent increase in inflation and the fall in value of the pound, there are ever increasing fears that the UK economy is heading into a recession, if it is not already in one. In the circumstances, how can businesses prepare their contracts to help them survive in a recession?
Exercising price review clauses
Price review clauses, otherwise referred to as price change clauses, can be commonly found in supply contracts. They can be used by a supplier to adjust the price of a product to pass on increases in the manufacturing and supply cost to the buyer.
These clauses can often have time periods or specified dates to exercise the price increase within. Businesses should therefore ensure that the provisions of any price increase clause have been or are being met in order to allow any increased manufacturing costs to be enforced under the contract.
Termination clauses will often allow the customer, and sometimes both parties, to terminate the contract on convenience by giving the necessary notice within the specified timeframe.
Termination clauses often allow either party to terminate in whole or part if the other party materially breaches the contract.
Other examples of termination provisions include, but are not limited to, when the other party:
- Enters into liquidation, administration, bankruptcy or other specified form of financial difficulty
- Fails to provide information required to fulfil the other party’s obligation
- Fails to pay any amount due
- Acts or omits in a way which jeopardises a right of the other party
- Undergoes a change in the control of the company.
In light of the above, businesses should ensure that they are not in breach of any contractual provisions with a supplier or customer. If the business is in material breach of the contract, the other party may be able to terminate the contract and walk away, provided the necessary notice is given. This can cause various cash flow issues for the business.
Alternatively, if a business seeks to terminate a contract without adequate grounds to do so, the business could be in repudiatory breach of the contract. This means that the other party could sue the business for breach of contract which can result in costing the business more than if the contract continued.
Force majeure typically covers one or both parties from performing the contract in the occurrence of unforeseen events such as natural disasters and war. Standard force majeure clauses do not cover a recession. However, it will be worth checking your business contracts to see whether a recession or other financial difficulty is covered.
It is recommended that businesses review their contracts to ensure that they are afforded flexibility and protection during the upcoming economic uncertainty. By reviewing clauses such as the above, businesses will be able to diarise key dates, ensure they are not in breach of the contract and know when they are able to terminate a contract.