Top tips to help businesses deal with rising supply chains costs

Inflation is running at a 40 year high; interest rates are rising in response. Businesses are facing demands for wage increases from employees, spiralling costs of serving debts, and dealing with dramatic cost increases in energy, food and transport. This situation is having significant consequences for contracts at all levels of the supply chain which were signed in very different economic conditions.

Some common themes emerging are:

• Current contracts are no longer profitable for suppliers, and customers are being presented with ultimatums demanding price increases.
• Businesses are servicing increasingly cost-conscious consumers and they do not want to pass on price increases to maintain customer loyalty.  
• One or more of the parties to a contract are attempting to end contracts early.
• Price discussions for new contracts are more time-consuming given the uncertain economic environment.

Here's our top tips for businesses who face pricing issues to help avoid protracted disputes:

Understand the context & work creatively

Obvious but often neglected, we recommend taking the time to understand the context of a dispute in order to inform potential solutions.  For example, what has brought about this situation? What are each party's concerns and priorities? What is a reasonable estimate of how long current issues will last? How important is this relationship?  Do you have an alternative solution if the relationship comes to an end?

There may also be some flexibility around other contractual commitments such as delivery times, specifications, or payment terms – perhaps a change to these elements would alleviate some of the pressure around pricing discussions.

Taking a step back to consider these broader questions may help to navigate a suitable way forward.

Understand your legal levers

If you a supplier or customer seeking to change or vary an element of your contract, is there an express mechanism for this within the contract? Contracts commonly include processes for varying or reviewing prices or order volumes, so as a first step revisit what your contract says to see what variations are permitted. Variations may only be exercisable at certain milestones or there may be conditions or constraints attached – if necessary, seek specialist input to support contractual interpretation.

If the contract does not include any provision for variations, the parties will need to have commercial discussions to find an agreeable solution. Always remember to document this clearly once the position is finalised to avoid future disputes.

Behave appropriately

If your counterparty is not performing their contractual duties or makes a sudden change to their performance, ensure your conduct doesn’t suggest you are willing to accept the change (for example don't start to pay a new price if you're not happy with it) otherwise you may be deemed to have accepted a variation to your contract through your ongoing course of dealing with them.

A pragmatic solution may be a temporary concession until the situation improves. This was a common strategy adopted by businesses impacted by the pandemic. However, if you are making a temporary concession take advice to make sure it is properly documented and cannot be construed as being a permanent variation.

Conclusion

Issues can become protracted disputes when communication breaks down. We recommend that if you are facing an issue with a supplier or customer you maintain open communication channels, even if there are no obvious or easy solutions. Early advice from a legal specialist can help you engage with your counterparty constructively whilst prioritising your legal and commercial interests.

During this period of political and economic upheaval and uncertainty we are helping clients navigate through issues pragmatically while maintaining commercial interests. Please do let us know if you would welcome a conversation about any ongoing contractual issues, you may be facing.