Tension in your supply chain - how to ensure that the price is right?

With record increases in the costs of raw materials, higher interest rates for borrowing and rapidly rising inflation, many businesses are coming under relentless supply chain pressure.

In many contracts, especially long-term supply agreements or where there are lead times between orders and delivery, these issues can lead to tensions between buyers and sellers. Manufacturers and suppliers will seek to increase prices to cover additional costs, buyers will want certainty and to avoid having to pay more than they planned or budgeted for. Freeths' dispute resolution team are currently advising both sellers and buyers engaged in price negotiations and have set out some top tips below:

1. Know your contract - all but the simplest agreements should allow for the possibility of a price review, but there is no “standard” method. Suppliers may be allowed to increase prices only if they can demonstrate an increase in costs. Increases could be limited to a certain amount or a percentage each year and there could also be limits on how many “reviews” can take place. It is vital to know what the contract says and, if there is ambiguity, where there is scope for disagreement and compromise.

You should also know all your rights under the contract and consider other performance issues, which may provide leverage for price negotiations. While it is generally the case that economic conditions would not amount to a force majeure event (which may entitle a party to lawfully stop performing the contract), each contract is unique and has its own wording.

2. Know the other party - as a supplier, it is important to understand the motivations of the buyer. Will they resist price increases because they cannot be passed on? Does the buyer have an alternative supplier? Buyers should also understand the pressures that the supplier is facing but should ask for facts and evidence and not rely on broad statements such as “everyone knows costs are going up”. Sometimes, cooperation can lead to innovative solutions.0
3. Know the market - ultimately, no one can continue in a loss-making position indefinitely and so it's important for both sides to be aware of the market conditions. Are there other possible suppliers for your product, or can you sell your product or service more effectively elsewhere. Knowledge of wider market trends can also support your position within a price review mechanism.0
4. Know the risks - if continued performance of the contract is unsustainable but a price increase cannot be agreed, then difficult decisions need to be made. A loss-making supplier presents a risk of its insolvency so buyers may need a contingency. Also, the risks and costs of a dispute from non-performance will need to be weighed against the dangers of continuing with the contract.  Only with a complete picture can you make the best decision for the business.

Freeths' dispute resolution team are available to assist all businesses facing these issues, from an initial review of contractual documents to a full risk assessment and advice on potential options.

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If you would like to discuss issues you are facing, please contact Louise Wilson, Richard Coates or Michael Hoskins.