The effect of inflation on contractual relationships
19 JUL 2022
The UK economy has been relatively stable over the last ten years, however recently the UK has experienced soaring inflation rates. In May 2022, the Office of National Statistics reported that the UK inflation rate had reached a record-breaking 9.1%. The UK has not seen rates like this since 1982, over 40 years ago. High inflation rates have a knock-on effect on everyday life from the cost of living to legal contracts.
Long-term contracts that were entered into before the increase in inflation may now be facing many challenges with regards to contractual obligations and performance. Some parties to commercial contracts might find themselves in positions where they can no longer afford to adhere to their obligations under the contract. In such situations, how may contracting parties mitigate the effect of the rising inflation?
Price change clause
A commercial contract such as one dealing with the supply of goods may contain provisions that allow suppliers to adjust the prices in order to fit the cost of manufacturing and supplying the products. Such clauses are in favour of the seller as they provide assurance that they will not be at a loss, in the event of an economic change in the market. However, the same cannot be said for the buyer. Such clauses create a considerable amount of uncertainty for the buyer in terms of the price of goods. To help alleviate this unpredictability, the clause should be negotiated to reflect a fair understanding of how the price of the goods is likely to increase over time.
Implied terms in the contract
When considering whether to imply a term into the contact the courts will either apply the business efficacy or the officious bystander test. Under the business efficacy test, the proposed term will only be implied if without it, the contract will lack commercial coherence. The officious bystander test looks at whether an objective person would conclude that the term is so obvious that it ought to be included. It is unlikely that a term that permits prices to increase in line with inflation would pass either tests, especially those pertaining to long-term contracts. It would be difficult to predict the effect of inflation over a long period of time, therefore any terms relating to inflation would not be considered obvious nor would it prevent a contract from being coherent.
Under English law, the courts expect parties to fulfil their commitments under the contract and are unlikely to provide any relief to parties due to high inflation rates. However, a contract may contain a provision that allows parties to terminate the contract without any cause, i.e. for convenience. If such a clause exists in the contract, it may be useful for parties to consider taking this route to discharge any obligations they may have under the contract that they cannot comply with. This also helps parties to avoid any claims for breach of contract being made against them.
The doctrine of frustration arises where an unforeseen event which is out of the parties’ control takes place. This event automatically renders performance of the contract impossible. Any obligations that the parties have will be discharged as the contract effectively comes to an end. While examples of what constitutes a frustrating event are non-exhaustive, they typically tend to cover things such as; an outbreak of war, a change in legislation or statutory prohibition of a product or service. With these examples in mind, it is hard to see how high inflation rates could also fall into this category. It is also a well-known fact that a contract cannot be frustrated purely because performance has become too expensive.
Parties to commercial contracts may consider negotiations to be a good option, especially where there are no provisions or clauses in the contract that permit a price change. Of course, both parties to the contract need to be willing to engage. The party who wishes to incorporate a price change might want to set out their reasons for the increase along with the evidence to support it. It would be a good practice to also demonstrate that they have considered alternative options to deal with the effects of the high inflation rate. The other party can voice any concerns that they may have and to suggest price rates that would work well for them. Parties should not be placed under any pressure to accept price variations and if parties cannot reach an agreement, it may be best for them to cut their losses and terminate the contract whether or not there is a right to do so.
Looking at the effects of high inflation rates on commercial contracts, it is clear that it is more challenging to deal with contracts that already exist and have no price change clause. While negotiations may appear to be a good solution in such cases, it is also evident that parties do not always come to an agreement. Therefore, it is advisable that parties who are looking to enter into contracts in the future should consider including provisions into their contracts that deal with economic changes such as inflation rates.
Please contact our team for any existing contract enquiries or if you need assistance with a new contract.
Yulia BarnesManaging Partner
Yulia Barnes is our Managing Partner. She is an experienced solicitor and advises on a wide range of contentious and non-contentious matters for both private and corporate clients.Yulia started her legal career at a large international Magic Circle firm. She then became a partner at a regional law firm and headed a Dispute Resolution Department. She then moved in-house before starting her own Boutique practice, Barnes Law, with the aim of providing exclusive services to high net-worth individuals and privately-owned businesses. More details can be found on her LinkedIn profile.
Expertise Yulia and her team are widely recognised for their professional and practical approach to matters. She is committed to ensuring that her clients’ objectives are achieved in the most cost-effective way possible.
Approach Yulia has a wealth of experience working with businesses of all sizes: from large multinational corporations to start-ups. She has particular expertise in a hospitality industry, investment funds, private and corporate clients, and focuses on startups and technology-driven companies. Yulia brings the same level of attention to detail, professionalism and a personal touch to every case and client, and truly immerses herself in her clients’ businesses. She prides herself on her problem-solving, commercially astute approach and her track record of partnering with clients to help them achieve their strategic objectives.
Will joined Barnes Law as an Associate Solicitor in Spring 2023, shortly after qualifying in September 2022.
Will works mostly on real estate and corporate/commercial matters. Will enjoys providing advice on transactional matters.
Away from the office, Will can be found reading or playing golf. While he played rugby until university, and rowed throughout his degree, he now tends to watch both from the sidelines. During the winter he can also be found skiing.
Will plans to continue developing his legal skills and experience at Barnes Law, under the expertise and guidance provided by Yulia.
Mark is an experienced solicitor whose practice areas include intellectual property (IP), IT, data protection and general commercial law.
Mark advises businesses of all sizes – from sole traders to corporations. Among his clients are: clothing and lifestyle brands, restaurants and food suppliers, IT companies, banks, hedge funds and venture capital firms, education providers, medical and pharmaceutical brands.
Outside of his practice, Mark also advises members of the Institute of Directors as part of its Directors’ Advisory Service.
- Prosecuting a UK trademark application on behalf of an education provider and representing them in related UK IPO opposition and revocation proceedings;
- Advising a publisher and a delivery business on data protection matters, B2B and B2C Ts & Cs of sale, website and app Ts & Cs, all aspects of global brand protection;
- Advising footwear brands, alternative asset managers and hedge funds on their global brand protection, including overcoming various refusals, representing them in opposition proceedings and settlement negotiations;
- Representing a central bank in opposition proceedings before the UK IPO;
- Advising a lifestyle brand concerning trademark clearance and protection, negotiations for a website/app development and maintenance agreement.
Ioulia TatawatFamily Law Adviser
Ioulia has a solid background in family law and offers guidance, clarity, and support to clients during one of their most challenging times in their life.
She advises on all three pillars of separation: divorce, children matters and financial settlements. Ioulia is a member of Resolution and is keen to try to settle matters at early stages.
Ioulia is dedicated to assisting clients and navigating them through their legal matters with clarity and support.
Alex joined Barnes Law in September 2023 after finishing his master’s degree in law. Prior to joining Barnes Law, Alex worked in property litigation at Ashfords. Alex assists Yulia on a variety of both contentious and non-contentious matters.
Outside of the office, Alex enjoys reading and hiking. Prior to working in law, Alex was a competitive tennis player.
Alex continues to develop his skills in legal practice under Yulia’s guidance, he plans to sit the Solicitor’s Qualifying Exams (SQE) in 2024.
Mehves joined Barnes Law in August 2023, right after graduating from Queen Mary, University of London (LLB Senior Status). As part of her qualification journey, Mehves is currently pursuing her Legal Practice Course (‘LPC’) at the University of Law. She also holds a degree in European Union Law from Maastricht University, Netherlands.
Mehves works closely with Yulia on a variety of contentions matters and also writes Barnes Law’s legal blogs, manages social media accounts and is responsible for marketing.
Outside of work and studies, she enjoys running, tennis and yoga.
Mehves is looking forward to developing her legal skills at Barnes Law.
Julia PodgornovaInvestor Relationship Manager
Julia guides clients in making important business decisions based on comprehensive risk assessment and strategy. She supports investors in devising strategies designed to maximise each business’s potential from pre-seed to IPO.
Julia’s particular area of expertise are IT start-ups at different stages. Julia supports business through their fund-raising journey. As an Investor Relations Manager, Julia communicates with investors to facilitate a smooth round and legal part of each transaction.
In her free time Julia enjoys sailing, ballroom dancing, art exhibitions and travel.