As the recent, widely reported dispute between Tesco and Unilever demonstrates, the uncertainty, market turmoil and exchange rate volatility created by the Brexit vote has opened the door for a variety of disagreements and disputes within supply chains. Disagreements over prices and continuity of supply are not unusual, but the current situation has created a further angle which suppliers may seek to exploit.
Can your supplier increase the price you pay as a result of Brexit?
The answer depends on the wording of your own contractual arrangements. Specific provisions allowing a party to increase prices as a direct result of the June Brexit vote will be rare, but commercial contracts may contain other provisions which might, at least in part, address the issue:
- Is there a price escalation mechanism?
- Does your contract provide for the parties to seek to agree changes in pricing on the occurrence of certain events?
- How and when do these provisions operate? For instance, what are the relevant trigger events? Is any price review upwards only, or could prices move both ways?
- Has the correct procedure been followed (timing, notices etc.)?
- Are provisions pursuant to which the parties are to agree or calculate a new pricing structure sufficiently certain to amount to enforceable obligations?
Absent an express contractual mechanism, Brexit, in itself, is unlikely to provide a contractual entitlement to unilaterally impose a price variation. Collateral events, such as exchange rate volatility, or future events occurring on formal withdrawal from the EU (such as the imposition of new taxes or tariffs) are more likely to provide an express contractual trigger than the Brexit vote alone.
However, some suppliers are citing Brexit as justification to seek to impose unilateral pricing changes, and these are often accompanied by an explicit, or implicit, threat of cessation of supply, with a view to exerting commercial pressure on a customer to accept the proposed increase, irrespective of the strict contractual position.
What if your supplier threatens to cease supply, unless you agree to a price increase?
Is your supplier under an express contractual obligation to supply you? Are they obliged to fulfil the orders which you place with them? For instance under many framework style agreements, individual contracts/binding agreements are not formed until orders are placed and accepted by the supplier, with no binding obligation to accept orders placed. If your supplier is obliged to supply, what are the extent of those obligations: are there, for instance, minimum or maximum volume requirements? Are orders required to be placed in a specific manner, or within specific times, to trigger those obligations?
Is your supplier obliged to supply to you at a fixed price, even if it is obliged to fulfil orders? Or does the contract provide it with a discretion on pricing (even absent any formal price change mechanism or agreement)?
Might your supplier rely on any grounds to excuse a failure to supply or delay? Does the contract provide for circumstances where such conduct would be expressly excused, or might any failure fall within the ambit of force majeure, material adverse change or frustration?
Can you go elsewhere?
What are your alternative avenues of supply? Are the goods and services which you require available from a number of suppliers, or does the market within which you operate limit your options? Should you be putting in place contingency arrangements now, such as broadening your supply chain, building stocks of key components, or putting in place arrangements to produce or provide the goods, or services, under threat yourself?
Does your contract place you under any exclusivity obligation which obliges you to source all of your requirements for a particular product or service from your supplier? If so, what is the extent and breadth of their application: is the definition of product loose enough to allow you to source a suitable alternative? Do any such provisions continue to apply in the specific circumstances, such as in the event that your supplier fails to fulfil an order, or is unable, or unwilling, to supply?
Might the position adopted by your supplier be premised on difficulties in its own financial position, either based on its own cost base, or otherwise? If so, how might insolvency of this supplier impact on you? Is negotiation of a reasonable, commercial resolution preferable in such circumstances? Might you be able to propose an alternative commercial solution which assists your supplier in dealing with the situation it faces, such as a change to payment terms or volumes, which has less of an impact on your own bottom line or risk to your business?
If your supplier’s refusal to supply is a breach of its contractual obligations, would that breach give rise to an express, or implied, right to terminate the contract? Would termination be of benefit to you commercially (for instance if you were under a requirement to make purchases from that supplier) and do you have alternative options for supply? Or might you respond citing your potential damages claim for losses occasioned by a refusal to supply in breach of contract? If so, does your contract exclude the recovery of certain head of loss, such as loss of profit, or contain financial, or other, limitations on your supplier’s potential liability to you?
Could there be alternative remedies available to you, such as an action for specific performance where continuity of supply is essential and damages would not provide you with an adequate remedy? Might you be able to raise points founded in economic duress, or based on competition law in response to your supplier’s position?
Do you know how your competitors would respond to these questions? Are they in a stronger, or weaker, position than you? Are they using the same supply chain? Do you need to act promptly to secure your avenues of supply before they take up any alternative options, or capacity in the market?
This briefing is only intended to provide examples of some of the questions you might ask when faced with a supplier seeking to impose a price increase, or threatening to withhold supply. Your options, and the optimum solution for you, will depend on both the terms of your contract and the factual and commercial basis of your relationship with your supplier and your wider business.