Love it or hate it: Brexit’s effect on supplier price increases

Marmite gives food for thought when it comes to the imposition of price increases by suppliers.

The recent dispute between Unilever and Tesco in relation to the sale of Marmite, Ben & Jerry’s ice cream and other products shows that uncertainty and volatility in the markets and exchange rates following the Brexit referendum has increased the scope for disagreement in supply chains.  Unilever had, in short, refused to deliver products to the supermarket after Tesco refused to accept a significant price-hike across Unilever’s brands.

Whilst pricing disagreements are not unusual, the current position in the markets has created an additional angle that suppliers may wish to try and exploit.

Contractual Issues

Whether or not a supplier can actually increase its prices directly as a result of the UK’s vote to leave the EU will depend on the wording of the contract. Generally, price increases cannot be unilaterally imposed unless the arrangements between the parties allow for it. 

It is unlikely that contracts will have a specific “Brexit” clause – such as specifically dealing with the consequences of the UK’s exit from the European Union – but there may be other provisions which could capture elements of the issue.  Contracts can, for example, contain price increase mechanisms whereby prices rise on the occurrence of certain events.  The key question however will be how and when these provisions can operate.  Do the relevant trigger events even apply? Is the price review upwards only, or could it equally be moved downwards?  Has the supplier jumped through all of the necessary procedural hoops, such as in relation to timing and giving appropriate notice?

Without however an express term, it is unlikely that Brexit will directly give rise to a contractual entitlement to simply impose a price increase. It is more likely that potentially related events, such as exchange rate changes, or new taxes or tariffs (which could of course follow following the UK’s exit from the EU) will allow a party to seek or impose a price variation rather than the Brexit vote alone. These trigger events are circumstance specific, and may happen on Brexit or simply not at all; whether or not a supplier can rely on such terms will very much depend on the drafting and interpretation of the specific terms of the contract.

Commercial Considerations

As seen in the Unilever/Tesco dispute, on top of contractual rights, suppliers may wish to try to flex their muscles and wield commercial pressure on their customers to accept the price increase by threatening to suspend or cease the supply, irrespective of what the contract between the parties actually says. 

How far suppliers can press this will, as you might expect, depend very much on the nature of the contractual obligation between the parties, the basis of contract and the contracting process, and the parties’ respective bargaining positions.  For example, if there is a framework style agreement, individual agreements are not formed until purchase orders are placed by the customer and accepted by the supplier.  There could however be an obligation on the supplier to supply but again it should be considered how far those obligations go.  Are there maximum and minimum volumes to be supplied, or do they have to be supplied within specific times or in a specific manner?  Or could the supplier for example rely on any grounds to excuse a failure to supply or delay?  The contract could for example contain terms where such conduct by the supplier could be excused, or depending on the drafting, couldn’t fall within the ambit of a force majeure clause?

Some options include accepting the increase, negotiating it, or of course going elsewhere.  This will be as much a commercial question as any, but the customer should ensure it is not bound by any exclusivity arrangements.  If it is, is there a way around the exclusivity?  Does a contract for example allow the customer to go elsewhere if the supplier fails or refuses to complete an order? 

Of course, a supplier’s refusal to supply goods may simply be a breach of contract that gives the customer a right to terminate the contract.  Could this give the customer the right to get its supplies cheaper elsewhere? Or could the threat of termination be used in a response to the supplier’s proposed price hike?

As you will no doubt appreciate from the above, the options available will very much depend upon the contractual terms and the specific facts and circumstances of the situation, and the appropriate way forward will be as much a commercial question as it is a contractual one.

If you are facing any of these issues speak to a commercial expert, please get in touch with James Butler or Martin McKinnell who will be more than happy to assist.

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