As the widely reported dispute between Tesco and Unilever demonstrates, the 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.
As a hospitality operator it will no doubt be a concern if food suppliers or drinks companies seek to exploit the situation by imposing price hikes, as you will have to decide whether to face reduced profits or risk alienating customers by, in turn, increasing your prices. Another risk is the potential disruption in the supply of goods, if commercial agreements fall apart, which could compromise your service to customers.
Can your supplier increase prices 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 re. 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?
Unless there is 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.
Refusal to supply
What if your supplier threatens to cease supply, unless you agree to a price increase? Questions you need to ask:
- 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 iscretion on pricing (even where there is no 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?
Alternative sources of supply
You may need to consider what your alternative avenues of supply are. In particular, 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. You might wish to put 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.
You also need to be clear as to whether your contract places you under any exclusivity obligation which obliges you to source all of your requirements for a particular product or service from your supplier. If this is the case, consider 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?
Safeguarding your business
You should seriously consider whether the position adopted by your supplier might be premised on difficulties in its own financial position, either based on its own cost base, or otherwise. If this is likely, think about how insolvency of this supplier might impact on you. In such circumstances negotiation of a reasonable, commercial resolution might be preferable. You might 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.
Breach of contractual obligations
If your supplier’s refusal to supply is a breach of its contractual obligations, look at whether that breach may give rise to an express, or implied, right to terminate the contract. Think about whether termination would be of benefit to you commercially – for instance if you were under a requirement to make purchases from that supplier – and whether you have alternative options for supply.
Alternatively, you might respond citing your potential damages claim for losses occasioned by a refusal to supply in breach of contract. 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?
There may 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. You might be able to raise points founded in economic duress, or based on competition law in response to your supplier’s position.
It is useful to 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?
These are just 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 best 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.
If you need help in reviewing your current situation, or with any follow up negotiations, Freeths’ commercial experts can assist.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.