Inflation woes spark rise in contract disputes

By Tim Aldred

28 Mar 2023

Stuart Farr Of Taylors Solicitors

Blackburn-based Taylors Solicitors has recorded a rapid increase in the number of commercial contract disputes resulting from rising inflation - and the methods used to calculate it.

The law firm's commercial disputes partner Stuart Farr says that business owners are increasingly 'at loggerheads' with suppliers about longstanding or rolling contracts after reaching a ‘tipping point’ following a dramatic hike to their fees.

Taylors has seen a 25 per cent surge in the number of new commercial contract dispute cases over the last year.

Some involve advising clients on the receiving end of these rises while others involve acting for suppliers to recover lost profits after customers have terminated agreements without notice.

Among the factors driving the trend is that many older contracts include provision for inflation-linked rises based on the outdated retail prices index rather than the consumer prices index, which is more commonly used nowadays.

Stuart said that using RPI – which is typically higher than CPI – is now considered an unreliable reflection of actual inflation and is largely discredited.

He said: “Since around 2011, it has not been used as a national statistic except in limited cases. However, it will not be officially phased out completely until 2030.

“Problems tend to arise in relation to contracts which are ongoing and long-term, or have routine roll-over provisions so they are renewed automatically.

“The intention of these long-term arrangements was to create certainty for the parties and when the inflationary effects were low or stable, as they were for many years, these contracts did not give rise to any major issues.

“Minor adjustments to prices due to inflation were arranged and implemented without much fuss or financial pressure. However, when inflation starts to rise to high levels and beyond the parties’ expectations, as we have been witnessing, the adverse impact caused by contractual obligations to increase payments can cause considerable angst even within an established commercial relationship.

“The effect can render the contract pricing altogether uncommercial and one-sided in favour of the supplier. There comes a tipping point, with businesses being overwhelmed by the pricing of the contract, and we are seeing a significant rise in disputes as a result.”

Stuart added: “A classic example involves a client who has rented electrical equipment over a fixed period of 20 years, with some time still left to run on the contract. The client has been paying increases based on RPI, so has effectively been overpaying for many years.

“As the equipment has aged and become obsolete, the contract price has increased out of all proportion to the value of the goods and the service being provided.

“What started out as a contract value in the region of £20,000 per year has now become an obligation to pay a substantial six-figure sum, entirely due to the effects of RPI-based inflationary increases imposed cumulatively year-on-year.

“This has led to them and others in similar situations trying to get out of the contract altogether, which is often impossible without incurring hefty exit payments or penalties.”

Stuart added: "Clients have said they have gone along with their contracts for years because inflation has been so low, and they have not really noticed an increase of, for example, one per cent. They’ve budgeted for this type of increase and have cracked on.

“But it has come as a nasty shock to them when their bills have gone up by 10 per cent or more. Many are lumbered with outdated equipment which needs upgrading. They want rid of the contract but are often stuck with it.

"The lesson is that the law will not intervene to protect a party from a bad bargain. Companies should now be wary of longer-term contracts which include a formula for automatic inflationary increases, especially those based on RPI.

“They should regularly review contracts to see whether a provision for price adjustment due to economic conditions is necessary, and they should ensure the contract balances that with terms providing protections for the benefit of the paying party.”

Enjoyed this? Read more from Tim Aldred

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