Why should you review your contracts to consider inflation?

The looming cost of doing business coupled with rising inflation is rippling out across industries in the UK.

In real terms, suppliers face a five per cent year-on-year reduction in their charges.

When faced with factors like cost increases and wage inflation from their suppliers, coupled with an inability to pass these costs onto customers, contracts will become unprofitable.

Changes to general economic, financial, and commercial conditions can lead to a sense of dissatisfaction with an agreed price, for example.

It is vital, then, that a review of contracts is made in light of rising inflation.

After years of relative stability and in anticipation of increased volatility, parties engaged in long-term commercial contracts might be inclined to protect their interests by writing a price escalation clause into their contract.

What is a price escalation clause?

Before a dispute comes into effect, a price escalation clause is the first port of call for determining which party will pick up the increased costs.

There are contracts with a price escalation clause built in, designed to allocate the risk between the contractor and owner.

In the absence of such a clause, a force majeure clause could be the answer.

What is a force majeure clause?

Although there has been some scrutiny around a force majeure clause, particularly in the last few years, this clause should be considered when reviewing a contract.

A force majeure clause is designed to assign risk when something happens that is outside of either party’s control.

In the event of a contract being silent on this issue, the risk of price escalation could fall on to the contractor.

If you need advice on how to draft a shareholders agreement or are looking to outsource the creation of one, please get in touch with one of our Corporate Partners, Maung Aye, on +44 (0) 20 7240 0521 or at maung.aye@mackrell.com


The following two tabs change content below.
Maung Aye
Maung is a partner in our Corporate and Commercial department. He joined Mackrell.Solicitors following corporate law positions in London and in a leading regional firm in Essex. Maung read European Legal Studies at Lancaster University and the Università degli Studi di Trento and is a fluent Italian speaker.