Could renegotiating contracts be the key to survival during the ‘cost of doing business crisis’?

By Matthew Sutton, commercial partner at law firm, Shakespeare Martineau.

Businesses across the UK are facing spiralling costs due to the volatile economic climate. Rising interest rates, energy bills and a shortage of labour are all having a detrimental impact in many business sectors. For those organisations about to face a bitter winter, could looking to make changes to their contracts with customers be the key to surviving the looming ‘cost of doing business crisis’?

Aside from the most immediate cost pressures, many businesses are still feeling the effects of Brexit, in the form of staff shortages and an increased administrative burden when dealing customers in the EU, in addition to facing critical supply chain issues caused by geopolitical disruption. These factors are making it increasingly difficult for many to continue in a ‘business as usual’ fashion. As directors grow concerned about the months ahead, now could be the time to look at the feasibility of price increases and the possibility of renegotiating contracts with business customers that may have been agreed in more benign times to secure these increases. Renegotiations with customers may be challenging, particularly with customers who are large multinational organisations. With this in mind, it’s essential before making any decisions or contacting customers, that a business contemplating such a course of action has a clear understanding of its current contractual position and what, if any, right to adjust prices it may already have.

For businesses looking to increase the prices payable by their business customers to help mitigate cost pressures, key initial questions to consider are:

• Is there a contractual right to increase prices or is the business committed to supply at a fixed price?
• If there is a right to increase prices, how wide is this right and how frequently can it be exercised? So, for example, price adjustment clauses are frequently annual and may be linked to a published index. Will this be sufficient in the current climate?
• If there is no right to increase prices, how long is the business committed to supply products for? In particularly difficult situations, is contract termination an option, and if so, will the potential for exercising this right assist in discussions with the customer?

After taking the legal factors into consideration and seeking professional advice, should it be required, businesses considering entering a price renegotiation should look at their commercial leverage. How replaceable are they? In practice, the more difficult it is for a business to be replaced in the supply chain, the better the prospect for successfully negotiating an increase in contract prices.

One other contract issue worth considering when a business is looking at its relationship with a customer in difficult circumstances, is whether the supply contract clause contains a force majeure clause and, if so, does it provide any assistance. Force majeure clauses are intended to provide a party to a contract with relief from liability where it is prevented from performing its contractual obligations by events beyond its reasonable control, such as wars and epidemics. When considering a force majeure clause, however, it is important to have in mind that the English courts have been generally reluctant to allow a party relief from its contractual obligations under a force majeure clause purely because market conditions have rendered contract performance less profitable or even uneconomic. It is also worth remembering that a force majeure clause will almost certainly not entitle a contracting party to adjust the prices payable under the contract. Nor do clauses of this sort typically entitle the party claiming force majeure to terminate a contract.

When negotiating new contracts with business customers, it is important to recognise that the increasingly volatile economic landscape is likely to be with us for some time and so including suitable provisions to manage the risk of cost increases will be crucial going forward. Fixed prices for goods and services supplied over long periods are likely to be less attractive to suppliers, who are more likely to seek to include contract provisions which allow for regular price reviews at least annually, but possibly scheduled throughout the financial year. A flexible contract which offers cost protection for suppliers may also be beneficial to business customers if s it offers the possibility of price adjustments downwards if costs reduce.

Renegotiating contracts with customers is not easy and is certainly not guaranteed to succeed. However, where a business is facing cost pressures that may have a significant impact on its profitability and internal cost management processes have been exhausted, it may provide a route for helping to ensure the continuing viability of a business into the future.