The UK has seen food prices soar over the last 12 months and this trend looks set to continue as the impact of various environmental, legal and political factors take effect. These increased prices will undoubtedly have an effect on businesses operating at all levels of the food supply chain, even those which have attempted to mitigate the effects of soaring food prices by entering into fixed price supply agreements. This short article looks at the issue of rising food prices and examines some of the steps which can be taken to protect your business.
Drought was officially declared in South East England in February after DEFRA convened a summit of water companies, farmers and wildlife groups to discuss water shortages. Soil moisture has also reached a record low in the key agricultural region of East Anglia, causing many farmers to have their licences to take water from rivers and underground sources curbed. With water shortages likely to cause a severe reduction in crop yields, it is inevitable that affected crops will see significant price rises.
Similarly, the coming into force of Council Directive 1999/74/EC, which bans the use of battery cages and eggs from birds housed in battery cages throughout the EU, is causing a significant shortage of eggs from Directive compliant sources. Again, this shortage will inevitably result in a substantial increase in the price of egg from welfare friendly flocks, such as free range or enriched colony accommodation flocks.
The European Commission has responded to mounting concerns over the rising cost of food by launching its own internal Food Task Force to tackle rising food prices and ensure a better functioning food supply chain. However, businesses operating at all levels of the food supply chain can still expect to feel the impact of food price rises in the short to medium term. Many suppliers tied into fixed price supply agreements will find themselves contracted to supply products at prices significantly lower than the open market value, a situation which may cause many suppliers to seek to avoid their contractual obligations and/or seek to renegotiate the price at which their products are supplied.
The following paragraphs highlight some of the steps which can be taken by businesses to protect their position in the face of rising food prices.
- Before concluding the contract
- Consider the circumstances in which either party may wish to renegotiate prices, ensuring that the contract sets out clearly whether an adjustment will or will not be permitted.
- Consider the circumstances in which the supplier may be excused from supplying (or the customer excused from accepting) the goods in question. Ensure that clauses which may excuse performance, such as Force Majeure clauses, are clearly drafted. For example, if a supplier of onions is not to be entitled to refuse to supply in the event of a crop shortage caused by drought, it would be sensible to expressly exclude “crop shortages caused by drought” from the events which may excuse performance commonly found in Force Majeure clauses (such as an “Act of God”).
- Carefully consider the structure of the supplier’s obligation to supply and any minimum volume obligations. It is no good having a watertight Force Majeure clause and a clearly drafted fixed price clause if the supplier is not obliged to accept orders or has the right to refuse to supply entirely at its discretion.
- Check the termination clause does not give a supplier a right to terminate at will. If it does, a supplier may be able to terminate the contract if it believes it can obtain a better price for its products elsewhere.
- When informed of proposed price rises
- Know your position
Suppliers will often contact a customer to explain why some unforeseen circumstance has made it impossible to supply goods at the agreed price and requesting agreement to a price rise. Knowing your contractual rights will often be sufficient to resist such a request. A clear reference to a contractual obligation to supply at a particular price for a particular period, coupled with a reservation of rights in the event that the supplier breaches these provisions, will often be sufficient to deter the threatened price rise. It is worth keeping in mind that a contract will not be “frustrated” (i.e. no longer capable of performance) simply because the supply of goods at an agreed price is no longer commercially advantageous to the supplier. It is very rare for a contract to be frustrated and if a supplier is still able to supply goods, even if this means buying in goods from another source at a higher price, it is a safe assumption that the existing supply agreement has not been frustrated and is still binding upon the parties.
- Consider your options
Suppliers will sometimes push ahead with price rises, even in the face of clear contractual provisions prohibiting such conduct. In these circumstances it is important to act fast.
- Consider whether there are any other viable sources of supply.
- If so, how do the prices compare with the revised prices offered by the incumbent supplier.
- Are there any other commercial reasons why a change in supplier would / would not be acceptable.
- Take legal advice
It is important to be sure of your legal position before embarking on any given course of action, otherwise important legal rights could be waived inadvertently.
- Act fast
Once armed with information as to your commercial and legal options you can decide whether it is best to stick with the existing supplier or move to an alternative. Whatever you decide, it is important to act fast.
Any right to treat a contract as terminated and to move to an alternative supplier may be lost if there is a delay between being informed of price rises and notification of your intention to treat the contract as terminated. If this is not handled correctly, instead of being able to claim damages for the increased cost of supply from your supplier, you may be faced with a claim for wrongful termination of the supply agreement.
Even if you decide to stick with your existing supplier, you may wish to seek to recover the difference between the contract price and the imposed higher price at a later date. If so, you will have to show that you only agreed to the price rises under duress. Essentially you will have to show:
- you had no option but to accept the price rises (i.e. no alternative supplier was available);
- you agreed to the price rises under duress;
- you communicated you objections to the imposed price rises clearly and forcefully; and
- you took legal action as soon as the duress was over (i.e. as soon as you were no longer dependent upon receiving supply from that particular supplier).
A failure to act fast in these circumstances could result in you losing any right to recover the increased costs from the supplier in question.
Price rises as a result of unforeseen circumstances are common and will often be accepted as necessary by both parties to an agreement. However, where parties have entered into an agreement to supply at a fixed price, a customer may be able to recover price rises imposed by a supplier in breach of contract (particularly if a supplier uses illegitimate commercial pressures, such as a shortage of alternative goods / suppliers, to seek to force through such price rises in order to protect its margin).
In such circumstances it is important to know your rights and to act fast. If steps are not taken to protect your position quickly, you may be viewed as having agreed to the price rises and hence lose any right to recover the additional sums paid to the supplier in respect of those price rises.